Name _Gianne Denise C. Reynoso_________________ Date of Submission: May 9, 2020, Sat.

Course: MBBA507 – Financial Management Academic Year: 2nd semester, 2019-2020

Faculty: Christian John P. Formaran, CPA, MBA Final Assessment/Exam

General Instruction:
 Use this template to submit your answers to the following questions below
 Answers should be in PDF format, Font = Arial, Font size = 12, Single spacing, Long Bond
Page Size, Justified alignment.
 Send your answers to our UB LMS and to my email (as back-up) - cjpformaran@gmail.com
 Use this format name upon submission - surname_MBBA507_Final Assessment

FINAL ASSESSMENT

COMPREHENSIVE PROBLEM 1: Working Capital

Questions (a) to (g) refer to Kho Bid Manufacturing Company. Use the following information to solve
for (a) and (b)

KHO BID MANUFACTURING COMPANY

Pro-Forma Statement of Financial Position
As of December 31, 2019

Cash P20,000 Current Liabilities (10%) P200,000

Marketable securities 30,000 Long-term Liabilities (15%) 300,000
Accounts receivable 150,000 Total Liabilities P500,000
Inventory 200,000
Total Current Assets P400,000
Net Fixed Assets P600,000 Stockholders’ equity P500,000
TOTAL ASSETS P1,000,000 TOTA LIAB. & EQUITY P1,000,000

During 2019, firm’s earnings before interest and taxes were 20% of P800,000 in sales. The income
tax rate is 34%.

Required:
a. Determine the level of working capital, net working capital and current ratio.
b. Calculate the return on equity.

Use the following information about Kho Bid Manufacturing Company to solve for (c) and (d).

Kho Bid Manufacturing Company decides to examine its working capital policy. In addition to its
current strategy of maintaining current assets at 50% of sales, the company is considering two other
strategies based on current assets at 30% or 70% of next year’s sales. Projected net sales and fixed
assets for next year are P1,000,000 and P600,000, respectively. The company plans to maintain its
existing capital structure of 50% debt and 50% equity. Current liabilities are to be 40% of projected
total liabilities.

Required:
c. Calculate the company’s net working capital and current ratio under each of the three strategies.
d. Explain what effect these strategies would have on the company’s liquidity.

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph
Refer to (b) and the following information about the Kho Bid Manufacturing Company to solve for €
and (f).

Kho Bid expects its earnings before interest and taxes in 2020 to be 18% of P1,000,000 in sales.
Interest rates are projected to remain at 10% for short-term debt and 15% for long-term debt. The
firm’s tax rate will be 34%.

Required:
e. What is the company’s rate of return on equity for each of the three strategies?
f. Describe the relationship between the company’s liquidity and profitability.

Use the following information about Kho Bid Manufacturing Company to solve for (g).

Kho Bid Manufacturing Company wants to determine the impact of changing the financing mix when
using an aggressive current asset strategy of having current assets at 30% of sales. Earnings before
interest and taxes are expected to be P180,000. Short-term interest rates are 10% and long-term
rates are 15%. The firm’s tax rate is 34%. The company wants to maintain a mix of 50% debt and
50% equity under restricted, compromise and flexible financing strategies as shown below:

KHO BID MANUFACTURING COMPANY

Pro-Forma Statement of Financial Position
As of December 31, 2020

ASSETS Restricted Compromise Flexible

Current Assets P300,000 P300,000 P300,000

Fixed Assets 600,000 600,000 600,000
TOTAL ASSETS P900,000 P900,000 P900,000

LIABILITIES AND STOCKHOLDER’S EQUITY

Current Liabilities (10%) P100,000 P300,000 P450,000

Long-term Liabilities (15%) 350,000 150,000 -
Total Liabilities P450,000 P450,000 P450,000
Stockholders’ equity 450,000 450,000 450,000
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY P900,000 P900,000 P900,000

Required:
g. Show the expected return on equity, net working capital and current ratio for each proposed
strategy.

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph
COMPREHENSIVE PROBLEM 2: Capital Budgeting

A. UB Company plans to replace a production machine that ·was acquired several years ago. The
old machine's acquisition cost was P450,000, with salvage value of P 50,000. The machine being
considered is worth P 800,000 and the supplier is willing to accept the old machine at a trade-in
value of P60,000. Should the company decide not to acquire the new machine, it needs to repair the
old one at a cost of P 200,000. Tax-wise, the trade-in transaction will not have any implication but
the cost to repair is tax-deductible. The effective corporate tax rate is 35%.

For purposes of capital budgeting, the net investment in the new machine is
____________________ (Show your solution).

B. Thelma Industries is considering an expansion. The necessary equipment would be purchased for
P9 million, and the expansion would require an additional P3 million investment in net operating
working capital. The tax rate is 40%.

a. What is the initial investment outlay? __________________. (Show your solution)

b. The company spent and expensed P50,000 on research related to the projected last year.
Would this change your answer? Explain.

c. The company plans to use a building that it owns to house the project. The building could
be sold for P1 million after taxes and real estate commissions. How would that fact affect your
answer?

C. You are the financial manager of Romualdez Manufacturing Company (a large and highly
profitable manufacturing company). You are currently evaluating a project proposal involving the
production of new product line. The proposed project will have a 3-year life and will require the
purchase of new capital equipment with a total purchase price of P2,000,000. In addition, the project
will require an initial investment of P250,000 in supplies and spare parts for the equipment, with 60%
of this amount financed with trade credit. The new product line is expected to increase cash sales by
P800,000 per year and increase cash operating expenses by P350,000 per year. The new
equipment will have a 5-year life. At the end of three years, you expect to terminate the project,
liquidate the supplies and parts and sell the equipment for P100,000. Assume that the marginal tax
rate is 34%.

Based on the information given above, determine the following (Show your computation):

a. What is the net investment cash outflow for this project? _______________.
b. What is the operating cash flow for the 1st year of the project’s life? _______________.
c. What is the operating cash flow for the 2 nd year of the project’s life? _______________.
d. What is the operating cash flow for the 3rd year of the project’s life? _______________.
e. What is the tax effect of selling the equipment at the end of the 3 rd year? ____________.
f. What is the project-disposal cash flow (not including the annual operating cash flow)?
________________________.

D. Nicole Air Services is now in the final year of a project. The equipment originally cost P250 million,
of which 80% has been depreciated. Nicole can sell the use equipment today for P5 million and its
tax rate is 40%. What is the equipment’s after-tax salvage value? ________________. (Show your
computation):

- NOTHING FOLLOWS –

“IF YOU DO, DON’T DOUBT. IF YOU DOUBT, DON’T DO.”

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph
Answers:
Comprehensive Problem 1

a. Working Capital = P400,000

Net Working Capital = P400,000 - P 200,000 = P200,000
Current Ratio = P 400,000 / P 200,000 = 2 times

b. Net Sales 800,000.00

EBIT (20% of sales) 160,000.00

Less: Interest Expense
Current Liab (10%) 20,000.00
Non-Current Liab (15%) 45,000.00

Earnings before tax 95,000.00

Less Income tax 34% 32,300.00

Net Income 62,700.00

Return on Equity (P 62,700 /P 500,000) = 12.54%

c.
Strategies
Current Assets as a Percent of Sales
30% 50% 70%

Current assets (CA) ₱300,000 ₱500,000 ₱700,000

Fixed assets 600,000 600,000 600,000
Total assets ₱900,000 ₱1,100,000 ₱1,300,000

Current liabilities (CL) ₱180,000 ₱220,000 ₱260,000

Long-term liabilities 270,000 330,000 390,000
Total liabilities ₱450,000 ₱550,000 ₱650,000
Stockholders’ equity 450,000 550,000 650,000

Total liabilities and equity ₱900,000 ₱1,100,000 ₱1,300,000

Net working capital (CA – CL) ₱120,000 ₱280,000 ₱440,000

Current ratio (CA/CL) 1.67 times 2.27 times 2.69 times

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph
d. The company’s liquidity position, measured by the amount of net working capital and
current ration, improves when current asset as percentage of sales goes higher.

e. The company’s rate of return on equity for each of the three strategies is shown below:
Strategies
Current Assets as a Percent of Sales
30% 50% 70%
Net sales ₱1,000,000 ₱1,000,000 ₱1,000,000
EBIT (18% of sales) 180,000 180,000 180,000
Interest expense
Short-term debt
18,000 22,000 26,000
(10%)
Long-term debt (15%) 40,500 49,500 58,500
Earnings before taxes
121,500 108,500 95,500
(EBT)
Income taxes (34%) 41,310 36,890 32,470
Net income ₱80,190 ₱71,610 ₱63,030

Return on equity
17.82% 13.02% 9.70%
(NI/SE)

f. The company’s profitability decrease as liquidity increases. As shown in the answers

given above, the firm’s liquidity (current ratio) is highest at 2.69 times but profitability (ROE)
is the lowest with only 9.70% when current assets are 70% of sales.

g.
Financing- Mix Strategies
Restricted Compromise Flexible
EBIT ₱180,000 ₱180,000 ₱180,000
Interest expenses
Short-term (10%) 10,000 30,000 45,000
Long-term (15%) 52,500 22,500
-
Earnings before taxes (EBT) 117,500 127,500 135,000
Income taxes (34%) 39,950 43,350 45,900
Net income ₱77,550 ₱84,150 ₱89,100

Return on equity (NI/SE) 17.23% 18.70% 19.80%

Net working capital (CA – CL) ₱200,000 (P 150,000)
-
Current ratio (CA/CL) 3.0 times 1.0 times 0.67 times

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph
Comprehensive Problem No. 2

A. UB Company
Purchase Price of new machine P 800,000
Less: Proceeds from sale of old machine 60,000
Avoidable Cost of repairs (net of tax)
(200,000 x 65%) 130,000 (190,000)
Net Cost of Investment P 610,000

B. Thelma Industries

a. Purchase price of necessary equipment P 9,000,000

Additional investment in net working capital 3,000,000
Initial Investment Outlay P 12,000,000

b. No I will not change my answer, the P 50,000 spent on research related to the project is
considered sunk cost, and do not affect the decision-making.

c. It will add 1 Million to the initial investment outlay. The possible after-tax sales price must
be charged against the project as a cost since the potential sale of the building represents
an opportunity cost of conducting the project in that building.

C. Romualdez Manufacturing Company

a. Purchase price 2,000,000.00

Initial Cash investment 100,000.00
Net Investment cash outflow 2,100,000.00

b.
Cash Sales 800,000.00
Less : Cash Operating Expense 350,000.00
Depreciation Expense 400,000.00
Net Income before Tax 50,000.00
less: Income Tax (34%) 17,000.00
Net Income 33,000.00
Add: Depreciation 400,000.00
Net Operating Cash flows 433,000.00

c.
Cash Sales 1,600,000.00
Less : Cash Operating Expense 700,000.00
Depreciation Expense 400,000.00
Net Income before Tax 500,000.00
less: Income Tax (34%) 170,000.00
Net Income 330,000.00
Add: Depreciation 400,000.00
Net Operating Cash flows 730,000.00

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph
d.
Cash Sales 2,400,000.00
Less : Cash Operating Expense 1,050,000.00
Depreciation Expense 400,000.00
Loss on sale of Equipment 700,000.00
Net Income before Tax 250,000.00
less: Income Tax (34%) 85,000.00
Net Income 165,000.00
Add: Non-Cash Expenses
Depreciation Expense 400,000.00
Loss on sale of Equipment 700,000.00
Net Cash flows 1,265,000.00

e.
Proceeds from sale of equipment 100,000.00

Cost of Equipment 2,000,000.00

less Accumulated Depreciation 1,200,000.00

Net Book Value 800,000.00
Loss on Sale of Equipment (700,000.00)
Tax Rate 34%
Tax savings due to loss on sale of equipment 238,000.00

f.
Actual Proceeds received from Disposal 100,000.00
Tax savings due to loss on sale of equipment 238,000.00
After Tax Proceeds from Disposal 338,000.00
Change in Working Capital -
Project Disposal Cash flow 338,000.00

D. Nicole Air Services

Equipment's original cost 250,000,000.00

Depreciation (80%) 200,000,000.00
Book Value 50,000,000.00
less : Proceeds from sale of
equipment 5,000,000.00
Loss on Sale (45,000,000.00)
Tax Rate 40%
Tax Savings on loss 18,000,000.00
Add: Proceeds from sale of
equipment 5,000,000.00
At net salvage value 23,000,000.00

Campuses: Hilltop | MH del Pilar | Pallocan East | Pallocan West | Lipa

Telephone Numbers: +63 43 723 1446 | 980 0041
Website: www.ub.edu.ph