FINANCE 202 & 203

TESTBANK
1. For a given company, the cost of preferred stock is less than the cost
of common stock because:

a. Dividends paid on preferred stock are tax deductible expenses for

the company while dividends paid on common stock are paid out of
after-tax earnings.
b. Preferred stock represents a less risky source of funds from the
companys viewpoint than common stock.
c. Investors expect cash flows from common stock have a higher degree
of uncertainty than the expected cash flows from preferred stock.
d. All of the above.

2. Elan Corporation is considering borrowing P100,000 from a bank for one

year at a stated interest rate of 9 percent. What is the effective
interest rate of Elan if this borrowing is in the form of a discounted
note?
a. 8.10 percent c. 9.81 percent
b. 9.00 percent d. 9.89 percent

3. The master budget process usually begins with

a. Production budget c. Financial budget
b. Operating budget d. Sales budget

4. Which of the following is included in a firms financial budget?

a. Budgeted income statement
b. Capital Budget
c. Production schedule
d. Cost of goods sold budget

5. Using the Capital Asset Pricing Model (CAPM), the required rate of
return for a firm with a beta of 1.25 when the market return is 14
percent and the risk-free rate is 6 percent is

a. 14.0 percent c. 7.5 percent

b. 6.0 percent d. 16.0 percent

6. RMG Corporation is preparing to issue common stock. The Chief Financial

Officer is attempting to estimate RMGs cost of new common stock. The
next dividend is expected to be P3.70 and will be paid one year from
now. Dividends are expected to grow at a constant 7% per year. Flotation
cost on the new issue will be P2.25 per share. RMGs Beta coefficient is
1.5, the risk-free rate is 7.5%, and the expected return on the DJ
Industrial Average is 12.5%. Based on this information, RMGs cost of
new common stock is nearest.

a. 8.4% c. 13.7%
b. 12.5% d. 15.4%

7. Kent Goods, Inc. has a total assets turnover of 0.30 and a profit margin
of 10 percent. The president is unhappy with the current return on
assets, and he thinks it could be doubled. This could be accomplished
(1) by increasing the profit margin to 15 percent and (2) by increasing
the total assets turnover. What new asset turnover ratio, along with 15
percent profit margin, is required to double the return on assets?

a. 35% c. 40%
b. 45% d. 50%

8. Which of the following will cause a decrease in a companys accounts

receivable turnover ratio?
a. Tighten credit standards.
b. Enforce credit terms more aggressively.
c. Ease enforcement of credit terms.
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 d. Factor all accounts receivable.

9. The sales budget is classified as

a. A financial budget c. An operating budget
b. A flexible budget d. A program budget

10. Ratios that measures firms ability to generate earnings is

a. Time interest earned.
b. Days sales in receivables.
c. Sales to working capital.
d. Operating asset turnover

11. GRX Inc. has a current ratio of 4:1. Which of the following
transactions would normally increase its current ratio?
a. Purchasing inventory on account
b. Purchasing machinery on cash
c. Selling inventory on account
d. Collecting on accounts receivable

12. OTW Corporation has current assets totaling P 15 million and a current
ratio of 2.5 to 1. What is OTWs current ratio immediately after it has
paid P2 million of its accounts payable?
a. 3.75 to 1 b. 2.75 to 1 c. 3.25 to 1 d. 4.75 to 1

13. Horizontal, vertical, and common size analyses are techniques that are
used by analyst in understanding the financial statement of companies.
Which of the following is an example of vertical common-size analysis?
a. Commission expense in 19x5 is 10% greater than it was in 19x4
b. A comparison of financial ratio form between two or more firms
of the same industry
c. A comparison in financial form between two or more firms in
different industries
d. Commission expense in 19x5 is 5% of sales

14. A financial analyst made up the following schedule for Health Care
Products:
19x8 19x7 19x6 19x5
Net Sales 134% 116% 107% 100%
Net Income 123% 111% 110% 100%

This analytical technique is termed:

a. Percentage of change analysis c. Component Analysis
b. Trend Analysis d. Revenue and Expense Analysis

15. Joemyr has projected cost of goods sold of P4,000,000, including fixed
cost of P800,000.Variable costs are expected to be 75% of net sales.
What will be the projected net sales?
a. P4,266,667 b. P4,800,000 c. P5,333,333 d. P6,400,000

16. A firm forecasted sales of P3, 000 in April, P4, 500 in May and P6, 500
in June. All sales are on credit. 30% is collected in the month of sale
and the remainder the following month. What will be the balance in
accounts receivable at the end of June?
a. P1, 950 c. P4, 550
b. P6, 500 d. P5, 100

(17-18)
Operational budgets are used by a retail company for planning and
controlling its business activities. Data regarding the companys
monthly sales for the last 6 months of the year and its projected
collection patterns are shown below.
Forecasted sales
July P775,000
August 750,000
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 September 825,000
October 800,000
November 850,000
December 900,000

Types of sales
Cash sales 20%
Credit sales 80%

Collection Pattern for Credit Sales

In the month of sale 40%
In the first month following the sale 57%
Uncollectible 3%

The cost of merchandise averages of 40% of its selling price. The

companys policy is to maintain an inventory equal to 25% of the next
months forecasted sales. The inventory balance at cost is P80,000 as
of June 30.

Question 1- The budgeted cost of the companys purchases for the month of
August would be
a. P302,500 c. P307,500
b. P305,000 d. P318,750
Question 2- The companys total cash receipts from sales and collection
on account that would be budgeted for the month of September
would be
a. P757,500 c. P793,800
b. P771,000 d. P856,500

19. Watson Corporation computed the following items from its financial
records for the year:
Price-earnings ratio 12
Payout ratio 0.6
Asset turnover ratio 0.9
The dividend yield on Watsons common stock is
a. 5.0% b. 7.5% c. 7.2% d. 10.8%

20. Dividend yield is 10%, price-earnings ratio is 4 times, Plowback ratio

is
a. 2.5% b. 40% c. 60% d. None

21. The least common motive for a firm to hold cash and marketable
securities is
a. the transactions motive
b. the speculative motive
c. the safety motive
d. the liquidity motive

22. The same as the cost of an equivalent fully subscribed issue of

additional common stock, which is equal to common stock equity.

a. cost of common stock c. cost of preferred stock

b. cost of retained earnings d. cost of long-term debt

23. The Gwaps Corporation has an outstanding one-year bank loan of P300,000
at a stated interest rate of 8 percent. In addition, Gwaps is required
to maintain a 20 percent compensating balance in its checking account.
Assuming the company would normally maintain zero balance in its
checking account, the effective interest rate on the loan is

a. 6.4 percent c. 9.6 percent

b. 8.0 percent d. 10.0 percent

24. During 2005, Ver Company purchased P1,920,000 of inventory. The cost
of goods sold for 2005 was P1,800,000 and the ending inventory at
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 December 31, 2005, was P360,000. What was the inventory turnover for
2005?
a. 5.0 c. 6.0
b. 5.3 d. 6.4

25. During 2005, Concon Company paid a current dividend of P35,000 to its
preferred stockholders. In addition, Concon Company paid a P55,000
dividend to its common stockholders. If 25,000 shares of common stock
were outstanding through the years and net income was P160,000, then
the earnings per share of common stock was
a. P2.80 c. P5.00
b. P4.25 d. P6.40

26. Given a years end net income of P 1.5 million, and 50,000 common
shares outstanding throughout the year with the market price per share
at years end being P 120, the price-earning ratio is
a. 2 times b. 3 times c. 4 times d. 5 times

27. A firm has an average age of inventory 20 days, an average collection

period of 30 days, and an average payment period of 60 days. The firms
cash conversion cycle is
a. 70 days c. -10 days
b. 50 days d. 110 days

28. The following is the balance sheet for 2006 for Marvelous Inc.

Marvelous Inc
Balance Sheet
2006

Assets Liabilities & Equity

Cash P150, 000 Accounts Payable P900, 000
A/R 900, 000 Notes payable 300, 000
Inventory 600, 000 Accrued Expenses 75, 000
Currents Assets 1, 650, 000 Current Liabilities 1, 275, 000
Fixed Assets 600, 000 Ordinary Shares 750, 000
Retained Earnings 225, 000
Total Assets P2, 250, 000 Total Liab. & Equity P2, 250, 000

Sales for 2006 were P3, 000, 000. Sales for 2007 have been projected
to increase by 20%. Marvelous Inc. is operating below capacity. The
company has an 8% return on sales and 70% is paid out as dividends.

The amount of new funds required is

a. P48, 600 c. P50, 000
b. P46, 800 d. P45, 000

29. Michigan Merchandising is preparing its cash budget for January 2010
and made the following projections:
Sales P1,500,000
Gross profit rate 25%
Decrease in inventories 70,000
Decrease in Accounts Payable for Inventories 120,000
For January 2010, what were the estimated cash disbursements for
inventories?
a. P935,000 c. P1,055,000
b. P1,050,000 d. P1,175,000

30. Colorado Company desires an ending inventory of P60,000. It expects

sales of P120,000 and has a beginning inventory of P40,000. Cost of
sales is 60% of sales. Budgeted purchases are
a. P60,000 b. P72,000 c. P92,000 d. P132,000

31. A growing company is assessing current working capital requirements. An

average of 58 days is required to convert raw materials into finished
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 goods and to sell them. Then an average of 32 days is required to
collect on receivables. If the average time the company takes to pay
for its raw materials were 15 days after they are received, then the
total cash conversion cycle for this company would be
a.11 days b. 41 days c. 75 days d. 90 days

32. GHI Companys budgeted sales for the coming year are P40,500,000 of
which , 80% are expected to be credit sales at terms of n/30. GHI
estimates that a proposed relaxation of credit standards would increase
credit sales by 20% and increase in the average collection period from
30 days to 40 days. Cost of money is 15%.Based on a 360-day year, how
much opportunity cost is involved with the proposed relaxation of
credit standards?
a. P243,000 b. P540,000 c. P900,000 d. P1,620,000

33. A measure of profitability and not short-term liquidity is the

a. Accounts receivable turnover ratio.
b. Sales to working capital ratio.
c. Total assets turnover ratio.
d. Acid-test ratio.

34. Which of the following equations can be used to budget purchases? (BI=
Beginning Inventory, EI= Ending Inventory desired, CGS= Budgeted cost of
goods sold)
a. Budgeted purchases= CGS+BI-EI
b. Budgeted purchases= CGS+BI
c. Budgeted purchases= CGS+EI+BI
d. Budgeted purchases= CGS+EI-BI

35. Which of the following transactions would increase the current ratio
and decrease net profit?
a. An income tax payment due from the previous year is paid.
b. A stock dividend is declared
c. Uncollectible accounts receivable are written off against the
allowance account
d. Vacant land is sold for less than the net book value

36. When managing accounts receivable, a good strategy to employ without

losing future sales is to
a. Send the accounts to a collection agency
b. Tighten the credit terms
c. Offer cash discount
d. Make frequent personal visits to the customer

37. The yield to maturity of a bond is:

a. The discount rate in a present-value equation that equates the

market price of a bond with present value of its future debt-
service obligations.
b. The average annual rate of return an investor expects to receive
from buying and holding the bond until maturity.
c. Equal to the coupon rate if the bond sells at par value.
d. All of the above.

38. The percent-of-sales method of financial forecasting

a. Is more detailed than a cash budget approach
b. Requires more time than a cash budget approach
c. Assumes that balance sheet accounts maintain a constant
relationship to sales
d. Provides a month-to-month breakdown of data

39. MAKURIMAN Company manufactures a single product. MAKURIMAN keeps

inventory of raw materials at 50% of the coming months budgeted
production needs. Each unit of product requires three pounds of
materials. The production budget is, in units: May, 1,000; June, 1,200;
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 July, 1,300; August, 1,600. Determine the raw materials purchases in
July.
a. 1,450 pounds c. 3,900 pounds
b. 2,400 pounds d. Some other number

40. Based on the data presented below, what is HULOGNA Corporations cost
of sales for the year?
Current ratio 3.5
Acid test ratio 3.0
Year-end current liabilities P600,000
Beginning Inventory P500,000
Inventory turnover 8.0
a. P1,600,000 b. P2,400,000 c. P3,200,000 d. P6,400,000

41. Assume you are given the following relationships for the KEMPIT
Company:
Profit margin ratio 6.0%
Sales/total assets 1.5 times
Return on assets (ROA) 9%
Return on equity (ROE) 20%
The KEMPIT Companys debt ratio is
a. 45% b. 55% c. 35% d. 65%

42. It is the rate that a firm must earn on the projects in which it
invests to maintain the market value of its stock.

a. stock price c. internal rate of return

b. cost of capital d. net present value

43. KAYAKOPA Motor Company uses 4,500 units of Part S-10 each year. The
cost of placing one order for Part S-10 is estimated to be about P20.
Other cost associated with carrying Part S-10 in inventory are:

Annual Cost per part

Insurance P0.20
Property taxes 0.09
Interest on funds invested 0.15
Others 0.06
TOTAL COSTS P0.50
Assume that the company has been able to reduce the cost of placing an
order to only P1.00. Also assume that when the waste and inefficiency
caused by inventories is considered, the cost to carry an inventory
jumps to P1.60 per unit. Under these conditions, what would be the
Economic Order Quantity?
a. 75 b. 80 c. 95 d. 100

44. A firm maintains a debt-equity ration of 1.0. The debt consists of

bonds with a before tax cost of 9%. The equity consists of ordinary
shares with a cost of 18%. The tax rate is 40%. What is the WACC?
a. 8.1% c. 10.8%
b. 9.9% d. 11.7%

45. The following ratios are used to measure the profitability and returns
to the investors except:
a. Gross profit margin c. Dividend yield
b. Operating profit margin d. Current Ratio

46. The current market price of Rex Company stock is P80 per share and its
price-earnings ratio is 8 to 1. A P4 annual dividend was just paid to
current shareholders. If dividends and earnings are expected to grow at
a constant rate of 12%, Rex Companys cost of retained earnings is
a. 50% c. 17.0%
b. 17.6% d. 12.5%

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47. The MNO Company believes that it can sell long-term bonds with a 6%
coupon, but a price that gives a yield to maturity of 9%. If such bonds
are part of next years financing plans, which of the following should
be used for bonds in their after tax (40% rate) cost of capital
calculation?
a. 3.6% c. 4.2%
b. 5.4 % d. 6.0%

(48-50)
KLEM Corporation is considering a project for the coming year that will
require an investment cost of P100,000,000. The company plans to
finance the project by a combination of debt and equity, as follows:
Issue P20,000,000 of 10-year bonds at a price of 102, with an
interest rate of 10%, and flotation cost of 3% of par.
Use P80,000,000 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 KLEM
Corporation is 1.2. The corporate income tax rate is 30%.

Question-1: What is the after-tax effective cost of bonds?

a. 6.80% c. 6.73%
b. 7.07% d. 6.94%
Question-2: Using the capital asset pricing model (CAPM), what is the
cost of equity capital for KLEM Corporation?
a. 9.6% c. 15.20%
b. 10.34% d. 7.2%
Question-3: 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 KLEM Corporations project?
a. 13.40% c. 13.53%
b. 22% d. 14.9%

(51-55)
Following are selected financial and operating data taken from the
financial statements of MARYLYNE Corporation:
As of December 31
200B 200A
Cash P 80,000 P 640,000
Notes and accounts receivable, net 400,000 1,200,000
Merchandise inventory 720,000 1,200,000
Marketable securities short term 240,000 80,000
Land and buildings (net) 2,720,000 2,880,000
Bonds payable long term 2,160,000 2,240,000
Accounts payable trade 560,000 880,000
Notes payable short term 160,000 320,000

For the Year Ended December 31

200B 200A
Sales (20% cash, 80% credit sales) 18,400,000 19,200,000
Cost of goods sold 8,000,000 11,200,000

Question-1: Current ration as of December 31, 200B:

a. 0.5:1 c. 2.6:1
b. 2.0:1 d. 1:2.6

Question-2: Quick (acid test) ratio as of December 31, 200B

a. 2.0 to 1 c. 1 to 1
b. 0.5 to 1 d. 0.7 to 1

Question-3: Accounts receivable turnover for 200B:

a. 23.0 times c. 36.8 times
b. 18.4 times d. 4.6 times

Question-4: Merchandise inventory turnover for 200B:

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 a. 13.33 times c. 10.0 times
b. 11.10 times d. 8.33 times

Question-5: The average age of accounts receivable for 200B (use 360 days):
a. 19.57 days c. 0.05 days
b. 19.57 months d. 18.40 days

56. A firm has total interest expense of P 16,000 per year, sales of
P 600,000 per year, a tax rate of 30%, and a net profit after tax of
P 56,000. What is the firms times interest earned ratio?

a. 6 c. 4.5
b. 5 d. 3.5

57. A firm has daily cash receipts of P100,000. A bank has offered to
reduce the collection time on the firms deposits by two days for a
monthly fee of P500. If money market rate are expected to average 6%
during the year, the net annual benefit (loss) from having this service
is
a. P12,000 c. P3,000
b. P6,000 d. P 0

58. ABZ Corporations economic order quantity(EOQ) for Material RST is

5,000 pounds. If the company maintains a safety stock of RST at 500
pounds, and its order point is 1,500 pounds, what would be the total
annual carrying costs assuming the carrying cost per unit is P0.20?
a. P100 c. P1,000
b. P600 d. P1,100

**********END OF EXAMINATION**********

THOT: Your attitude determines your altitude.

klem

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59. A companys investment turnover is 1.4 and the return on invested capital is
35%. What is the profit margin?
a. 25% c. 49%
b. 35% d. 87.5%

60. Francis Companys debt to equity ratio is 0.6 to 1. Current liabilities total
P120,000 and long term liabilities total P360,000. If Francis Company has
working capital equal to P140,000, total assets must equal
a. P600,000 c. P800,000
b. P1,200,000 d. P1,280,000

61. The following information pertains to Batalla Company for 200B:

Inventory at December 31, 200B P 16,000
Purchases of merchandise, all on credit 72,000
Cost of Goods Sold 80,000

The companys merchandise inventory turnover for 200B was

a. 4.0 months c. 4.0 times
b. 10.0 times d. 3.60 months

62.Ryan Company had 20,000 shares of common stock outstanding through 2005. These
shares were originally issued at a price of P15 per share. The book value on
December 31, 2005 was P25 per share and the market value on December 31, 2005
was P30 per share. The dividend on common stock in total for 2005 was P45,000.
The dividend yield ratio for Ryan Company for 2005 was
a. 9% c. 15%
b. 7.5% d. 10%

63. When a company offers credit terms of 2/10, net 30, the annual interest cost,
based on a 360-day year, is
a. 24.0% c. 35.3%
b. 24.5% d. 36.7%

64. A firm has an average age of inventory of 90 days, an average collection

period of 40 days, and an average payment period of 30 days. The firms
operating cycle is
a. 110 days c. 120 days
b. 130 days d. 70 days

65. The Pennsylvania Company is preparing its cash budget for the month of May.
The following information is available concerning its accounts receivable:
Estimated credit sales for May P200,000
Actual credit sales for April 150,000
Estimated collections in May for credit sales in May 20%
Estimated collections in May for credit sales in April 70%
Estimated collections in May for credit sales prior to April 12,000
Estimated write-offs in May for uncollectible credit sales 8,000
Estimated provision for bad debts in May for credit sales in May 7,000
What are the estimated cash receipts from accounts receivable collection in
May?
a. P142,000 c. P150,000
b. P149,000 d. P157,000

THOT: Your Attitude determines Your Altitude.

klem

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