Questions

608
MULTIPLE CHOICE:
1. Which of the following statements is correct?
a. The stockhoiders' equity is a major component of working
capital.
b. Net working capital is the difference between quick assets
and current liabilities.
C. Working capital is a measure of long-term solvency.
d. Net working capital is the difference between current assets
and current liabilities.
2. The primary objective of working capital management is to
maximize the company's total current assets.
b. minimize the company's total current liabilities.
balance the amount of current assets and current liabilities.
d. achieve a balance between risk and return.
a.
3. In a conservative or relaxed working capital financing policy,
a. operations are conducted on a minimum amount of working
capital.
b. operations are operated with too much working capital.
short-term liabilities are used to finance not only termporary
current assets, but also part or all of the permanent current
asset requirements.
d. the company is exposed to risk of illiquidity because of low
working capital position.

4. Financing inventory build-up with long-term debt is an example of
a conservative working capital policy.
b. matching policy.
an aggressive working capital policy.
d. hedging policy.
a.
a. the use of long-term debt to finance current assets.
b. the use of short-term debt to finance non-current assets,
5. The hedging approach to financing involves
e matching maturities of debt with specific financing needs.
issuance of common stocks to raise funds for working capital
d.
requirements.
6. Which of the following is incorrect?
a. Profitability varies directly with liquidity.
b. The greater the risk, the greater is the potential for larger retum,
C. Long-term financing has less liquidity risk than short-term
financing, but has a higher explicit cost, hence lower return.
d. More current assets lead to greater liquidity, but yield lower
returns.
7. Which of the following statements is true?
a. Short-term debt is usually more expensive than long-term debt.
b. Liquid assets do not ordinarily earn higher returns relative to
long-term assets, so holding the former will maximize the

return on total assets.
C. A conservative working capital policy is characterized by
higher current ratio and acid-test ratio.
d. Determining the appropriate level of working capital for a firm
requires changing the firm's capital structure and dividend policy.
8. The length of time it takes for the initial cash outflows for goods
and services to be realized as cash inflows from sales is called
a. product life cycle.
b. manufacturing cycle.
vicious cycle.
d. cash conversion cycle.
9.
If the average age of accounts payable is 15 days, the average
age of accounts receivables is 60 days, and the average age of
inventory is 10 days, the number of days in the operating cash
conversion cycle is
a. 70 days.
b. 85 days.
c. 55 days.
d. 60 days.
10. The following data are taken from the records of Apple
Corporation for the year ended December 31, 200B:
Net credit sales
Average materials inventory
Average finished goods inventory

Average accounts receivable
Average accounts payable
Net credit purchases
Raw materials used
Gross profit rate
P576,000
000'
P96,000
%5%
What is the average number of days in the company's operating
cash conversion cycle? (Use a 360-day year)
a. 50 days
b. 75 days
C. 105 days
45 days
11. An objective of cash management is to
maximize the cash balance to avoid the risk of illiquidity.
b. minimize the cash balance to maximize the return from idle
cash.
c. invest cash for a return while retaining sufficient liquidity to
satisfy future needs.
d. reserve as much cash as possible for potential investment
opportunities.
12. In cash management, the difference between the bank balance for
a firm's account and the cash balance that the firm shows on its
own books is called
al float.
b. bank charges.
C. interest income.
d. reconciling item.
13. Banks sometimes require its borrowers to maintain a certain
percentage of the face amount of a loan which the bank requires
its borrowers to keep in a non-interest bearing current account.
This is called compensating balance, which
a, decreases the effective rate of interest paid by the borrower.
b. compensates the bank for services rendered by providing it
with deposits of funds.
C. represents prepaid interest on a loan.
d. cannot be used for disbursements by both the borrower and
the bank.
14. A working capital technique that increases the payable float and
therefore delays the outflow of cash is
a. electronic data interchange (EDI).
b. automatic fund transfer (AFT).
C. a draft.
d. Baumol Cash Management Model.
5. CompanyA grants credit terms of 30 days to Company B.
operating cycle of Company B is 20 days. In this case, Company A
The
a. is, in effect, financing more than Company B's inventory needs.
b. is, in effect, financing less than Company B's inventory needs.
C. will have a lower level of accounts receivable than those
companies granting shorter credit terms.
d. can be sure that Company B will be able to convert its
inventories into cash before payment is due.
16. A change in a seller's credit policy has caused the following:
Sales decreased
Discounts taken decreased
Investment in accounts receivable increased
The number of doubtful accounts increased
Based on this information, we can say that
a. the company increased the rate of discount offered.
b. net profit has decreased.
C. gross profit has increased.
d. the average collection period has increased.
17. For a manufacturing firm, the most direct way of preparing a cash
budget requires incorporation of the following, except
a. sales projections and credit terms.
b. collection percentages and other cash receipts.
estimated purchases and payment terms and other cash
disbursements.
d. projected net income and depreciation expenses.
18. Belle Company's average monthly cash receipts is P1,500,000. Its
average collection period is ten (10) days. A collection agency has

offered to be the company's collector and shorten collection period
to four (4) days for a monthly fee of P1,500. The company can
invest its excess funds in money market placement at a rate of 8%.
If the collection agency's offer is accepted, Belle Company's net
annual benefit (loss) is
P6,000.
b. (P6,000).
C. P270,000.
d. P500.
A Qror Corporation had income before tax of P100,000 for the year.
bcluded in this amount was depreciation expese of P20,000, bond
iscount amortination of P18,000, and the amount paid for salaries
and woges of P30,000. The estimated cash ftow for the year is
e P138,000,
d. P120,000.
20 Annabelle Corporation is engaged in a multi-level marketing
business that presently requires all sales agents to mail checks to
its Manila office An average of three days is required for mailed
checks to be received, one day for Annabelle Corporation to
process them and three days to clear through its banks.
The company's treasurer proposed a change in the system, where
the checks will no longer be mailed to Manila office. Instead,
checks collected will be deposited on-line in any branch of the
company's depository bank, and the deposit slips, as well as the
other pertinent documents will be sent by fax or e-mail to the

Manila office on the same day, The original deposit slips and other
documents will be submitted by the sales agents to Manila when
they attend the Sales Agents' Monthly Meeting.
The new system will eliminate the mailing float and the processing
Annabelle Corporation has an average daily collection of
PS0,000.
If the new system is implemented, Annabelle Corporation's
average cash balance will increase by
a. P 50,000.
b. P150,000.
C P350,000.
d. P200,000.
Majority of Aning Company's customers are farmers from remote
rural areas, Farmers Bank has offered to provice Aning Company
a lockbox system at a fixed fee of P300 per month and a variable
fee of P2 for each payment processed by the bank.
Aning Company receives 30 payments per day, averaging P5,000
per payment. With the lockbox system, the company's collection
Tioat will decrease by 3 days. Money market securities earn 5%
per annum.
4.
Should Aning Company accept Farmers Bank's offer to provide a
lockbox system? (Use 360 days in a year.)
a. Yes, because it would earn additional income of P22,500 per

year.
b. Yes, because it would earn net benefit of P2,700 from the
lockbox system.
C. No, because the cost of the lockbox system is P2,700 more
than the expected return on money market placements.
d. No, because the lockbox system would require the company
to spend P25,200 per year.
EMS 22 and 23 ARE BASED ON THE FOLLOWING INFORMATION:
Ben Corporation uses the Baumol Cash Management Model to
determine its optimal cash balance.
For the coming year, the expected cash disbursements total P432,000.
The interest rate on marketable securities is 5% per annum. The fixed
cost of selling marketable securities is P8 per transaction.
2. Using the Baumol Cash Management Model, the company's
optimal cash balance is
a. P11,757.55.
b. P 5,878.78.
P142,000.00.
d. P
1,175.76.
3. Using the Baumol Cash Management Model, the average cash
balance is
a. P11,757.55.
b. P 5,878.78.
C. P142,000.00.
d. P 1,175.76.
4. Which of the following items is not a marketable security?
a. Treasury Bills
b. Commercial Papers
Central Bank Certificate of Indebtedness (CBCIS)
d. Convertible Bonds
5. When managing cash and short-term investments in marketable
securities, the treasurer of a corporation is primarily concerned with
a. liquidity and safety.
b. maximizing the rate of return.
maximizing risk.
tax avoidance.
26 An objective of accounts receivable management is to have both
the optimal amounts of receivables outstanding and bad debts.
This balance requires the trade-off between the benefit of more
credit sales and
the cost of sales.
more bad debts.
C. the cost of accounts receivables, such as collection, interest
and cost of bad debts.
d. a high accounts receivable turnover.
b.
27. Following are ways of accelerating collection of accounts
receivabies, except
shorten credit terms.

minimize negative float.
C. age accounts receivables.
d. offer special discounts to those who pay promptly.
a.
b.
28. The average collection period for a firm measures the number of
days after a typical credit sale is made until the firm receives the
payment. It should be related to the firm's credit terms.
example, a firm that allows terms of 2/10, net 30 should have an
average collection period of
a. thirty days.
b. ten days.
For
C. twenty days.
d. somewhere between 10
days and 30 days.
29. Which of the following represents a firm's average gross receivables
balance?
I. Average age in days of receivables x average daily sales
II. Average daily sales x average collection period
III. Annual credit sales + accounts receivable turnover
C. II only
d. I, II, and III
a. I only
b. I and II only
. A change in credit policy accelerated the collection of accounts
receivable. As a result, the company experienced the following, except
an increase in discounts taken by customers.
D. an increase in the average collection period.
a decrease in the receivables balance.
d. a decrease in bad debts.
ITEMS 31 and 32 ARE BASED ON THE FOLLOWING INFORMATION:
Elaine Corporation is planning to introduce changes in its collection
procedures.
collection period longer by 10 days, although there will be no
change in bad debts.
The new procedures are expected to make the
For the coming year, Elaine Corporation's budgeted sales is
P32,400,000 or P90,000 per day. Short-term interest rates are
expected to average at 9% per annum.
31. As a result of the changes in collection procedures, Elaine Corporation's
average accounts receivable balance will increase (decrease) by
a. P900,000.
b. P 90,000.
d.
P32,400,000.
32. To make the changes in collection procedures cost beneficial, the
minimum savings in collection costs for the coming year should be
a. P900,000.
b.
P 8,100.
d. P90,000.
81,000.
33. A company's president requested the credit and collection
manager to submit proposals on how to change the company's
credit policy.
The credit and collection manager submitted two proposals. In
both proposals, sales, profits, and collection periods will change
although by different figures. Bad debts experience will remain
the same despite the proposed changes.
In making a decision on which proposal should be implemented,
the president should consider the following factors, except
a. the impact of the proposed changes on the current
customers of the company.
b, the cost of short-term credit.
/c. the company's current bad debts experience.
d. the change in credit terms to be imposed by banks which
provide short-term financing to the company.
EMS 34 and 35 ARE BASED ON THE FOLLOWING INFORMATION:
Che-Che Corporation is planning to change its credit policy. The
proposed change is expected to:
shorten the collection period from 50 days to 30 days.
increase the ratio of cash sales to total sales from 20% to
30%.
decrease total sales by 10%.

34. If projected sales for the coming year is P40M, what is the peso
impact on the average accounts receivable balance of the
proposed change in credit policy? (Use 360 days in a year.)
a. P2,344,444 decrease
b. P2,100,000 decrease
P 6,800,000 decrease
d. P18,889 decrease
35. What is the impact of the proposed credit policy on the company's
accounts receivable turnover?
Decrease by 7.2
b. Increase by 4.8
C.
Decrease by 20 days
d. Increase to 4.8 times
36. Donny Traders sells on credit terms of 2/10, net 30. Average daily
credit sales is P50,000. On the average, 70% of the customers
avail of the discount and pay on the 10th day after purchase, while
the rest pays on the last day of the credit term. How much is the
company's accounts receivable balance?
a. P1,500,000
b. P 450,000
c.
P 800,000
d. P1,050,000
37. Flint Company's average collection period is 20 days. The average daily
sales is P5,000. All of the company's customers pay by credit card.
How much is the company's average accounts receivable balance?
a. PO
b. P100,000
C. P50,000
d. P 5,000
38. May Corporation's average daily sales is P6,400,000, 10% of which
is cash sales. The variable cost ratio is 60%. Starting next year,
May Corporation will relax its credit standards. The relaxation in
credit standards is expected to cause the following changes:
Total credit sales will increase by 20%.
The collection period for incremental sales is 60 days. (The
payment behavior of the existing customers will not change.)
The variable cost ratio, even for the incremental sales, will be the
same as in the past. The cost of borrowing is estimated at 25% per
year. The company uses 360 days in a year in all its computations.
What is May Corporation's expected benefit (loss) from the
planned relaxation in credit policy?
a. P1,152,000
b. P 460,800
C.
(P 27,520)
d. P432,000
39. Sisa Corporation has the following data:

Selling price per unit
Variable cost per unit
Annual credit sales - units
Collection period
Rate of return
P70
P45
50,400
30 days
%0%
Sisa Corporation is considering easing its credit standards. If it
does, sales will increase by 25%; collection period will increase to
45 days; bad debts losses are anticipated to be 4% of the
incremental sales; and collection costs will increase by P31,645.
If the proposed relaxation in credit standards is implemented, the
net benefit (loss) for Sisa Corporation is
a. P215,000.
b. P315,000.
C. (P 33,075).
d. (P100,000).
40. Inventory management is the formulation and administration of
plans and policies to efficiently and satisfactorily meet production
and merchandising requirements and minimize costs relative to
inventories. One of its objectives is to
maximize the units in inventory.

a.
b. maximize sales.
C. minimize production costs.
d. maintain inventory at a level that best balances the estimates
of actual savings, the cost of carrying additional inventory,
and the efficiency of inventory control.
41. Inventory costs, in addition to the costs of the purchased items,
have been traditionally classified as follows, except
order costs.
b. carrying costs.
a.
C. stockout costs.
d. order-filling costs.
42. Inventory management requires the firm to balance the quantity of
inventory on hand for operations with the investment in inventory.
Two cost categories in inventory management are order costs and
carrying costs.
a. The carrying costs include handling costs, interest on capital
invested, and obsolescence.
b. The order costs include quantity discounts lost, handling
costs, and setup costs for a production run.
C. The carrying costs include purchasing costs, shipping costs,
quantity discounts lost, and setup costs.
d. The order costs include insurance costs, shipping costs, and

obsolescence.
43. The following data are taken from the records of Chikoy
Corporation for year 200A:
Sales
Cost of sales
Inventory turnover
P25,200,000
P14,400,000
9 times per year
For 200B, budgeted sales and cost of sales are the same as in
200A actual data, although the company will try to increase its
inventory turnover to 12 times per year. If short-term interest
rates are expected to average at 8%, what is the company's
expected savings due to the increase in inventory turnover?
a. P400,000
b. P700,000
C. P32,000
d. P56,000
44. Which inventory costing system will result in a high inventory
turnover ratio in a period of rising prices?
a. FIFO
b. LIFO
C. Perpetual
d. Periodic
3. In inventory management, a decrease in the frequency of ordering

will normally
a. increase total carrying costs.
b. increase the total ordering costs.
C. have no effect on total carrying costs.
d. have no effect on total ordering costs.
46. A company would be wiling to have a low inventory turnover ratio
if the
a. inventory order costs is low.
b. carrying cost of inventory is high.
c. cost of stock out is high.
d. lead time is short.
47. The EOQ model is a deterministic model that calculates the ideal
order quantity (or production lot) given specified periodic demand,
the cost per order or production run, and the periodic carrying cost
per unit. The EOQ model
a. minimizes the sum of inventory carrying costs and either
ordering or production setup costs.
b. minimizes the sum of ordering costs and production setup
costs.
C. minimizes the sum of carrying costs and handling costs.
d. minimizes the level of average inventory in units.
48. The Economic Order Quantity (EOQ) model can be used to establish
inventory policy. In the case of a manufacturer, the EOQ is called the
Economic Lot Size (ELS) or Economic Production Quantity (EPQ).

Which of the following statements about the ELS is incorrect?
a. The objective of the ELS model is to minimize the sum of
inventory carrying costs and the costs of production runs or
setup costs.
b. In the ELS model, the production rate is deemed to be
instantaneous.
C. In the ELS model, the demand is assumed to occur at a
constant rate over some period of time.
d. The ELS model is used to maximize contribution margin or
minimize costs given resource constraints.
LINEAK FRGAMNG
49. Which of the following is not an element in the EOQ formula?
a. yearly demand
b. variable cost per order d. periodic carrying cost per unit
C. safety stock
FO Which of the following statements is false?
a The cost of inventory itself, as weli as any quantity discounts lost
on inventory purchases, is directly reflected in the EOQ model.
b. A decrease in inventory order costs will decrease the EOQ.
C. An increase in inventory carrying costs will decrease the EOQ.
d. An increase in the variable cost of placing and receiving an
order will increase the ECQ.
51. The Economic Order Quantity (EOQ) formula does not assume that
a. demand is known.
b. usage is uniform.
the cost of placing an order is constant.
d. the cost of inventory itself is constant.
C.
52. In the EOQ model, the return on capital that is foregone when it is
invested in inventory is a(an)
a, order cost.
b. carrying cost.
exclusion in the EOQ computation.
d. irrelevant cot.
C.
ITEMS 53 to 55 ARE BASED ON THE FOLLOWING INFORMATION:
Emil Traders, Inc. sells cellphone cases which it buys from a local
manufacturer. Emil Traders selis 24,000 cases evenly throughout
the year. The cost of carrying one unit in inventory for one year is
P11.52 and the order cost per order is P38.40.
53. What is the economic order quantity?
La, 400
b. 283
C. 200
d. 625
54. If Emil Traders would buy in economic order quantities, the total
order costs is
P921,600.
6. P 2,304.
C. P 76,800.
d. P460,800.
a.
55. If Emil Traders would buy in economic order quantities, the total
inventory carrying costs per year is
a. P276,480.
C. P 23,040.
d. P138,240.
b. P 2,304.
56. The basic EOQ model equals the square root of the (1) product of
twice the demand times the cost per order, (2) divided by the
periodic carrying cost per unit. If the annual demand increases by
44%, the EOQ will increase (decrease) by
a. 6.63%.
b. 20%.
C. 9.38%.
d. 12%.
ON THE FOLLOWING INFORMATION:
ITEMS 57 and 58 ARE BASED
The following information is available for Edgar Corporation's
Material X
12,600 units
360 days
20 days
Annual usage
Working days per year
Normal lead time
The units of Material X are required evenly throughout the year.
57. What is the reorder point?
a. 35 units
b. 20th day
c. 700 units
d. 630 units
58. Assuming that occasionally, the company experiences delay in the
delivery of Material X, such that the lead-time reaches a maximum
of 30 days, how many units of safety stock should the company
maintain and what is the reorder point?
Safety Stock
Reorder Point
350
350
1,050
700
a.
b.
C.
d.
1,050
700
1,050
59. The following information pertains to Annie Corporation's Material X:
Annual usage
Working days per year
Normal lead time in working days
Safety stock
25,200 units
360 days
30 days
1,050 units
The maximum lead time in working days and the reorder point for
Material X are
Maximum Lead Time
Reorder Point
30 days
15 days
45 days
45 days
a.
2,100
1,050
3,150
2,100
b.
C.
d.
60. Using the EOQ model, Ram Corporation determined the economic
order quantity for a merchandise item to be 800 units. To avoid
stockout costs, it maintains 200 units in safety stock. What is Ram
Corporation's average inventory of such merchandise item?
400 units
a.
C.
500 units
d. 1,000 units
b. 600 units
ITEMS 61 and 62 ARE BASED ON THE FOLLOWWING INFORMATION:
Using the EOQ model, Apple Baby Corporation computed the
economic order quantity for one of the products it sells to be 4,000
units. Apple Baby Corporation maintains safety stock of 300 units.
The quarterly demand for the product is 10,000 units. The order
cost is P200 per order. The purchase price of the product is P2.40.
The company sells at a 100% markup. The annual inventory
carrying cost is equal to 25% of the average inventory level.
61. The annual inventory carrying costs is
a. P2,300.
b. P2,000.
C. P4,300.
d. P4,000.
62. The total inventory order cost per year is
a. P 2,300.
b. P800,000.
C. P2,000.
d. P5,520.
The following information pertains to Emy Manufacturing Corporation's
33,750 units
P15
P500
TTEMS 63 to 66 ARE BASED ON THE FOLLOWING INFORMATION:
Product X:
Annual demand
Annual cost to hold one unit of inventory
Setup cost (or the cost to initiate a production run)
Beginning inventory of product X
At present, the company produces 2,250 units of Product X per
production run, for a total of 15 production runs per year. The
company is considering to use the EOQ model to determine the
economic lot size and the number of production runs that will minimize
the total inventory carrying cost and setup cost for Product X.
63. At present, the company's total annual inventory costs is
a. P 7,500.
b. P16,875.
c. P24,375.
d. P22,500.
64. If the EOQ model is used, the economic lot size is

a. 2,250 units.
b. 1,500 units.
c. 2,250,000 units.
d. P1,500.
65. If the EOQ model is used, the number of production runs should be
C. 67.5 runs.
d. 22.5 runs.
15 runs.
a.
b. 1,500 units.
66. If the EOQ model is used, the total annual inventory costs, compared
with that under the present system, will increase (decrease) by
a. (P1,875).
b. P3,750.
C. (P 5,625)
d. P11,250
67. Which of the following is not a source of short-term credit?
C. deferred income
d. common stock
a. purchases on account
b. accruals
58. Which of the following is incorrect?
a. When a firm purchases goods or services on credit from a
supplier, it automatically obtains short-term financing.
b. Trade credit usually bears no interest, so it is costless.

C. Accruals or accrued expenses is a form of spontaneous
financing which represents liabilities for services that have
been provided to the company but have not been paid for.
d. Pledging of receivables is an example of secured short-term
credit.
69. Which of the foillowing forms of short-term borrowing is a secured
credit?
a. commercial paper
b. line of credit
c. chattel mortgage
d. banker's acceptances
70. A company obtained a short-term loan from a bank. Information
about such loan is as follows:
Principal of loan
Stated interest rate
P5,000,000
10%
Terms
1 year
If the
pan is discounted, the effective interest rate is
10%.
a.
C. 9.09%.
d. 8.89%.
b. 11.11%.
71. A company received a P500,000 line of credit from its bank. Some
information about the credit line is as follows:
Stated interest rate
10%
Compensating balance requirement
20%
Assuming that the company drew down the entire amount at the
beginning of the year, and that the loan is discounted, what is the
effective interest rate on the loan?
C. 30%
d. 14.29%
10%
a.
b. 20%
72. A company received a line of credit from its bank. The stated
interest rate is 12%, deducted in advance. The line of credit
agreement requires that an amount equal to 20% of the loan be
deposited into a compensating balance account. On March 1, the
company drew down the entire usable amount of the loan and
received the proceeds of P340,000. How much is the principal
amount of the loan?
a. P340,000
b. P500,000
C. P231,200
d. P448,800
73. A company purchases merchandise form its supplier on credit
terms of 3/10, net 30. What is the equivalent annual interest rate
(use a 360-day year) if the company foregoes the discount and
pays on the 30th day?
a. 55.67%
b. 3%
60%
d. 3.09%
C.
74. What is the current price of a P100,000 treasury bill due in 180
days on an 8% discount basis?
a.. P100,000
b. P 96,000
C. P104,000
d. P 92,000
75. Jun Traders, a merchandising firm, purchases merchandise from
its suppliers on credit terms of 2/10, net 30. Jun Traders needs
cash, so it is considering two alternatives:
Alternative 1- Obtain a short-term loan from a bank at an
effective interest rate of 12%.
Alternative 2- Forego the discount on its credit purchases
and pay on the 30th day of the term.

Jun Traders should choose (Use a 360-day year.)
Alternative 2 because this is a costless credit financing.
b.
a.
Alternative 2 because its cost is cheaper by 10%.
C. Alternative 1 because its cost is cheaper by 24.73%.
d. Alternative 1 because its cost is cheaper by 1%.
76. A company's policy is to maintain a current ratio of at least 2:1. At
present, its current ratio is 2.5 is to 1. If current liabilities at present
amounts to P250,000, what is the maximum amount of short-term
commercial loan that can be obtained by the firm to finance
inventory expansion without violating its current ratio policy?
a. P125,000
b. PO
C. P62,500
d. P50,000
company obtained a short-term bank loan of P500,000 at an
annual interest rate of 10%.
compensating balance of 20% be maintained in the borrower's
account. The compensating balance will earn interest of 2% per
annum, payable on the maturity of the loan.
77.
The bank requires that a
Even before the approval of the loan, the company has been
maintaining a balance of P50,000 in the account.
compliance with the bank's condition, the company will just
deposit from the loan principal an amount of P50,000. What is the
effective interest rate of the loan?
Thus, in
10%
b. 10.89%
a.
C. 11.11%
d. 12.5%
The expected boom in business in the coming period led the Baby
Apple Company to decide to expand its operations. The expansion
requires an increase of P500,000 in working capital, which the
company is considering to finance through any of the following
alternatives:
1. Pledge the accounts receivable
The company's average accounts receivable is P625,000
per month. A financier will lend 80% of the face value of
the receivables at 10% interest per annum, payable on the
maturity of the loan.
2. Issue P515,000 of 3-month commercial paper to net
P500,000. New paper will be issued every 3 months.
3. Borrow from a commercial bank an amount that will net
P500,000 after deducting a compensating balance of 15%

and interest of 5%.
Use a 360-day year in all your calculations.
78. The cost of Alternative 1 is
a 10%.
Б. 12.5%.
8%.
C.
d. 120%.
79. The annual cost of Alternative 2 is
a. 11.65%.
b. 1%.
C. 12%.
0.97%.
d.
80. The annual cost of Alternative 3 is
5%.
b. 20%.
C. 25%.
6.25%.
d.
a.
Lei Company enters into an agreement with a firm that will buy Lei
Company's accounts receivable and assume the risk of collection.

Details about the agreement are as follows:
Average amount of receivable to
be factored each month
Average collection period
Amount to be advanced by the
factor
P500,000
60 days
80% of the face amount
of the
eivables
Interest rate, deductible in
advance
Factor's fee, deductible in advance
Annual savings of Lei Company in
collection expenses
10% p.a.
2%
P60,000
How much is the monthly net proceeds from factoring the receivables?
81.
a. P500,000
b. P400,000
C. P383,333
d. P350,000
82. What is the annual net cost of factoring?
a. P120,000
b. P100,000
P160,000
d. (P 10,000)
C.
83. What is the effective annual cost rate of financing?
a 26.09%
b. 25%
C. 20%
d. 29.41%
84. If the interest charge and factor's fee is not deducted in advance,
the effective annual cost rate is
a. 26.09%.
b. 25%.
C. 20%.
d. 29.41%.
85. Loi often factors its accounts receivable. The factor requires a 10%
reserve and charges 2% commission on the amount of receivables
factored. The remaining amount (after deducting the reserve and
commission) is further reduced by an annual interest charge of 12%
.At the beginning of the month, the company factored P500,000 of
accounts receivable due in 60 days and received net proceeds of
(Use a 360-day year)

a. P440,000.
b. P387,200.
c. P431,200.
d. P380,000.
ITEMS 86 to 89 ARE BASEI)
Jem Traders, Inc. needs P100,000 to pay a supplier's invoice for
merchandise purchased with terms of 2/10, net 30. Jem Traders
wants to pay on the 10th day of the credit term so it can avail of
the 2% discount.
The funds needed can be raised by obtaining a short-term loan from a
bank which agrees to grant a 30-day loan at 12% discounted interest
per annum. The bank requires that a compensating balance of 10%
be maintained in the borrower's non-interest earning deposit account.
86. The amount needed by Jem Traders to pay the invoice within the
discount period is
a. P 98,000.
b. P100,000.
87. The principal amount of the loan that must be obtained from the
bank to raise the needed fund is
a: P110,112.
b. P108,780.
C. P 9,000.
d. P102,000.
C. P112,360.
d. P125,640.
What is the effective interest rate of the loan?
C. 10%
d. 13.48%
88.
12%
a.
b. 22%
89. If Jem Traders fails to pay the discount and pays the account on
the 30th day of the term, what is the annual cost of this non-free
trade credit?
a. 2%
b 36.73%
C. 24%
d. 0
30, Which of the following is not a source of long-term financing?
a. Common stucks
b. Bonds
C. Preferred stocks
d. Floating lien
91. One of the sources of long-term financing is the issuance of
common stocks. The advantages (to the issuer) of issuing
common stocks are as follows, except
a. the sale of common stocks increases credit worthiness of the

firm by providing more equity.
b. common stock cash dividends are not tax deductible as expense.
common stock is frequently more attractive to investors than
C.
debt because it grows in value with the success of the firm,
d. common stock dividends are not fixed - thèy are paid from
profits when available.
It is a hybrid of debt and equity. It has a fixed charge and increases
leverage, but payment of dividends is not a legal obligation.
ca. Preferred stock
b. Common stock
92.
C. Bonds
d. Commercial paper
93. Bonds, a source of long-term financing, are long-term debt
instruments. They are similar to term loans, except that they are
usually offered to the public and sold to many investors. Among the
advantages (to the issuer) of issuing bonds are as follows, except
cost of debt is limited- bondholders usually do not participate
in the superior earnings of the firm.
b. interest paid on debt (bonds) is tax deductible.
CC. debt adds risk to a firm.
d. basic control of the firm is not shared with the debt holders.
a.
94. Leasing has become a major means of financing because it offers

a variety of tax and other benefits. The three principal forms of
lease are sale-leaseback, operating lease, and capital lease. The
operating lease
a. involves the sale of property by the owner and a lease of the
property back to the seller.
b. is non-cancelable and fully amortizes the cost of the leased
asset over the term of the basic lease contract.
C. transfers substantially all of the benefits and risks of
ownership of property to the lessee.
d is a form of off-balance-sheet financing.
95. Jammy Corporation presently has 200,000 shares, P10 par value
common stocks issued and outstanding.
stockholders of Jammy Corporation have preemptive rights.
The
common
If Jammy Corporation issues 100,000 additional shares of cornmon
stock at P15 per share, a current holder of 30,000 shares of Jammy
Corporation's common stocks must be given the option to buy
a. 15,000 additional shares.
b. 30,000 additional shares.
C. 45,000 additional shares.
d. 60,000 additional shares.
96. Which of the following brings in additional capital to the firm?
a. Issuance of stock dividend

b. Two-for-one stock split
C. Exercise of warrants
d. Conversion of convertible bonds to common stocks
97. Warrants are long-term options that give holders the right to buy
common stocks in the future at a specified price. Issuers of debt
sometimes attach stock purchase warrants to debt instrument as an
inducement to investors. A major use of warrants in financing is to
increase the return on debt.
b. lower the cost of debt.
C. avoid dilution in earnings per share.
d. maintain managerial control.
a.
98. To acquire additional capital while attempting to maximize
earnings per share, a company should normally
select debt over equity initially.
b. select equity over debt initially.
C. issue both bonds and stocks in equal proportion.
d. discontinue paying dividends and use current cash flows to
raise capital funds.
a.
99. If a firm's degree of operating leverage is higher than the industry
average, such firm
is more profitable.
C. has profits that are more sensitive to changes in sales volume.
d. has higher sales.

a.
is less risky.
b.
Following is the income statement of Annabelle Corporation for the
year ended December 31, 200A:
ANNABELLE CORPORATION
Income Statement
For the year ended December 31, 200A
P50,000,000
40,000,000
P10,000,000
6,000,000
P 4,000,000
1,000,000
P 3,000,000
900,000
P 2,100,000
Sales (500,000 units at P100 each)
Less variable cost (500,000 at P80 each)
Contribution margin
Less fixed costs
Operating income (or EBIT)
Less interest expense

Income before tax
Less income tax (30%)
Income after tax
100. What is Annabelle Corporation's degree of operating leverage (DOL)?
C. 4.90
d. 7.35
a. 2.50
b. 3.33
101. What is Annabelle Corporation's degree of financial leverage (DFL)?
a. 1.72
b. 2.50
C. 2.00
d. 1.33
102. What is Annabelle Corporation's degree of total leverage (DTL)?
C. 1.25
d. 0.80
a. 4.00
b. 3.325
103. The weighted average cost of capital approach to decision making
is not directly affected by the
a. cost of debt outstanding
value of the common stocks
b.
C. current budget for capital expansion
d. proposed mix of debt, equity, and existing funds used to

implement the project.
104. Which of the following statements about cost of capital is false?
a. Cost of capital is based on what the company pays for its
capital, not the return earned on the capital employed.
b. The overall cost of capitai is the minimum rate a firm must
earn on all investments to cover capital costs.
C. The overall cost of capital is the cost of the firm's equity
capital at which the market value of the firm will remain
unchanged.
d. The overall cost of capital is the weighted average cost of
the various debt and equity components in a firm's capital
structure.
105. Ideally, a firm's optimal capital structure is the one that balances
the cost of debt and equity capital and their associated risk levels.
The optimal capital structure minimizes the firm's
a. weighted average cost of capital.
b. cost of debt.
cost of equity capital.
d. earnings per share.
C.
106. Which of the following statements is incorrect?
a. Capital structure is the mix of the long term sources of funds
used by the firm.
b. Capital structure consists of the firms long-term financing,

i.e., long-term debt and stockholders' equity.
C. The optimum capital structure is a combination of long-term
debt and equity that minimizes the cost of capital and value
of the firm.
d. Debt is cheaper than equity, but excessive use of debt
increases the firm's risk and drives up the weighted average
cost of capital.
An increase in the corporate income tax rate might
encourage a firm to increase the amount of debt in its
capital structure.
b. An increase in economic uncertainty encourages equity
financing.
C. In general, debt financing is more expensive than equity
financing.
d. When calculating the cost of capital, the cost assigned to
retained earnings should be lower than the cost of external
common equity.
107. Which of the following statements is incorrect?
a.
108. At present, Jerry Corporation's capital structure is composed of
200,000 shares of common stocks outstanding with a market price
of P20 per share. It also has P4 million in 8% bonds and P2 million
in 10%, P10 par value preferred stocks, both currently selling at par,
The company is considering a P3-million expansion program which

can be financed with:
1. all common stocks at P20 per share.
2. all bonds at 10% interest rate.
3. all preferred stocks.
If the expansion program is undertaken, the company estimates
that it can earn EBIT (earnings before interests and taxes) of
P2,000,000. The income tax rate is 30%.
If the expansion program is implemented, the expected earnings
per share under each alternative source of financing are:
All Common Stocks All Bonds All Preferred Stocks
P4.71
3.26
P3.69
P3.21
a.
b.
5.71
5.71
4.69
2.69
4.78
C.
d.
2.78
3.83
3.38
109. Jervi Corporation is planning to issue P20M bonds at an effective
interest rate of 10%. The company pays income tax at a rate of
30%. What is the cost of debt capital?
10%
C.
3%
d. 13%
a.
b.
7%
110. Sam Corporation is planning to issue 100,000 shares of 10%, P50 par
value preferred stocks for P80 per share. The company pays income
tax at a rate of 30%. What is the cost of capital (preferred stocks)?
C. 6.25%
d. 4.25%
10%
a.
b. P5
111. Tanya Corporation issued preferred stocks for P120 per share.
The issue price is P20 more than the stock's par value.
company incurred underwriting fees of P10 per share. The stocks
will earn annual dividends of P12 per share. If the tax rate i5
30%, the cost of capital (preferred stocks) is
The
10%
a.
b.
7.42%
d. 10.91%
C.
12%
112. Vicky Corporation has preferred stocks that pay dividends of P6.72
per share. If the cost of funds (capital) coming from preferred
stocks is 12% and the income tax rate is 30%, what is the price of
the preferred stocks?
a. P56.00
b. P 0.81
C. P 1.79
d. P38.08
Hector Corporation's capital structure is as follows:
Bonds payable, 10 years, 10%
10% preferred stocks, P200 par value,
10,000 shares issued and outstanding
Common stocks, P50 per share,
30,000 shares issued and outstanding
Retained earnings
Total
P1,000,000
2,000,000
1,500,000
500,000
P5.000,000
The company's earnings per common share (EPS) is P12. The
common shares' current market price is P60, while that of preferred
shares is P250. The income tax rate is 30%.
113. For purposes of computing the company's overall cost of capital,
the cost of common stocks and retained earnings is
a. 24%.
b. 16.32%.
C. 20%.
d. 13.6%.
114. The cost of debt is
7%.
14.71%.
7.58%.
C.
a.
d.
b. 10%.
115. The cost of preferred stocks is
C. 8%.
d. 5.44%.
a. 10%.
6.8%.
b.
116. What is the weighted average cost of capital?
8.54%
a. 34.80%
b. 23.66%
C.
d. 12.60%
117. Harry Corporation's common stocks currently sell for P40 per
share. The estimated dividend payment at the end of this year is
P4 per share. The expected growth rate is 12%.
dividend growth model, the cost of capital is
a. 22%.
b. 10%.
Using the
C. 12%.
d. 23%.
Harold Corporation's common stocks currently sell for P50 per share.
Flotation cost is 5%. In the past, the company paid dividends of
P4.50 per share. The expected dividend growth rate is 10%.
118. Using the dividend growth model, the cost of capital is
c. 20.42%.
d. 10.42%.
19.47%.
a.
b. 19.90%.
119. What is the cost of retained earnings?
a. 19.47%
b.
19.90%
C. 20.42%
d. 10.42%
120. Pinky Corporation expects to pay dividends of P5 per share at the
end of this year. The expected growth rate is 10%.
Using the dividend growth model, what is the stock's market price
if the cost of capital (common stocks) is 25%?
a. P14.29
b. P50
C. P20
d. P33.33
The return on market portfolio is 12% and the risk-free rate is 5%.
The beta coefficient is 1.4.
121. Using the capital asset pricing model, what is the cost of capital
(or required rate of return)?
a. 14.8%
b. 12%
C. 9.8%
d. 14.0%
122. If the beta coefficient increases to 1.6, the required rate of return
will increase (decrease) by
0.2%.
b. (0.2%).
a.
C.
1.4%.
d. (1.4%).
123. Chelsea Corporation is planning to invest in a project.
investment opportunities are being considered:
Two
Alternative
Cost of Investment
Expected Return on Investment
P100 M
P100 M
11%
15%
Chelsea Corporation can invest in only one of the alternatives. The
investment project will be financed by issuing common stocks. The
company uses the capital asset pricing model (CAPM) in computing
the cost of capital (common stocks). At present, the market rate is
12% and the risk-free rate is 8%. The beta coefficient is 1.3.
Which investment alternative should the company choose?
a. Alternative 1 only
b. Alternative 2 only
C. Alternatives 1 and 2
d. None
Following are some financial data pertaining to Kyle Corporation:
Capital structure (in millions):
Long-term debt (12% interest rate)
Stockholders' equity:
Common stocks, P10 par value
Additional paid-in capital
Retained earnings
Total
P 140
P 40
400
860
P1,000
420
Kyle Corporation's common stock is currently selling at par. The
current market return is 14% and the risk-free rate is 10%. The
beta value for Kyle Corporation is 1.20. It pays income tax at the
rate of 30% of taxable income.

124. The after-tax cost of debt is
8.40%.
d. 17.64%.
12%.
3.84%.
b.
C.
a.
125. Using the capital asset pricing model, the cost of common equity is
14.8%.
b. 12.0%.
C. 18.8%.
a.
d.
4.8%.
126. The weighted average cost of capital is
a. 22.96%.
b. 11.48%.
14.80%.
C.
d.
13.91%.
127. Charmaine Corporation has P50M bonds in its capital structure.
The corporation issued the bonds at par, P1,000 per bond, with
10% interest rate. The bonds will mature in 10 years. At present,

such bonds can be sold at P1,300 per bond and can be issued at
140 basis points over Philippine treasury bonds.
Corporation's income tax rate is 30%. The interest rate for
Philippine treasury bonds is 8%.
Charmaine
What is Charmaine Corporation's current cost of debt?
a. 7.84%
b.
C. 11.20%
d. 9.52%
8%
Apple Corporation is engaged in the call center business. A boom
in this type of business has caused Apple Corporation's
management to consider expanding its operations by opening
more call centers in key cities all over the countr
expansion project requires an investment of P240M, a 100%
increase
Management is considering three financing alternatives:
The plahned
the corporation's present capital structure.
in
Alternative 1- Debt and Equity Financing
Float bonds with 10% interest rate, expected proceeds of
P72M, net of flotation costs.

Issue 8% preferred stocks, expected proceeds of P48M,
net of P2M flotation costs.
Issue common stocks, expected proceeds of P120M, net of
6% flotation costs.
Alternative 2- Debt Financing
> Float bonds with 12% interest rate. Expected proceeds,
P240M, net of flotation costs.
Alternative 3-Equity Financing
Issue common stocks, expected proceeds, P240M, net of
5% flotation costs.
The company's capital structure is composed of 30% bonds, 20%
preferred stocks, and 50% common stocks.
The common stocks currently sell for P50 per share. For the past
2 years, common stock dividends amounted to P5 per share. The
expected dividend growth rate is 4%. Apple Corporation pays
income tax at the rate of 30%
128. What is the weighted average cost of capital for Apple
Corporation's first financing alternative?
C. 15.06%
d.
6.80%
a. 11.30%
30.19%
b.

Corporation's second financing alternative, assuming that the costs
of preferred stocks and common stocks are 8.5% and 15%,
respectively?
a. 31.66%
b.
C. 10.06%
d. 11.65%
8.16%
Corporation's alternative 3, assuming that costs of bonds and
preferred stocks are 6.8% and 8.33%, respectively?
a. 30.08%
13.06%
11.21%
C.
d. 11.19%
b.
131. What is the after-tax weighted marginal cost of capital for Apple
Corporation's financing alternative 2, consisting solely of bonds?
3.84%
C.
8.40%
b. 12.00%
a.
d. 17.65%
Ayie Corporation is considering a project for the coming year that
will require an investment cost of P100M. the company plans to
finance the project by a combination of debt and equity, as follows:
- Issue P20M of 10-year bonds at a price of 102, with an
interest rate of 10%, and flotation cost of 3% of par.
Use P80M of funds generated from earnings retained in the
business.
The expected market rate of return is 14%. The current rate of
Treasury Bills is 8%. The beta coefficient for Ayie Corporation is
1.2. The corporate income tax rate is 30%.
132. What is the effective rate of interest of the bonds?
10.20%
10%
a.
C.
b.
9.89%
d. 10.10%
133. What is the after-tax effective cost of bonds?
a. 6.80%
b. 7.07%
C. 6.73%
d. 6.94%
134. Using the capital asset pricing model (CAPM), what is the cost of
equity capital for Ayie Corporation?
a. 9.6%
b. 10.34%
C. 15.20%
d. 7.2%
135. Assume that the after-tax cost of debt is 7% and the cost of equity
capital is 15%, what is the weighted average cost of capital for
Ayie Corporation's project?
13.40%
a.
13.53%
d. 14.96%
C.
b. 22%
Oneng Corporation's present capital structure consists of 30% debt,
10% preferred equity, and 60% common equity.
structure is considered optimal and Oneng Corporation wishes to
This capital
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.
136. The percentage of P80M that will come from long-term debt is
30%
a.
C. P24M.
d. P18M.
b.
22.5%
137. The percentage of P80M that will oome from a new issuance of
common stock is
60%
a.
C. 30.6%.
d. 45%.
b.
40.8%
138. If the company will maintain the optimal capital structure to finance
the project, and preferred stocks are issued, the proceeds should be
P6M.
10%.
d. 7.5%.
a.
C.
b. P8M.
139. Butchoy Corporation's present capital structure, at book value, is
shown below:
P 9,800,000
1,400,000
9,800,000
P21.000.000
Bonds
Preferred stocks (140,000 shares)
Common stocks (280,000 shares)
Total
Additional data pertaining to the capital structure were gathered
and they are as foilows:
Preferred
Stocks
Common
Stocks
P40 per share
Bonds
80% of par P10 per share
9%
Current selling price
Interest rate
Expected dividend payments
Dividend growth rate
Income tax rate
1.20/share
6%
8%lyear
30%
What is Butchoy Corporation's weighted average cost of capital if
its new financing will be in proportion to the market value of its
present financing?
11.00%
C.
8.86%
d.
8.39%
a.
b. 23.12%
140. Unye Corporation expects to pay dividends of P4.80 per share at
the end of the current year. The dividend growth rate is 10% and
the cost of common equity capital is 14%.
If the dividend growth model is used to appraise Unye Corporation's
shares of stocks, the price of the stocks to the public is
a. P120.00 per share.
b. P 5.28 per share.
14.00%.
C.
d. 15.40%.
141. Danise Corporation believes that it can sell long-term bonds with
an 8% coupon rate, although the effective rate is 10%. If such
bonds are part of Danise Corporation's financing plans for next

year, what is the after-tax (30% tax rate) cost of bonds for
purposes of calculating the corporation's cost of capital?
a. 5.44%
b. 7%
C. 8%
d. 10%
At the end of 200A, Tanya Corporation had the following capital
structure considered to be optimal (in millions of pesos):
Amount
P 42.00
25.20
100.80
Debt (10% coupon bonds)
16% Preferred stocks, P100 par value
Common stocks and retained earnings
25%
15%
60%
The management of Tanya Corporation is planning to increase its
productive capacity. This plan will require acquisition of additional
facilities that calls for a substantial amount of capital expenditures.
Tanya is considering four investment alternatives:
Amount of
Investment Required
P300M
300M
300M
300M
Rate of Returm
Alternative A
Alternative B
Alternative C
Alternative D
14.80%
15.20%
15.50%
16.00%
Preferred stocks may be issued at par.
Common stock has a par value of P10 and is selling for P42 per
share, net of P3 per share flotation cost. The company has had
8% dividend yield and a growth rate of 9% per year.
Retained earnings as of the end of 200A amount to P58.8M.
The 10% yield on bonds is applicable to a maximum of P70M
bonds. Additional debt will require a 4% premium and be sold to
yield 14%.
The corporate tax rate is 40%
142. The cost of retained earnings and common stocks are
Retained Earnings
Common Stocks
8%
a.
9%
b.
5.44%
17.72%
25%
C.
d.
18.34%
17.72%
18.34%
143. What is the cost of preferred stocks?
10.88%
16%
C.
a.
d. P16
5.12%
b.
144. The weighted-average cost of capital as of the end of 200OA is
C. 17.72%
d. 15.15%
14.78%
a.
b. 18.34%
145. What is the retained earnings breakpoint?
C. P100.8M
a. P58.8M
b. P98.0M
d. P35.28M
146. What is the weighted-average cost of capital beyond the retained
earnings breakpoint?
C. 17.72%
d. 15.15%
14.78%
a.
b. 18.34%
147. What is the debt breakpoint?
a, P7OM
b. P42M
C. P280M
d. P 28M
148. If the additional facilities require an investment of P30OM, which
investment alternative should be chosen?
a. Alternative A
b. Alternative B
Alternative C
d. Alternative D
C.
ITEMS 149 and 150 ARE BASED
Neo Corporation is a closely held corporation owned by Rivera
Family. It currently earns P6M profit after tax and has 300,000
shares outstanding. Next year, Neo Corporation will go public for
the first time. Its initial public offering of 100,000 shares will be
priced at P60 per share, with a 5% spread on the offering price. In
addition, Neo Corporation will incur P200,000 in out-of-pocket costs.
149. If all the shares will be issued, the net proceeds will be
a. P6.0M.
b. P5.5M.
C. P5.7M.
d. P5.8M.
150. What rate of return must be earned on the net proceeds from the
IPO so that there will be no dilution in earnings per share during
the year of going public?
a. 35.09%
b. 33.33%
34.48%
d. 36.36%
C.
151. Bea Recreation Corporation is a publicly listed corporation. In
200C, it decided to go private by buying all its 5M outstanding
shares at P5.80 per share.

In 200D, it restructured the company by selling its low margin
facilities (bowling and billiard centers) for P20M and concentrated
in operating its golf course, tennis, and badminton centers. Within
one year, the restructuring improved the company's earnings per
share to P1.50. This made the company's management consider
expanding its golf and tennis operations. Funds for the planned
expansion can be raised by going public again and issue the 5M
shares that it previously reacquired. The company's investment
bankers said that the shares can be offered to the public at a P/E
ratio of 4 times the present earnings per share of P1.50.
At what price will the 5M shares be offered to the public?
845
a. P6.00
b. P4.00
C. P1.50
d. P2.67
Ka Jess Corporation is planning to go public for the first time. To
determine some relevant information pertaining to the planned
IPO, Ka Jess Corporation submitted the following operating and
financial data for the most recent year to its investment bankers:
KA JESS CORPORATION
Baiance Sheet
December 31, 200D

Assets:
Cash
P 240,000
3,360,000
6,080,000
10,800,000
P20,480.000
Accounts receivable
Inventory
Plant and equipment, net
Total assets
Liabilities:
Accounts and notes payable
Long-term liabilities
Total Liabilities
Stockholders' Equity:
Common stocks (480,000 shares
@ P4 par value)
Additional paid-in capital
Retained earnings
Total stockholders' equity
P3,520,000
3,808,000
P7,328,000
P1, 920,000
4,480,000
6,752,000
P13,152,000
P20.480.000
Total liabilities and stockholders' equity
KA JESS CORPORATION
Income Statement
For the Year Ended December 31, 200D
Sales
Cost of goods sold
Gross income
P35,884,800
25,964,800
P 9,920,000
4,255,040
P 5,664,960
Less operating expenses
Income from operations
Income from operations
Less interest expense
Income before tax
Less provision for income tax
Net income
P 5,664,960
592,960
P 5,072,000
2,028,800
P 3.043.200
The investment bankers estimate that the new public offering will
be at 5 times the earnings per share. The company will issue
120,000 new common shares to the public.
152. What will be the initial price of the new shares?
C. P 0.99
d. P25.35
a. P31.50
b. P 1.01
153. If an underwriter spread of 6% and out-of-pocket costs of
P159,480 will be incurred, how much will the net proceeds from
the new issuance be?
a. P3,042,000
b. P2,700,000
C. P2,859,480
d. P2,882,520
154. What return must the corporation earn on the net proceeds from
the issuance of new shares to equal the earnings per share before
the offering?
a. 25%
b. 31.10%
C. 25.35%
d. 28.18%
155. Assume that the price-earnings ratio after the distribution of new
shares is 5, and that of the 120,000-share distribution, 30,000
shares belong to the current stockholders and 90,000 are new
corporate shares and these will be added to the 480,000 shares
currently outstanding. At how much should the stocks be priced to
the public?
a. P25.35
b. P31.70
C. P 26.70
d. P126.80

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608

1. Which of the following statements is correct?

a. The stockhoiders' equity is a major component of working

b. Net working capital is the difference between quick assets

and current liabilities.

C. Working capital is a measure of long-term solvency.

d. Net working capital is the difference between current assets

and current liabilities.

2. The primary objective of working capital management is to

maximize the company's total current assets.

b. minimize the company's total current liabilities.

balance the amount of current assets and current liabilities.

d. achieve a balance between risk and return.

3. In a conservative or relaxed working capital financing policy,

a. operations are conducted on a minimum amount of working

b. operations are operated with too much working capital.

short-term liabilities are used to finance not only termporary

current assets, but also part or all of the permanent current

d. the company is exposed to risk of illiquidity because of low

working capital position.

a conservative working capital policy.

an aggressive working capital policy.

a. the use of long-term debt to finance current assets.

b. the use of short-term debt to finance non-current assets,

5. The hedging approach to financing involves

e matching maturities of debt with specific financing needs.

issuance of common stocks to raise funds for working capital

6. Which of the following is incorrect?

a. Profitability varies directly with liquidity.

C. Long-term financing has less liquidity risk than short-term

financing, but has a higher explicit cost, hence lower return.

d. More current assets lead to greater liquidity, but yield lower

7. Which of the following statements is true?

a. Short-term debt is usually more expensive than long-term debt.

b. Liquid assets do not ordinarily earn higher returns relative to

long-term assets, so holding the former will maximize the

C. A conservative working capital policy is characterized by

higher current ratio and acid-test ratio.

d. Determining the appropriate level of working capital for a firm

requires changing the firm's capital structure and dividend policy.

and services to be realized as cash inflows from sales is called

a. product life cycle.

d. cash conversion cycle.

If the average age of accounts payable is 15 days, the average

age of accounts receivables is 60 days, and the average age of

inventory is 10 days, the number of days in the operating cash

Corporation for the year ended December 31, 200B:

Net credit sales

Average materials inventory

Average finished goods inventory

Average accounts payable

Net credit purchases

Raw materials used

Gross profit rate

What is the average number of days in the company's operating

cash conversion cycle? (Use a 360-day year)

11. An objective of cash management is to

maximize the cash balance to avoid the risk of illiquidity.

b. minimize the cash balance to maximize the return from idle

c. invest cash for a return while retaining sufficient liquidity to

satisfy future needs.

d. reserve as much cash as possible for potential investment

own books is called