MANAGEMENT ADVISORY SERVICES REVIEW

FINANCIAL MANAGEMENT RELATED TOPICS

Name: ____________________________________________________________ Date:____________________________ Quiz: ____________/_________________

INSTRUCTIONS: WRITE BEFORE EACH NUMBER THE LETTER OF YOUR CHOICE. STRICTLY NO ERASURE OR
ALTERATION IS ALLOWED. PROVIDE SOLUTIONS IF NECESSARY.

1. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage

2. Zap Company follows an aggressive financing policy in its working capital management while Zing Corporation
follows a conservative financing policy. Which one of the following statements is correct?
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-term debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing finances short-term assets with short-term debt.

3. Which of the following would increase risk?

A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.

4. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle.
D. Increase in the ratio of current assets to current liabilities.

5. Short-term financing plans with high liquidity have:

A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above

6. As a firm's cash conversion cycle increases, the firm:

A. becomes less profitable
B. increases its investment in working capital
C. reduces its accounts payable period
D. incurs more shortage costs

7. The longer the firm's accounts payable period, the:

A. longer the firm's cash conversion cycle is.
B. shorter the firm's inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.

8. Which of the following statements is most correct? If a company lowers its DSO, but no changes occur in sales or
operating costs, then:
A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
C. the company would probably end up with a higher ROE.
D. the company's total asset turnover ratio would probably decline.

9. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials and variable
conversion cost. It takes the firm 18 days to convert raw materials into calculator. Casie’s usual credit terms
extended to its customers is 30 days, and the firm generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working capital must Casie Company finance?
A. P1,400,000 C. P 900,000
B. P2,400,000 D. P1,800,000

10. Luke Company has an inventory conversion period of 60 days, a receivables conversion period of 45 days, and a
payments cycle of 30 days. What is the length of the firm’s cash conversion cycle?
A. 90 days C. 54 days
B. 75 days D. 105 days

11. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales
are P100,000. The company has P1.5 million in accounts payable. Its average daily purchases are P50,000. What is
 the length of the company’s cash conversion period?
A. 50 days C. 30 days
B. 20 days D. 40 days

12. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which are to be paid
uniformly. Hyperbole has the opportunity to invest the money at 9% per annum. The company spends, on the
average, P25 for every cash conversion to marketable securities and vice versa.
What is the opportunity cost of keeping cash in the bank account?
A. P3,825.00 C. P4,190.00
B. P1,912.50 D. P 188.55

13. What are the expected annual savings from a lock-box system that collects 150 checks per day averaging P500
each, and reduces mailing and processing times by 2.5 and 1.5 days respectively, if the annual interest rate is 7%?
A. P 5,250 C. P 21,000
B. P 13,125 D. P300,000

14. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit
sales at terms of n/30. Palm estimates that a proposed relaxation of credit standards will increase credit sales
by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the
proposed relaxation of credit to standards will result in an expected increase in the average accounts receivable
balance of
A. P 540,000 C. P2,700,000
B. P 900,000 D. P1,620,000

15. What is the economic order quantity for the following inventory policy: A firm sells 32,000 bags of premium sugar
per year. The cost per order is P200 and the firm experiences a carrying cost of P0.80 per bag.
A. 2,000 bags C. 8,000 bags
B. 4,000 bags D. 16,000 bags

16. Narra Company is considering a switch to level production. Cost efficiencies will occur under level production
and after tax cost would decline by P70,000 but inventory would increase from P1,000,000 to P1,800,000.
Narra would have to finance the extra inventory at a cost of 10.5 percent.
What is the maximum interest rate that makes level production feasible?
A. 7.00 percent C. 8.75 percent
B. 5.83 percent D. 10.00 percent

17. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high selling products for the
coming year. Its supplier quoted a price of P25 per zipper. Diesel planned to purchase 7,500 units per month
but its supplier could not guarantee this delivery schedule. In order to ensure availability of these zippers,
Diesel is considering the purchase of all these 90,000 units on January 1. Assuming Diesel can invest cash at
12%, the company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is
A. P127,500 C. P123,750
B. P135,000 D. P264,000

18. Which of the following is the major independent variable in constructing pro forma income statements and
balance sheets?
A. total assets C. dividend payout
B. net income D. sales

19. Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements
will tend to
A. Understate profits when sales are decreasing and overstate profits when sales are increasing.
B. Understate profits, no matter what the change in sales, as long as fixed costs are present.
C. Understate profits when sales are increasing and overstate profits when sales are decreasing.
D. Overstate profits, no matter what the change in sales, as long as fixed costs are present

20. Which of the following statements is most correct?

A. Since accounts payable and accrued liabilities must eventually be paid, as these accounts increase,
required new financing also increases.
B. Suppose a firm is operating its fixed assets below 100 percent capacity but is at 100 percent with respect to
current assets. If sales grow, the firm can offset the needed increase in current assets with its idle fixed assets
capacity.
C. If a firm retains all of its earnings, then it will not need any additional funds to support sales growth.
D. Additional funds needed are typically raised from some combination of notes payable, long-term bonds, and
common stock. These accounts are nonspontaneous in that they require an explicit financing decision to
increase them.

21. Leverage Company’s December 31, 2006 balance sheet (in P’000,000) is given below:
Cash P 10 Accounts payable P 15
Accounts receivable 25 Notes payable 20
Inventories 40 Accrued expenses 15
Long-term debt 30
 Net fixed assets 75 Common stock 70
Total assets P150 Total Liab & equity P150
Sales during the past year were P100,000,000 and they are expected to rise by 50 percent to P150,000,000
during 2007. Also, during last year fixed assets were being utilized to only 85 percent of capacity, so Leverage
Company could have supported P100,000,000 of sales with fixed assets that were only 85 percent of last year’s
actual fixed assets. Assume that Leverage’s profit margin will remain constant at 5 percent and that the company will
continue to pay out 60 percent of its earnings as dividends. What amount of nonspontaneous, required new
financing (RNF), will be needed during the next year?
A. P55,500,000 C. P49,500,000
B. P52,500,000 D. P40,125,000

22. 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.

23. 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
A. 11.50% B. 11.79% C. 11.83% D. 12.14%

24. Grateway Inc. has a weighted average cost of capital of 11.5 percent. Its target capital structure is 55 percent
equity and 45 percent debt. The company has sufficient retained earnings to fund the equity portion of its capital
budget. The before-tax cost of debt is 9 percent, and the company’s tax rate is 30 percent. If the expected dividend
next period (D1) is P5 and the current stock price is P45, what is the company’s growth rate?
a. 2.68% b. 3.44% c. 4.64% d. 6.75%

25. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
A. Three days after the invoice is received.
B. The 8th day is the customer’s decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date

26. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a
condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking
account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only
P100,000 in its checking account for transactional purposes. Premiere’s effective interest costs of the loan is
A. 12.00% C. 16.30%
B. 14.25% D. 15.86%

27. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net 30 days (2/15 net
30). It can borrow funds from a bank at an annual rate of 12%, or it can wait until the 30th day when it will
receive revenues to cover the payment. If it borrows funds on the last day of the discount period in order to
obtain the discount, its total cost will be
A. P 51,000 less C. P 75,500 less
B. P100,000 less D. P 24,500 more
2 The most commonly held view of capital structure is that the weighted average cost of capital:
8 A. falls first with moderate levels of leverage and then increases.
B. does not change with leverage.
C. increases proportionately with increases in leverage.
D. increases with moderate amounts of leverage and then falls.
2 A company expects to report P100 million in net income this year, and 67.5% of the net income will be paid out
9 as dividends. How large can the firm's capital budget be this year without it having to include the cost of new
common stock in its cost of capital analysis?
A. P100.0 million C. P 50.0 million
B. P 67.5 million D. P 32.5 million
3 Which of the following changes would tend to decrease the company cost of capital for a traditional firm?
0 A. Decrease the proportion of equity financing.
B. Increase the market value of the debt.
C. Decrease the proportion of debt financing.
D. Decrease the market value of the equity.
3 Ellis Company expects to generate P10 million internally which could be available for financing part of its P12
1 million capital budget for this coming year. Ellis’ management believes that a debt-equity ratio of 40
percent is best for the firm. How much should be paid in dividends if the target debt-equity ratio is to be
maintained?
A. P2,800,000 C. P1,428,571
B. P8,571,429 D. P4,000,000

3 Increases in total long-lived assets should not ordinarily be financed by

2 A. long-term debt
B. Equity
C. Spontaneous increases in liabilities
D. short term debt
3 Investors in long-term corporate bonds are concerned about interest rate risk. The risk reflects
3 A. The increased probability of bankruptcy during periods of high interest rates.
B. The decrease in bond prices at interest rates rise.
C. The probability that a bond issue will be called when interest rates fall.
D. The chance that the corporation will default on the interest payments.
3 A financial instrument which promises to repay the principal at a specified date but will pay interest only when
4 earned is called
A. A non-participating preference share
B. A revenue bond
C. An income bond
D. A mortgage bond

3 A firm floats a new stock issue and uses the proceeds from the issue to retire a bond issue which has matured.
5 Which one of the statements will hold in all cases?
A. The firm has increased its operating leverage
B. The firm has decreased its financial leverage
C. The firm has increased its earnings per share
D. The firm has decreased its earnings per share
3 Which one of the following would be most likely to cause an immediate increase in primary earnings per share
6 A. A merger
B. A conversion of convertible bonds
C. An exercise of warrants
D. Purchase of treasury stock
3 Which of the following is not an advantage for leasing an asset rather than purchasing the asset with funds
7 from a term loan?
A. The avoidance of the risk of technological obsolescence
B. The lack of restrictive borrowing covenants
C. The terminal value of the asset goes to the lessee
D. The lease payment is fully tax deductible
3 A highly risk averse decision maker will often react to bounded rationality by
8 A. Satisficing
B. Ignoring the limiting factor
C. Attempting to find the optimal solution
D. Increasing the number of solutions considered
3 Apple Inc.’s P1,000 par value convertible debentures are selling at P1,040 when its stock is selling for P46.00
9 per share. If the conversion ratio is 20, what will be the conversion price?
A. P22.61
B. P46.00
C. P50.00
D. 52.00
4 Warrants are
0 A. Long term options to sell shares of the issuing firm’s stock
B. Fairly stable, low risk investment
C. Investments whose value is directly related to the price of the underlying stock
D. Structured to sell for precisely their intrinsic value