1. An increase in the discount rate decreases the present value factor and the present value.

This is because a higher

interest rate means you would have to set less aside today to earn a specified amount in the future. A decrease in
the time period increases the present value factor and increases the present value. This is because if you have less
time, you will have to set aside more today to earn a specified amount in the future.

2. The PVIF at n=0 is one.

3. Bank B is paying the equivalent of 3% twice a year. The effective annual interest rate is (1+0.03)^2 -1 or 6.09%
this is more than the interest of Bank A but not double.

4. Its the BETA of Risk-free security that is zero.

5. Systematic risk cant be diversified away. The risk stem from system wide influences such as war or economic
condition.

6. Since investors can eliminate this risk by diversifying among a number of different firms, there is no additional
compensation. It is the bearing of systematic risk that brings additional expected return.

7. The opposite of risk seeking is risk averse.

8. BETA is an index measure of systematic risk.

9. The optimal level of working capital is one which maximizes shareholders wealth.

10. Generally long term borrowing has higher interest but it involves less risk for the borrowing firm.

11. Generally profitability would increase, reducing current asset means smaller denominator in the ROI ratio (Net
Income/Total Asset) inverse effect to net income.

12. Permanent Working capital only includes current assets required for minimum long term needs.

13. A portion of cash that meets future cash needs may be met by cash equivalent such as marketable securities.

14. T-Bills are popular investments because they are actively traded in the market and incurred SMALL transaction
cost.

15. Generally the longer the maturity the higher the yield- but greater the risk.

16. The optimal policy is the one that provides greatest benefit to the firm.

17. 3% discount may be taken within 10 days otherwise payment in full is due on 45 days.

18. This is usually the last resort due to collecting agencys high fees

19. Inventory cost should include forgone alternative use of the funds invested in Inventory

20. The ABC Method of inventory control was not develop by National television

21. Trade credit is credit granted from one business to another.

22. Trade credit is flexible than other short term borrowing; it is not a secured loan so you do not need to pledge
collateral.

23. Stretching accounts payable means more cost like cost of the cash discount (if any) forgone, any possibilities late
payment penalties or interest charges, and possible deterioration in credit ratings of the firm.
 24. A clean-up provision is a requirement to be out of debt ( to CLEAN UP debt) for certain period of each year.

25. It should be Accounts Receivable.

26. It is the Weighted Average of these three components. (the sum of WACC is the overall total)

27. YTM is the same as before-tax cost of debt.

28. The tax benefit associated with debt is only useful when a firm has taxable income.

29. None of the measures to compute cost of capital gives exact measures but rather approximations.

30. It is Market Value proportions that is consistent with this goal

PART II

1. B
2. B
3. B
4. B
5. A
6. B
7. B
8. B
9. Answer: A
Sales P30,000
Add decrease in Accounts Receivable 1,000
Cash collected from sales P31,000
10. Answer: D
Market Value of Equity (P3M x 3.5) P10,500,000
Market price per share: (P10.5M 100,000) P105
11. Answer: A
Average Accounts Receivable: (P900,000 + P1,000,000) 2 P 950,000
Average inventory; (P1.1M + P1.2M) 2 P1,150,000

Net sales: (P950,000 x 5) P4,750,000

Cost of goods sold (P1,150,000 x 4) 4,600,000
Gross margin P 150,000
12. Answer: C
Dividend per share: 0.75 x P2.20 P1.65
Market price: 10 x 2.20 22.00
Dividend yield: P1.65 P22.00 = 7.5%
13. A
14. A
15. C
16. Answer: A
Cost of Dinner P70
Favors and Program 30
Fixed Cost: (15000+7000+48000+10000)/ 250 320

Price of Ticket charged to breakeven 420

17. Answer: A
Selling price P60
Less: Variable Manufacturing Cost (30)
 10% commission on selling (6)
Contribution Margin per Unit P24
18. Answer : C
(P-V) units produced (sold)
(P-V) units produced F

(P50-35) 40000 units

(P50-35) 40000-360000

= 2.50

19. Answer : C
Profit Margin Ratio = Contribution Margin Ratio x Margin of Safety Ratio
Profit Margin= 40% x 20% 8%
Sales = Profit/Profit Margin
Sales= 60 000/0.08 P750000
20. A
21. C
Product A 12(5.25-4.85) 4.8
Product B 10(7.5-6.95) 5.5
Product C 6(12.25-10.35) 11.4
Contribution margin in Units 21.7

Composite Break even= (79950/21.7) 3500

22. B
23. Answer: A
Days sales outstanding
Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days
24. Answer: A
Average receivable
New policy: 2.6M/360 x 22.5 162,500
Old policy: 2.0M/360 x 27 150,000
Incremental Accounts Receivable 12,500
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09 843.75

25. Answer: A
Incremental sales 600,000
Variable cost (.75 x 600,000) (450,000)
Additional bad debts (600,000 x 2%) (12,000)
Additional carrying cost (844)
Additional discounts (2,600,000 x .5 x 03) (2,000,000 x .4 x .02) ( 23,000)
Before tax increase in income 114,156
Less tax 45,663
Incremental income 68,493

26. A
27. Not yet
28. Not yet
29. Not yet
30. C
31. E
32. Not yet
33. C
34. Answer: B
 ($0.70 - $0.65)/$0.65 = 0.076923
($0.72 - $0.70)/$0.70 = 0.028571
($0.75 - $0.72)/$0.72 = 0.041667
g = (0.076923 + 0.028571 + 0.041667)/3 = .049054
Re = [($0.75 1.049054)/$26] + .049054 = 7.93 percent

35. Answer: E

D1 = [(0.18 - (-0.015)) $11.40] = $2.223; D0 = $2.223/(1 - 0.015) = $2.26

36. D Solution Wait...

37. Rp = (0.08 $100)/$49 = 16.33 percent

38. B (refer to no 59)

39. Answer: C

WACC = (1/1.55) (0.145) + (0.55/1.55) (0.048) = 11.06 percent

40. Answer: C

RE = 0.14945 = 0.0425 + (1.38 mrp); mrp = 0.0775

RProject = 0.0425 + (1.25 0.0775) = 13.94 percent