ACC 222 REVIEW MATERIAL

Overview of Financial Management

1. The management official in-charge of the firm’s financial activities including
financial planning, raising funds, making capital budgeting decisions, and managing
the firm’s working capital is the _______.
a. controller
b. chief executive officer
c. treasurer
d. chief financial officer

Financial Planning and Forecasting

2. Other things held constant, which of the following actions would increase the
amount of cash on a company’s balance sheet?
a. The company repurchases common stock.
b. The company issues a new common stock.
c. The company gives customers more time to pay their bills.
d. The company purchases a new piece of equipment.

Cost of Capital
3. It measures the relative variability of the firm’s stock with that of the composite
price in the stock market.
a. Dividend
b. CAPM
c. Beta coefficient
d. Flotation cost

Interest Rates
4. Statement 1: The higher the expected rate of inflation, the larger the required rate
of return.
Statement 2: If risk and inflation are expected to be relatively high, interest rates
tend to be relatively high.
a. True, False
b. True, True
c. False, False
d. False, True

Capital Structure and Leverage

5. Business risk is concerned with the operations of the firm. Which of the following
is not part of the determinants of business risk?
a. Foreign risk exposure
b. Financial Leverage
c. Competition
d. Uncertainty about output prices
6. If the firm’s financial leverage is high, its business risk is
a. Low
b. High
c. Very Low
d. Very High
7. Statement I: Capital Structure is the mix of debt, preferred stock, and common
equity that is used to finance the firm’s assets.
Statement II: Optimal Structure is the capital structure that maximizes a stock’s
optimal value.
a. True, False
b. False, True
c. True, True
d. False, False

Capital Budget, Cash Flow and Risk Estimation

8. Which of the following statements is correct?
a. Since debt financing raises the firm’s financial risk, increasing the target
debt ratio will always increase the WACC.
b. Since debt financing is cheaper than equity financing, raising a company’s
debt ratio will always reduce its WACC.
c. Increasing a company’s debt ratio will typically reduce the marginal costs of
both debt and equity financing. However, this action still may raise the
company’s WACC.
d. Increasing a company’s debt ratio will typically reduce the marginal costs of
both debt and equity financing. However, this action still may lower the
company’s WACC.

Working Capital Management

9. Statement I – Setting up of lockbox arrangement is one way to speed up
disbursement of payment to its customers.
Statement II – Working capital is defined as operating current assets less the
operating current liabilities.
a. True, False
b. False, True
c. True, True
d. False, False

Risk and Rate of Return

10. Balagot & Co.’s stock has an expected return of 10%, risk-free rate of 4%, and a
beta of 1.55 and is in equilibrium. What is its market risk premium?
a. 3.88%
b. 3.87%
c. 4.87%
d. 4.88%

Profitability
11. CAE Division reported the following results for 2022:
Annual Sales P100,000
Net Earnings 50,000
Investment 150,000
The division’s ROI is _____.
a. 35%
b. 33%
c. 34%
d. 30%
Capital Structure and Leverage
ABC Company has the following financial information:
Debt P50,000
PPE 100,000
Earnings Before Interest and Taxes 65,000
Equity 50,000
Cash 2,000
Tax Rate 30%

12. What is the net operating profit after tax?

a. P35,000
b. P45,500
c. P47,000
d. P36,000
13. What is XYZ Co’s invested capital?
a. P88,000
b. P98,000
c. P95,000
d. P85,000
14. What is XYZ Co’s return on invested capital?
a. 47%
b. 46%
c. 45%
d. 44%

Horizontal Analysis
15. Moira Corporation earned a net income of P50,000 in 2021 and P35,000 only in
2022. What PERCENTAGE increase in net income must Moira aim for in 2023 to
offset the 2022 decline in net income?
a. 41.85%
b. 42%
c. 43%
d. 42.86%

ACC 212 (Reviewer)

DERIVATIVE MARKETS
1. When an investor enters a contract to reduce the risk of loss in another
transaction, this is called _____.
a. Hedging
b. Safekeeping
c. Transformation
d. Speculation
2. The increase in international trade has created an enormous market for hedging
with forward contracts for the purpose of minimizing _____.
a. foreign exchange risk
b. political risk
c. interest rate risk
d. credit risk
3. Forwards are _____.
a. standardized like futures.
 b. absolutely the same as futures.
c. over-the-counter derivatives.
d. exchange-traded derivatives.
4. Futures are _____.
a. exchange-traded derivatives.
b. absolutely the same as forwards.
c. customizable like forwards.
d. over-the-counter derivatives.
5. Which of these is not part of an options contract?
a. Underlying asset
b. Ceiling on maximum limit
c. Strike price
d. Expiration date
MORTGAGE MARKETS
6. The monthly mortgage payment divided by the loan amount is commonly referred
to as the
a. Loan balance
b. Effective borrowing cost
c. Lenders yield
d. Monthly loan constant
7. Assume that a borrower has a choice between two comparable fixed-rate
mortgage loans with the same interest rate, but different mortgage terms, one
being a 30-year mortgage and the other a 15-year mortgage. Under financially
unconstrained circumstance, which of the following statements best describes the
borrowers preference?
a. The borrower would prefer the 30-year mortgage.
b. The borrower would prefer the 15-year mortgage.
c. The borrower would be indifferent between two mortgages.
d. The borrower is unable to compare mortgage loans of two different
maturities.
8. For the purposes of estimating the effective borrowing costs is often viewed as
the implied internal rate of return (IRR), since it takes into consideration costs
that the borrower faces, but which are passed on as income to the lender,
included in this calculation are closing costs, which may consist of all the
following except.
a. Title insurance
b. Mortgage insurance
c. Recording fees
d. Earnest money
9. One reason why adjustable-rate mortgages (ARMs) become popular has to do
with the impact that they have on the interest rate risk that is borne by the
parties involved. If the interest rates were to rise on a level-payment mortgage
(LPM) the interest rate risk of the loan would typically be borne by
a. The borrower only
b. The lender only
c. Both the borrower and lender
d. Neither the borrower nor the lender
10. Partially amortizing mortgage loans require periodic payment of principal but are
not paid off completely over the loans term to maturity. Instead, the balance of
the principal amount is paid at maturity in what is commonly referred to as a
 a. Balloon payment
b. Early payment
c. Up-front payment
d. Payment cap
MONEY MARKET INSTRUMENT
11. ______ is a short-term unsecured promissory note issued by reputed business
organizations at a price lower than its face value and redeemable at par.

a. Treasury bill

b. Commercial paper

c. Certificate of deposit

d. Promissory note

12. They can be issued to individuals, corporations and companies during periods of
tight liquidity when the deposit growth of banks is slow but the demand for credit
is high.

a. Commercial papers

b. Call money

c. Commerical Bill

d. Certificate of deposit

13. Helmuth Inc.'s latest net income was $2,580,000, and it had 250,000 shares
outstanding. The company wants to pay out 45% of its income. What dividend
per share should it declare?
a. 4.36
b. 4.24
c. 4.48
d. 4.64

FINANCIAL MARKET AND INSTRUMENT

14. SAB Inc. is considering two financial plans for the coming year. Management
expects sales to be $300,000, operating costs to be $265,000, assets to be
$200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and
75% common equity. The interest rate on the debt would be 8.8%, but under a
contract with existing bondholders the TIE ratio would have to be maintained at
or above 4.5. Under Plan B, the maximum debt that met the TIE constraint
would be employed. Assuming that sales, operating costs, assets, the interest
rate, and the tax rate would all remain constant, by how much would the ROE
change in response to the change in the capital structure?

a. 2.72%
b. 2.59%
c. 2.96%
 d. 3.22%

EFFECTVE ANNUAL RETURN

15. Suppose you can invest in a money market security that matures in 80 days and
offers a 8 percent nominal annual interest rate. The effective annual interest
return on this security is?
a. 8.10%
b. 8.15%
c. 8.20%
d. 8.25%

INTEREST RATES
16. On 01 February 2018, US Treasury Yield Curve Rate for 5, 10 and 20-year
maturity is 2.56%, 2.78% and 2.90% respectively and US Treasury Real Yield
Curve Rates for 5, 10 and 20-year maturity are 0.63%, 0.67% and 0.78%
respectively. Find out the inflation premium appropriate for a bond with 10 years
maturity.
a. 2.11%
b. 1.93%
c. 2.56%
d. 2.12%

BOND EQUIVALENT YIELD AND DISCOUNT

17. What is the current yield of a bond with the following characteristics: an annual
coupon rate of 7%, five years until maturity, and a price of $800?
a. 6.75%
b. 8.75%
c. 8.25%
d. 6.25%

RATIOS

18. Stewart Inc.'s latest EPS was $3.60, its book value per share was $23.75, it had
215,000 shares outstanding, and its debt-to-assets ratio was 35%. How much
debt was outstanding?
a. $3,393,738
b. $2,749,519
c. $3,760,375
d. $4,166,620