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# 1. Lawson Inc.

## is expanding its manufacturing plant, which requires an investment of P4,000,000 in

new equipment and plant modifications. Lawson’s sales are expected to increase by P3,000,000
per year as a result of the expansion. Cash investment in current assets averages 30% of sales;
accounts payables and other current liabilities are 10% of sales. What is the estimated total
investment for this expansion?
a. 4,600,000
b. 4,300,000
c. 4,900,000
d. 3,400,000
2. Olson industries needs to add a small plant to accommodate a special contract to supply
building materials over a five-year period. The required initial cash outlays at time 0 are as
follows:
Land = 500,000
New building = 2,000,000
Equipment = 3,000,000

Olson uses straight-line depreciation for tax purposes and will depreciate the building over 10
years and the equipment over 5 years. Olson’s effective tax rate is 40%

Revenues from the special contract are estimated at P 1.2 million annually, and cash expenses
are estimated at P300,000 annually. At the end of the fifth year, the assumed sales values of the
land and building are P800,000 and P500,000, respectively (not considered in depreciation
calculations, rule when silent). It is further assumed the equipment will be removed at a cost of
P50,000 and sold for P300,000.

As Olson utilizes the net present value (NPV) method to analyze investments, the cash flow for
the period 3 would be:
a. 940,000
b. 860,000
c. 880,000
d. 680,000
3. A project has a NPV of P30,000 when the cut off rate is 10%. The annual cash flows are P41,010
on an investment of P100,000. The profitability index for this projects is
a. 1.367
b. 3.333
c. 2.438
d. 1.300
4. Althea invested P300,000 in a project that pays her an even amount per year for 10 years. The
payback period is 6 years. What is Althea’s yearly cash inflows from the project?
a. 25,000
b. 50,000
c. 75,000
d. 100,000
5. Your portfolio consists of 150,000 invested in a stock that has a beta of 0.40, P25,000 invested in
a stock that has a beta of 1.50, and P75,000 invested in a stock that has a beta 1.60. the risk free
rate is 6%. Last year, this portfolio had a required return of 12%. This year, nothing has changed
except for the fact that the market risk premium has increased by 2% (2 percentage points).
What is the portfolio’s current required rate of return?
a. 7.66
b. 12.28
c. 14.30
d. 17.42
6. Determine which beta coefficient for stock A is consistent with equilibrium given that the rate of
return is 14%, the risk-free rate is 6.25% and the market risk is 12.50%
a. 0.81
b. 0.87
c. 1.12
d. 1.24
7. Chelsea Hotels has a beta of 1.60, while Rebelyn Farms has a beta of 0.86. The required return
on an index fund that holds the entire stock market is 15%. The risk-free rate of interest is 9%.
By how much does Chelsea’s required return exceed Rebelyn’s required return?
a. 4.55
b. 7.59
c. 9.10
d. 9.86
8. Identify which of the following decisions would likely involve capital budgeting:
a. Purchase of new ship by a freight company
b. Planning and execution of major marketing program
c. Allocation of overhead costs to product lines using departmental rather than plant-wide
rates

9. Rising Moon Corporation wishes to replace its vendo machine (book balue: P50,000), which
recently broke down. This replacement is intended to avoid future breakdowns as well as
increase revenues owing to its larger shelf size. The purchase price of the vendo machine is
P250,000. Delivery costs and insurance during the transit amount to a total of P5,000. The old
vendo machine could be sold to a scrap shop for P35,000. Should the new machine be
purchased, repairs amounting to P20,000 to fix the old machine after the recent breakdown
could be avoided. However, because of the larger shelf size of the new machine, an additional
working capital of P25,000 will be needed.
I. Answer the following assuming no taxes
a. What is the net investment?
b. What amount is subject to depreciation?
II. Assume that Rising Moon is subject to a 30% income tax rate. Answer the following:
a. What is the net investment?
b. What amount is subject to depreciation?

10. A new investment in an equipment made by Jupert Corp. cost P850,000. Additional information
relating to the use of this equipment is presented below. Discount rate is 10%
Year Increase in net income Increase in net cash inflows
1 240,000 540,000
2 200,000 500,000
3 120,000 420,000
4 100,000 400,000
5 20,000 320,000

## After 5 years, the equipment will have a scrap value of P238,000.

I. What is the accounting rate of return based on the initial investment?
II. What is the accounting rate of return based on the average investment?

11. Joy technology is considering an expansion project. The following income statement items are
expected to materialize if (1) there is no expansion, and (2) there is an expansion:
No expansion Expansion
Sales 9,000 12,000
Cash expenses 6,000 6,900
Depreciation 1,500 2,100

Scenario I. No taxes
a. What is the incremental net income due to the expansion?
b. What is the incremental after-tax cash flows due to the expansion?
Scenario II. Assume Joy is subject to a 30% tax rate.
a. What is the incremental net income due to the expansion?
b. What is the incremental after-tax cash flows due to the expansion?
12. FerFer Company plans to purchase a cutting machine costing P70,000 that will increase its
efficiency in the production of its goods. Annual increases in cash flows due to the use of the
machine and the estimated salvage value at any point pf each year is given below:
Year Cash inflow Salvage value
1 30,000 25,000
2 20,000 14,000
3 15,000 5,000
4 15,000 1,000

## I. What is the payback period?

II. What is the bailout period?
13. Rayken Corporation is considering whether to invest in Project Ramen which requires an intial
cost of P20,000. Project Ramen is expected to generate P23,600 net year after which it will be
deemed worthless. Based on the risk of Project Ramen, its financers would require a rate of
return of 15% for it to be considered profitable.
a. Calculate Project Ramen’s NPV.
b. Calculate Project Ramen’s IRR
c. Calculate Project Ramen’s PI.
d. Evaluate the desirability of Project Ramen Based on the three models.
14. MaKy Corporation is evaluating a decision to acquire an equipment costing P150,000 that would
increase cashflows by P25,000 every year for the next 10 years. The salvage value of the
machine after 10 years is nil. The weighted average cost of capital of MaKy is 12%.
a. Calculate Project’s NPV.
b. Calculate Project’s IRR.
c. Calculate Projects’s PI.
d. Evaluate the desirability of the Project based on the three models.
15. The Patricia Coporation’s year-end balance sheet is given. The cost of common equity is 16%, its
before-tax cost of debt is 13%, and its marginal tax rate is 30%. Assume that the firm’s long-term
debt sells at par value. The firm has 288 shares of common stock outstanding that sell for P8.00
per share.
Asset Liabilities and equity
Cash 120
AR 240
Inventories 360 Long-term debt 1,152
PPE, net 2,160 Common equity 1,728
Total Assets 2,880 Total Liabilities and equity 2,880

## Determine Patricia’s weighted average cost of capital.

16. Queen industries, which has no debt outstanding, has a beta of 0.95 for its common stock.
Management is considering a change in the capital structure to 40% debt and 60% equity. This
change would increase the beta on the stock to 1.15, and after-tax cost of debt will be 7.5%. The
expected return on the equity market is 15%, and the risk-free rate is 5%.

I. Recommend whether Queen’s management should proceed with the capital structure change.

## 17. Anchor Enterprise’ balance sheet as of December 31, 2016 is as follows:

Current assets 60,000 Accounts payable 10,000
Accruals 10,000
Notes payable 10,000
Long-term Liabilities 30,000
Fixed assets 40,000 Equity 40,000
100,000 100,000

During 2016, the entity reported revenues of P500,000, net income of P100,000, and dividends of
P6,000. Sales are projected to grow by 20% next year. Both profit margin and the dividend pay-out
ratio will remain the same. Operations are at full capacity. Assume external funds will be raised
through issuance of long-term debt.

I. Calculate how much long-term debt will the company have to issue next year.
II. If the operations are not a full capacity, what will be your answer in the previous item?

18. Oneng corporation’s present capital structure consists of 30% debt, 10% preferred equity, and
60% common equity. This capital structure is considered optimal and Oneng corporation wishes
to maintain it. For the coming year, Oneng corporation is planning to invest in an P80M project
that will be financed according to the desired capital structure. Currently, Oneng Corporation
has P20M cash available for the project.
a. The percentage of P80M that will come from long-term debt is
a. 30%
b. 22.5%
c. 24%
d. 18%
b. The percentage of P80M that will come from a new issuance of common stock is
a. 60%
b. 40.8%
c. 30.6%
d. 45%
c. If the company will maintain the optimal capital structure to finance the project, and
preferred stocks are issued, the proceeds should be
a. 6M
b. 8M
c. 10M
d. 7.5M