Pre-final Examination

Joshua S. Umali, CPA

Item 1 to 4 are based on the following information:

In order to increase production capacity, Joshua Company is considering replacing an existing production machine with a new
technology improved machine beginning January 1. The following information is being considered by the Company.

 The new machine would be purchased for 160,000 in cash. Shipping, installation and testing would cost an additional
30,000.
 The new machine is expected to increase annual sales by 20,000 units at a sales price of P40 per unit. Incremental
operating costs include P30 per unit in variable costs and total fixed costs of P40,000 per year.
 The investment in new machine will require an immediate increase in working capital of 35,000. The cash outflow will
be recovered after five years.
 Joshua uses straight-line depreciation for financial reporting and tax reporting purposes. The new machine has an
estimated useful life of 5 years and zero salvage value.
 Joshua is subject to 40% income tax rate.

Joshua uses the net present value method to analyze investments and will employ the following factor and rates:

Period PV of 1 at 10% PV of an ordinary annuity of 1 at 10%

1 0.909 0.909
2 0.826 1.736
3 0.751 2.487
4 0.683 3.170
5 0.621 3.791
1. Joshua’s net cash outflow in a capital budgeting decision is:
a. 90,000 c. 204,525
b. 195,000 d. 225,000

2. Joshua’s discounted annual depreciation tax shield for Year 1 is

a. 13,817 c. 20,725
b. 16,762 d. 22,800

3. The overall discounted cash flow impact of Joshua’s working capital investment for the new production machine would
be
a. (7,959) c. (13,265)
b. (10,080) d. (35,000)

4. The acquisition of the new production machine by Joshua will contribute a discounted net of tax contribution margin of
a. 242,624 c. 363,936
b. 303,280 d. 454,920

Item 5 to 9 are based on the following information:

Financial statements of Joshua Corporation as of November 30, 2017 are reproduced below. The market price of Joshua’s
common stock was P20 per share on November 30, 2017.

Statement of Financial Position

2017 2016
Cash 3,000 2,000
Short-term marketable securities 1,000 1,000
Accounts receivable (net) 14,000 11,000
Merchandise inventory 24,000 16,000
Total Current Asset 42,000 30,000

Property, plant and equipment 68,000 60,000

Long-term investments 10,000 10,000
Total Noncurrent Asset 78,000 70,000
 Pre-final Examination

Joshua S. Umali, CPA

Total assets 120,000 100,000

2017 2016
Accounts Payable 5,000 4,000
Wages Payable 1,000 1,000
Total Current liabilities 6,000 5,000

Bonds Payable, 10% 20,000 20,000

Total Noncurrent Liabilities 20,000 20,000

Total Liabilities 26,000 25,000

Common stock, no par, 10,000,000 shares 25,000 25,000

Retained earnings 69,000 50,000
Total Current liabilities 94,000 75,000

Total liabilities and Stockholder’s Equity 120,000 100,000

Statement of Comprehensive Income

Sales (all on credit) 200,000

Cost of goods sold 120,000
Gross margin 80,000
Operating expenses 38,000
Operating income 42,000
Interest expense 2,000
Income before income taxes 40,000
Income tax 15,000
Net income 25,000

5. Joshua’s acid test (quick) ratio as of November 30, 2017 is:

a. 2.8 c. 7
b. 3 d. 4

6. Joshua’s accounts receivable turnover for the year ended November 30, 2017 is closest to:
a. 18.2 c. 9.6
b. 14.3 d. 16.0

7. Joshua’s merchandise inventory turnover for the year ended November 30, 2017 is closest to:
a. 10 c. 6
b. 5 d. 4

8. Joshua’s times interest earned for the year ended November 30, 2017 is closest to:
a. 21 c. 20
b. 12.5 d. 15

9. Joshua’s return on stockholder equity for the year-ended November 30, 2017 is closest to:
a. 12.50% c. 24.00%
b. 22.73% d. 29.59%
 Pre-final Examination

Joshua S. Umali, CPA

10. An investment project is expected to yield 10,000 in annual revenues, will incur 2,000 in fixed costs per year, and
required an initial investment of 5,000. Given a cost of goods sold of 60% of sales and ignoring taxes, what is the
payback period?
a. P2.50 c. 2.00
b. 5 d. None indicated. Please specify

Write in your answer sheet the formula for the following items:

Financial Analysis

11. Accounts receivable turnover.

12. Inventory turnover.
13. Number of days in receivables / aged-receivables
14. Number of days in inventory / aged-inventory
15. Debt ratio
16. Debt to Equity ratio
17. Times interest earned
18. Return on sale
19. Return on asset
20. Return on equity
21. Earnings per share
22. Price earnings ratio
23. Dividend pay-out ratio
24. Dividend yield ratio

Capital Budgeting

25. Payback period

26. Payback bail-out period
27. Payback reciprocal
28. Accounting rate of return
29. Net present value
30. Internal rate of return
31. Profitability index
32. Net investment
33. Net income after tax
34. Cash inflow after tax

Financial Management

35. Baumol Model

36. Reorder point

Capital Structure

37. CAPM
38. Cost of Common Share / RE (Growth rate model)
39. Cost of debt
40. Formula in computing weighted average cost of capital

“You don’t have to be great to start. You just have to start to become great.”