ACC 115| Management Science

Module #22 Student Activity Sheet

Name: Class number:

Section: Schedule: Date:

Quiz Materials:
Pen and non-scientific
calculator

GENERAL DIRECTIONS
READ THIS PAGE BEFORE STARTING THE ASSESSMENT

This is a 6 paged test and is composed of 1 section and has a total score of 30 points. You have sixty
(60) Minutes to finish this examination. The breakdown of the exam is as follows:

(1) Multiple-choice questions - The questions in this LEARNING OBJECTIVE:

section is with four answer choices. The test is
composed of 30 questions and is rated as 1 point each. This assessment measures the
competence of the student in terms of
All things unnecessary for the test must be put in front of the his/her application of knowledge and skills
testing area. Use BLACK or BLUE ink ballpen only. Write all your in the following topic:
answers on the designated answer sheet. Further, erasures are 1. Capital Budgeting
strictly NOT allowed and will invalidate your answers.

You may NOT use smart phones or reference materials during the testing session. Only the allowed
calculators should be used.

Try to answer all questions. In general, if you have some knowledge about a question, it is better to try
to answer it. You will not be penalized for guessing.

Be sure to allocate your time carefully so you can complete the entire test within the exam session. You
may go back and review your answers at any time during the exam session.

Those who are caught cheating or doing acts not allowed during the exam shall be instructed to
surrender their test papers and shall leave the testing room immediately. Subsequently, their papers
shall be rated as ZERO.

This concludes the instruction page.

You may now begin answering.

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 ACC 115| Management Science
Module #22 Student Activity Sheet

Name: Class number:

Section: Schedule: Date:

Write your final answer on the box provided before the number. Use CAPITAL letters only. Answers
written outside the box will not be considered. Erasures, changing of final answer, and the like will be
considered wrong.

1. The first step in the decision-making process is to

a. determine and evaluate possible courses of action. c. makes a decision.
b. identify the problem and assign responsibility. d. review results of the decision.

2. The long-term planning process for making and financing investments that affect a company’s
financial results over a number of years is referred to as
a. capital budgeting c. master budgeting
b. differential cost analysis d. long-range planning

3. Which of the following would not involve a capital-budgeting analysis?

a. The acquisition of new equipment.
b. The addition of a new product line.
c. The adoption of a new cost driver for overhead application.
d. The construction of a new distribution facility.

4. A project that when accepted or rejected will not affect the cash flows of another project.
a. Independent projects c. Mutually exclusive projects
b. Dependent projects d. Both b and c

5. The decision process that has managers select from among several acceptable investment
proposals to make the best use of limited funds is known as:
a. capital budgeting. b. capital rationing. c. project evaluation. d. project planning.

6. Mutually exclusive projects are those that:

a. if accepted, preclude the acceptance of competing projects.
b. if accepted, can have a negative effect on the company’s profit.
c. if accepted, can also lead to the acceptance of a competing project.
d. require all managers to consider.

7. The overall cost of capital is the

a. Rate of return on assets that covers the costs associated with the funds employed.
b. Average rate of return a firm earns on its assets.
c. Minimum rate a firm must earn on high-risk projects.
d. Cost of the firm's equity capital at which the market value of the firm will remain unchanged.

8. The three elements needed to estimate the cost of equity capital for use in determining a firm's
weighted-average cost of capital are
a. Current dividends per share, expected growth rate in dividends per share, and current book
value per share of common stock.

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 ACC 115| Management Science
Module #22 Student Activity Sheet

Name: Class number:

Section: Schedule: Date:

b. Current earnings per share, expected growth rate in dividends per share, and current market
price per share of common stock.
c. Current earnings per share, expected growth rate in earnings per share, and current book
value per share of common stock.
d. Current dividends per share, expected growth rate in dividends per share, and current market
price per share of common stock.

9. Cost of capital is the

a. amount the company must pay for its plant assets.
b. dividends a company must pay on its equity securities.
c. cost the company must incur to obtain its capital resources.
d. cost the company is charged by investment bankers who handle the issuance of equity or
long-term debt securities.

10. Which of the following is not considered a capital component for the purpose of calculating the
weighted average cost of capital as it applies to capital budgeting?
a. Long-term debt. b. Common stock. c. Short-term debt. d. Preferred stock.

11. Win Corporation has sold ₱50 million of ₱1,000 par value, 12% coupon bonds. The bonds were
sold at a discount and the corporation received ₱985 per bond. If the corporate tax rate is 40%,
the after-tax cost of these bonds for the first year (rounded to the nearest hundredth percent) is
a. 7.31%. b. 4.87%. c. 12.00%. d. 7.09%.

Interest is 12%, and the annual interest payment on one bond is $120. Thus, the effective
rate is 12.18% ($120 / $985). Reducing this rate by the 40% tax savings lowers the cost to
7.31%.

12. Masikap Engines Corporation has established a target capital structure of 40 percent debt and
60 percent common equity. The current market price of the firm’s stock is P 0 = ₱28; its last
dividend was D0 = ₱2.20, and its expected dividend growth rate is 6 percent. What will Allison’s
marginal cost of retained earnings, ks, be?
a. 15.8% b. 13.9% c. 7.9% d. 14.3%

13. The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5 percent and the
market risk premium is 6 percent. Assume the firm will be able to use retained earnings to fund
the equity portion of its capital budget. What is the company’s cost of retained earnings, k s?
a. 7.0% b. 7.2% c. 11.0% d. 12.2%

14. Newmass, Inc. paid a cash dividend to its common shareholders over the past 12 months of
₱2.20 per share. The current market value of the common stock is ₱40 per share, and investors
are anticipating the common dividend to grow at a rate of 6% annually. The cost to issue new
common stock will be 5% of the market value. The cost of a new common stock issue will be

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 ACC 115| Management Science
Module #22 Student Activity Sheet
a. 11.50% b. 11.79% c. 11.83% d. 12.14%

15. Dobson Dairies has a capital structure that consists of 60 percent long-term debt and 40 percent
common stock. The company’s CFO has obtained the following information:
 The before-tax yield to maturity on the company’s bonds is 8 percent.

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 ACC 115| Management Science
Module #22 Student Activity Sheet

Name: Class number:

Section: Schedule: Date:

 The company’s common stock is expected to pay a ₱3.00 dividend at year end (D1 =
₱3.00), and the dividend is expected to grow at a constant rate of 7 percent a year. The
common stock currently sells for ₱60 a share.
 Assume the firm will be able to use retained earnings to fund the equity portion of its capital
budget.
 The company’s tax rate is 40 percent.
What is the company’s weighted average cost of capital (WACC)?
a. 12.00% b. 8.03% c. 9.34% d. 7.68%

16. A major difference between an investment in working capital and one in depreciable assets is
that
a. an investment in working capital is never returned, while most depreciable assets have some
residual value.
b. an investment in working capital is returned in full at the end of a project’s life, while an
investment in depreciable assets has no residual value.
c. an investment in working capital is not tax-deductible when made, nor taxable when returned,
while an investment in depreciable assets does allow tax deductions.
d. because an investment in working capital is usually returned in full at the end of the project’s
life, it is ignored in computing the amount of the investment required for the project.

17. Bruell Company is considering to replace its old equipment with a new one. The old equipment
had a net book value of P100,000, 4 remaining useful life with P25,000 depreciation each year.
The old equipment can be sold at P80,000. The new equipment costs P160,000, have a 4-year
life. Cash savings on operating expenses before 40% taxes amount to P50,000 per year. What
is the amount of investment in the new equipment?
a. P160,000 b. P 72,000 c. P 80,000 d. P 68,000

The next two questions are based on the following information:

Pinewood Craft Company is considering the purchase of an equipment, as described below:

A compacting machine has just come onto the market that would permit Pinewood Craft Company to
compress sawdust into various shelving products. At present the sawdust is disposed of as a waste
product. The following information is available on the machine:

a. The machine would cost P420,000 and would have a 10% salvage value at the end of its 12-year
useful life. The company uses straight-line depreciation and considers salvage value in computing
depreciation deductions.
b. The shelving products manufactured from use of the machine would generate revenues of P300,000
per year. Variable manufacturing costs would be 20% of sales.
c. Fixed expenses associated with the new shelving products would be (per year): advertising,
P40,000; salaries, P110,000; utilities, P5,200; and insurance, P800.

18. The expected income each year from the new shelving products is:

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 ACC 115| Management Science
Module #22 Student Activity Sheet

Name: Class number:

Section: Schedule: Date:

a. P 52,500 b. P240,000 c. P 84,000 d. P 92,500

19. The accounting rate of return based on original investment is:

a. 12.5 percent b. 20.0 percent c. 25.0 percent d. 18.0 percent

20. Hatchet Company is considering replacing a machine with a book value of ₱400,000, a
remaining useful life of 5 years, and annual straight-line depreciation of ₱80,000. The existing
machine has a current market value of ₱400,000. The replacement machine would cost
₱550,000, have a 5-year life, and save ₱75,000 per year in cash operating costs. If the
replacement machine would be depreciated using the straight-line method and the tax rate is
40%, what would be the net investment required to replace the existing machine?
a. ₱90,000. b. ₱150,000 c. ₱330,000 d. ₱550,000

21. Which of the following is true?

I. The tax benefit from depreciation expense is the depreciation amount multiplied by the tax
rate.
II. Capital budgeting uses both financial and non-financial criteria when evaluating projects.

a. I only b. II only c. Both I and II d. Neither I nor II

22. Which of the following is true?

I. The payback period ignores the time value of money.
II. Accounting rate of return is based on cash flows.

a. I only b. II only c. Both I and II d. Neither I nor II

23. Datasoft Industries is considering the purchase of a ₱100,000 machine that is expected to result
in a decrease of ₱15,000 per year in cash expenses. This machine, which has no residual
value, has an estimated useful life of 10 years and will be depreciated on a straight-line basis.
The tax rate applicable for the company is 30%. For this machine, the accounting rate of return
based on average investment would be
a. 7 percent. b. 15 percent. c. 27 percent. d. 30 percent.

24. Calculating the payback period for a capital project requires knowing which of the following?
a. The net income generated from the project. c. The project's useful life.
b. The company's minimum required rate of return. d. The project's annual cash flow.

25. The payback criterion for capital investment decisions

a. is conceptually superior to the IRR criterion.
b. takes into consideration the time value of money.
c. gives priority to rapid recovery of cash.
d. emphasizes the most profitable projects.

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 ACC 115| Management Science
Module #22 Student Activity Sheet

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Section: Schedule: Date:

26. Consider a project that requires cash outflow of P50,000 with a life of eight years with no
salvage value. Annual before-tax cash inflow amounts to P10,000 assuming a tax rate of 30%
and a required rate of return of 8%. The project has a payback period (rounded) of
a. 5.0 years b. 5.6 years c. 5.8 years d. 6.0 years

27. The bailout payback period is

a. The payback period used by firms with government insured loans.
b. The length of time for payback using cash flows plus the salvage value to recover the original
investment
c. (a) and (b)
d. None of the above.

28. Womark Company purchased a new machine on January 1 of this year for ₱90,000, with an
estimated useful life of 5 years and a salvage value of ₱10,000. The machine will be
depreciated using the straight-line method. The machine is expected to produce cash flow from
operations, net of income taxes, of ₱36,000 a year in each of the next 5 years. The new
machine’s salvage value is ₱20,000 in years 1 and 2, and ₱15,0000 in years 3 and 4. What will
be the bailout period (rounded) for the new machine?
a. 1.4 years. b. 2.2 years. c. 1.9 years. d. 3.4 years.

29. Hooker Oak Furniture Company is considering the purchase of wood cutting equipment. Data
on the equipment are as follows:
Original investment ₱30,000
Net annual cash inflow ₱12,600
Expected economic life in years 5
Salvage value at the end of five years ₱3,000
The company uses the straight-line method of depreciation. What is the accounting rate of
return on original investment rounded off to the nearest percent, assuming no taxes are paid?
a. 42.0% b. 20.0% c. 24.0% d. 22.0%

30. Pogi Co. is planning to purchase a new machine that will take six years to recover the cost. The
new machine is expected to produce cash flow from operations, net of income taxes, of P4,500
a year for the first three years of the payback period and P3,500 a year of the last three years of
the payback period. Depreciation of P3,000 a year shall be charged to income of the six years
of the payback period. How much shall the machine cost?
a. P12,000 b. P18,000 c. P24,000 d. P36,000s

- End -

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