QUIZ 5

FINANCIAL MANAGEMENT

Topic 8 - Sources of Intermediate and LT Financing

Topic 9 - Dividend Policy

1. A decrease in firm’s willingness to distribute dividends is likely result from which of the
following
a. Increase in frequency of receivable collection
b. More profitable investment opportunity
c. Increase in earnings stability
d. More access on the capital markets
Correct answers: More profitable investment opportunity
2. Which is not true with regards to the equity funding of a company?
a. Equity instruments have no maturity dates
b. Preemptive right is offered on all types of long-term sources of funding
c. Interest rates on the market is not factor in declaration of dividend
d. Only the preference shares among the types of shares issued by a firm are so called
hybrid securities
Correct answers: Preemptive right is offered on all types of long-term sources of funding
3.Statement I - Floatation or issuance cost of new securities are present in an imperfect
economy.
Statement II - In an imperfect economy, issuance of new securities will not cause an incurrence
of floatation cost.
a. True; True
b. False; True
c. True; False
d. False; False
Correct answers: True; False
4. A share split will cause changes in the total balance of which of the following balance sheet
account?
a. None of the choices
b. Share capital
c. Cash
d. Retained Earnings
Correct answers: None of the choices
5. Dell Inc. strictly follows its residual dividend policy. The optimal capital budget of the firm
requires that all of the earnings for the year be used. Dell Inc. should pay
a. No dividends to holders of common shares
b. Only half of the intended dividends
c. Dividends by loaning from a financial institution and pay it out as dividends
d. Scrip dividends by issuing one year promissory note
Correct answers: No dividends to holders of common shares
6. Statement I - Holders of debt instruments issued by the company has a priority over equity
holders when it comes to voting of pertinent company decisions.

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 Statement II - The factor that the risk of obsolescence is borne by the lessor is one of the
benefits that attracts companies to substitute leasing assets on the decision of acquiring capital
assets through incurring liabilities.
a. False; False
b. False; True
c. True; False
d. True; True
Correct answers: False; True
7. Which of the following is not a practical thing to consider in determining the company’s
dividend policy?
a. Ownership control
b. Prevailing interest rates
c. Cash position
d. Legal restrictions
Correct answers: Prevailing interest rates
8. PWC Inc. has a policy of distributing 30% of its current year income after interest and taxes.
Which of the following statement is true in relation to this limited information?
a. PWC Inc. has a 70% retention ratio
b. 70% of the capital of PWC Inc. is funded by debt
c. PWC Inc. has already satisfied its capital budget for the year.
d. PWC Inc. has a dividend yield of 70%
Correct answers: PWC Inc. has a 70% retention ratio
9. Which of the following concepts tells us that dividends are to be paid only when the capital
budget has been already supplied?
a. Residual Dividend Model
b. Retain Earnings break-point principle
c. Gordon Growth model
d. Dividend irrelevance theory
Correct answers: Dividend irrelevance theory
10. A company that operates within a country whose legal system and laws relating to dividend
policy are strict will tend to
a. Maintain or increase dividend pay-out ratio
b. None of the foregoing choice
c. Increase plowback ratio
d. Maintain an equal retention and pay-out ratio
Correct answers: Maintain or increase dividend pay-out ratio
11. This theory states that investors practically prefers dividends from potential capital gains due
to the inherent uncertainty of capital gains.
a. Bird-in-the-hand theory
b. Dividend irrelevance theory
c. Marginality principle of earnings
d. Residual dividend model
Correct answers: Bird-in-the-hand theory
12. Statement I - Funding or financing is an act of contributing resources to finance a program,

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 project, or a need.
Statement II - Through equity capital funding, company’s negotiates through bank loans, or
through public issuance of instruments known as corporate bonds
a. False; True
b. True; True
c. True; False
d. False; False
Correct answers: True; False
13. Which is not a disadvantage of debt financing?
a. There is a corresponding increase in firm’s risk
b. Bankruptcy chance is high during economic downturns
c. Interest paid are tax deductible
d. Increase in cost of equity
Correct answers: Interest paid are tax deductible
14. Which of the following would have no influence on setting the optimal dividend policy?
a. Shareholders’ preference for current income compared to uncertain capital gains
b. The possibility of accelerating or delaying investment projects.
c. The cost associated with acquiring short-term funds for paying suppliers
d. Floatation cost or selling cost associated with issuing common stock
Correct answers: The cost associated with acquiring short-term funds for paying suppliers
15. Which is not a determinate of bond’s rating?
a. The relative mix of the financial asset portfolio held by the firm
b. The terms of the contract of the bond
c. Assessment of the credit riskiness of the firm
d. Financial performance of the issuing company as assessed using the ratio analysis
Correct answers: The relative mix of the financial asset portfolio held by the firm
16. Which of the following situation in which the quality of the company’s pay-out to
shareholders may decline
a. Increase in capital gains tax
b. Decrease in marginal tax rate on dividends
c. Decrease in cash position
d. Increase in positive NPV investment opportunities
Correct answers: Decrease in cash position
17. Which is not an advantage of leasing over debt financing?
a. The lessee has limited or no right to modify the asset on which right of use is only
transferred
b. Normally, mortgages is not a requirement
c. Rental payments is a reduction in taxable income
d. Formalities are less exhibited on the procedures
Correct answers: The lessee has limited or no right to modify the asset on which right of use is
only transferred
18. Statement I - Higher bond price is exhibited when there is a lower interest rate.
Statement II - Dividends are more predictable as compared to capital gains since capital gains
depends upon the price dictated by the supply and demand of selling shares in the stock

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 market.
a. False; False
b. True; False
c. True; True
d. False; True
Correct answers: True; True
19. Which is not a type of security issued by the Philippine government?
a. RTBs
b. Debt securities issued by GOCCs
c. Debt securities issued by entity registered in SEC
d. Bureau of the Treasury issued securities
Correct answers: Debt securities issued by entity registered in SEC
20. Statement I - Crowdfunding is not a form of raising fund for company’s capital budgets since
they are less known than equity or debt funding.
Statement II - In a perfect economy, new securities are assumed to be issued without incurring
any issuance cost.
a. True; False
b. True; True
c. False; False
d. False; True
Correct answers: False; True
21. Power Development Incorporation is expecting earnings before interest and taxes of P2
million for the next year. The cost of equity is 15%. The company has a long-term debt of
P5,000,000 on which the firm pays 10%. One million ordinary shares are outstanding. The firm’s
capital structure is funded by 40% debt and 60% equity. The applicable tax rate is 40%. Next
year Power Development Inc. expects to fun its positive net present value project costing P1.2
million, on which the funding will be the same as the firm’s capital structure. Assume also that
any new debt will also have an interest rate of 10%. The firm will follow a residual dividend
model and no other projects will be funded next year.
What is the net income of Power Development Inc.?
a. 900,000
b. 1,800,000
c. 720,000
d. 480,000
Correct answers: 900,000
22. Power Development Incorporation is expecting earnings before interest and taxes of P2
million for the next year. The cost of equity is 15%. The company has a long-term debt of
P5,000,000 on which the firm pays 10%. One million ordinary shares are outstanding. The firm’s
capital structure is funded by 40% debt and 60% equity. The applicable tax rate is 40%. Next
year Power Development Inc. expects to fun its positive net present value project costing P1.2
million, on which the funding will be the same as the firm’s capital structure. Assume also that
any new debt will also have an interest rate of 10%. The firm will follow a residual dividend
model and no other projects will be funded next year.
How much of the project is funded by equity?

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 a. 1,500,000
b. 720,000
c. 180,000
d. 900,000
Correct answers: 720,000
23. Power Development Incorporation is expecting earnings before interest and taxes of P2
million for the next year. The cost of equity is 15%. The company has a long-term debt of
P5,000,000 on which the firm pays 10%. One million ordinary shares are outstanding. The firm’s
capital structure is funded by 40% debt and 60% equity. The applicable tax rate is 40%. Next
year Power Development Inc. expects to fun its positive net present value project costing P1.2
million, on which the funding will be the same as the firm’s capital structure. Assume also that
any new debt will also have an interest rate of 10%. The firm will follow a residual dividend
model and no other projects will be funded next year.
What is the pay-out ratio?
a. 60%
b. 40%
c. 80
d. 20%
Correct answers: 20%
24. SMPH has a strict residual dividend policy and they projected that the net result of their
operation this year is positive at P12,000,000. SMPH has a target capital budget of P10,000,000
and a funding structure of 30% debt and 70% equity.
Determine the payout ratio.
a. 41.67%
b. 30%
c. 45.69%
d. 31.50%
Correct answers: 41.67%
25. SMPH has a strict residual dividend policy and they projected that the net result of their
operation this year is positive at P12,000,000. SMPH has a target capital budget of P10,000,000
and a funding structure of 30% debt and 70% equity.
Assuming the company has 400,000 outstanding ordinary shares, what will be the earnings per
share?
a. 30
b. 35
c. 0
d. 14.29
Correct answers: 30
26.
SMPH has a strict residual dividend policy and they projected that the net result of their
operation this year is positive at P12,000,000. SMPH has a target capital budget of P10,000,000
and a funding structure of 30% debt and 70% equity.
How much of the net income will be used to fund the debt portion of the capital budget?
a. 7,000,000

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 b. 0
c. 5,000,000
d. 10,000,000
Correct answers: 0
27. Rain company whose tax rate is 40% has a total asset of P500,000,000 and earnings before
interest and taxes of P200,000,000. The company’s target capital structure is 50% debt funded
and 50% equity funded. The cost of new and old debt is constant at 8%. Retention ratio is 40%.
How much is the total debt of the company?
a. 180,000,000
b. 250,000,000
c. 43,200,000
d. 20,000,000
Correct answers: 250,000,000
28. Rain company whose tax rate is 40% has a total asset of P500,000,000 and earnings before
interest and taxes of P200,000,000. The company’s target capital structure is 50% debt funded
and 50% equity funded. The cost of new and old debt is constant at 8%. Retention ratio is 40%.
What is the earnings before taxes of Rain Company?
a. 20,000,000
b. 86,400,000
c. 250,000,000
d. 180,000,000
Correct answers: 180,000,000
29. Rain company whose tax rate is 40% has a total asset of P500,000,000 and earnings before
interest and taxes of P200,000,000. The company’s target capital structure is 50% debt funded
and 50% equity funded. The cost of new and old debt is constant at 8%. Retention ratio is 40%.
How much is the total dividends to be paid out?
a. 20,000,000
b. 43,200,000
c. 250,000,000
d. 64,800,000
Correct answers: 64,800,000
30. Rain company whose tax rate is 40% has a total asset of P500,000,000 and earnings before
interest and taxes of P200,000,000. The company’s target capital structure is 50% debt funded
and 50% equity funded. The cost of new and old debt is constant at 8%. Retention ratio is 40%.
How much is the total capital budget be?
a. 86,400,000
b. 64,800,000
c. 20,000,000
d. 250,000,000
Correct answers: 86,400,000
31. Bayan Co. wants to keep its capital structure that is 70% equity and 30% debt. The
company projected that its net income for this year will be P500,000. Bayan Co. strictly follows
residual dividend policy and anticipates a retention ratio of 60%. What is the company’s capital
budget?

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 a. 428,571.43
b. 531,569.78
c. 450,000.00
d. 542,900.00
Correct answers: 428,571.43
32. A company roll out its capital budget for the coming year at P20,000,000. The optimal capital
structure is 40% debt and 60% equity. Earnings before taxes and interest is P34.667 million.
The company follows the residual dividend policy and maintains the same capital structure. The
company has P200,000,000 assets. The average interest rate on outstanding debt is 10% and
tax rate is 40%. How much is the total interest payment?
a. 16,000,000
b. 6,000,000
c. 8,000,000
d. 4,000,000
Correct answers: 8,000,000
33. Narra Inc. recently completed a 2-for-1 share split. Prior to the split, the company had
8,000,000 shares outstanding and the stock price is P60. After the split, the market
capitalization of the company’s stock equaled P2 billion.
What is the price of each stock after the stock split?
a. 15
b. 30
c. 60
d. 35
Correct answers: 30
34. Narra Inc. recently completed a 2-for-1 share split. Prior to the split, the company had
8,000,000 shares outstanding and the stock price is P60. After the split, the market
capitalization of the company’s stock equaled P2 billion.
Assuming that before the stock split Narra Inc. held in treasury 1,200,000 of its outstanding
shares, determine the price of each stock after the stock split?
a. 120
b. 30
c. 60
d. 15
Correct answers: 30
35. Electric Co. recently completed a reverse split where 1,000,000 shares becomes 500,000
shares. Prior to the reverse split the stock price is P75. What is the price of each stock after the
transaction?
a. 300
b. 75
c. 37.50
d. 150
Correct answers: 150

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