FM Quizzes

ABC Company has an inventory conversion period of 60 days; a receivable conversion period of 45
days, and a payments cycle of 30 days. What is the length of the firm's cash conversion cycle?
 75 days
ABC Company needs to pay a supplier's invoice of P90,000 and wants to take a cash discount of
3/10, n/40. The firm can borrow the money for 30 days at 12% per annum plus a 10%
compensating balance. Assuming ABC borrows the money on the last day of the discount period and
repays it 30 days later, the effective interest rate on the loan is:
 13.33%
ABC Company is planning to issue 345,000 shares of 12%, P100 par value preference stocks for
P150 per share. The company pays income tax at a rate of 30%. What is the cost of capital of
preference stocks?
 8%
ABC Company is planning to purchase a new machine. The payback period will be 6 years. The new
machine is expected to produce cash flow from operations, net of income taxes, of P3,500 a year for
each of the first 3 years of the payback period and P2,500 a year for each of the last 3 years.
Depreciation of P2,000 a year will be charges to income for each of the 6 years. How much will the
machine cost
 P18,000
ABC Company is planning to purchase a new machine which it will depreciate for book purposes on
a straight-line basis over a 10-year period with no salvage value and full year's depreciation taken in
the year of acquisition. The new machine is expected to produce cash flow from operation net of 10
years, of P66,000 a year in each of the next 10 years. A 12% accounting rate of return on the initial
investment is expected. How much will the new machine cost?
 P300,000
ABC Corporation presently has 200,000 shares, p10 par value ordinary stocks issued and
outstanding. The ordinary shareholders of ABC Corporation have preemptive rights. If ABC
Corporation issues 100,000 additional shares of ordinary ordinary stocks at P15 per share, a
current holder of 30,000 shares of ABC Corporation's ordinary stocks must be given the option to
buy:
 15,000 additional shares
A company is in the enviable situation of having unlimited capital funds. The best decision rule, in
an economic sense, for it to follow would be to invest in all projects in which
 the internal rate of return is greater than zero
A compensating balance:
 Compensates a financial institution for services rendered by providing it with deposits of
funds.
All but which of the following is considered in determining credit policy?
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 accounts payable deferral period
All of the following statements about working capital are correct except:
 Financing permanent inventory build-up with long-term debt is an example of an aggressive
working capital policy.
An advantage of the use of long-term debt as opposed to short-term debt to finance current assets
is:
 it decreases the risk of the firm
An example of carrying cost is:
 obsolescence
An investment rating approach which measures the length of time required to recover the initial
outlay for a particular investment proposal is the:
 payback period
An optimal capital budget is determined by the point where the marginal cost of capital is:
 equal to the marginal rate of return on investment
Bonds are long-term debt instruments. They are similar to term loans, except that they are usually
offered to the public and sold to many investors. among the advantages (to the issuer) of issuing
bonds are as follows, except:
 debt adds risk to the firm
Clean Company follows an aggressive financing policy in its working capital management while
Clear Corporation follows a conservative financing policy. Which one of the following statements is
correct?
 Clean has a low current ratio while Clear has a high current ratio.
Common sources of short-term financing include:
 stretching payables
Conglomerate merger combines two companies that have no related products or markets.
 True
Escape Company regularly pays its accounts payable on the 10th day and enjoys the 2% cash
discount, terms: 2/10, n/30. Because of an oversight, one supplier's invoice is not paid within the
discount period. What is the annual cost of the incident of paying an invoice on the 30th day, instead
of the 10th day? Use 360 days a year.
 36.73%
Debt financing is usually the cheapest component of capital; however, it cannot be used excessively
because:
 the financial risk of the firm may increase and thus drive up the cost of all sources of
financing
Deficiencies associated with using the payback method to evaluate investment alternatives include
 all of the above
DEM Company has announced that is plans to finance future investments so that the firm will
achieve an optimum capital structure. Which one of the following corporate objectives is consistent
with this announcement?
 maximize the net worth of the firm
Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment
proposal because it
 reduces the cash outlay for income taxes
From an investor's viewpoint, the least risky type of bond in which to invest is:
 secured bond
Great Company purchased a new machine on January 1 of this year for P90,000, with an estimated
useful life of 5 years and a salvage value of P10,000. The machine will be depreciated using the
straight-line method. The machine is expected to produce cash flow from operations, net of income
taxes, of P36,000 a year in each of the next 5 years. The payback period will be:
 2.5 years
Great Company is planning to issue P20M bonds at an effective interest rate of 10%. The company
pays income tax at a rate of 30%. What is the cost of debt?
 7%
Happy Company has a P5 million of average inventory and sales of P30 million. Using a 365-day
year, calculate the firm's inventory conversion period.
 60.83 days
Heller Company purchased an equipment for P500,000 with a useful life of 5 years and no salvage
value. The equipment is being depreciated using the straight-line method. it is expected to produce
annual cash flow from operations, net of income taxes, of P150,000. The present value of an
ordinary annuity of P1 for 5 periods at 14% is 3.43. The present value of P1 for five periods at 14%
is 0.52. Assuming that Heller uses a time adjusted rate of return of 14%, what is the machine's NPV?
 P14,500
If a company has a positive sum of the present values of all future cash flows related to a proposed
capital expenditure discounted at the company's cost of capital, the:
 return on the investment exceeds the company's cost of capital
If everything else remains constant and a firm increases its cash conversion cycle, its profitability
will likely:
 decrease
If the internal rate of return method is used in capital budgeting subject to capital rationing, a
project would be accepted if the:
 internal rate equals or exceeds the hurdle or cut-off rate
It is a hybrid debt and equity. It has fixed charge and increases leverage, but payment of dividends is
not a legal obligation.
 preference stock
Leasing has become a major means of financing because it offers a variety of tax and other benefits.
The three principals forms of lease are sale-leaseback, operating lease and capital lease. The
operating lease:
 is a form of off-balance sheet financing
One of the sources of long-term financing is the issuance of ordinary stocks. The advantages (to the
issuer) of issuing ordinary stocks are as follows, except:
 ordinary stock cash dividends are not tax deductible as expense
Preference and ordinary stock differ in that:
 preference stock has a higher priority than ordinary stock with regard to earnings and
assets in the event of bankruptcy
Profitability index is an example of which concept?
 capital budgeting
Refer to # 23, assume the new machine's salvage value is P20,000 in years 1 and 2 and P15,000 in
years 3 and 4. What will be the bailout period for the Great Company on this new machine?
 1.9 years
Refer to # 27, accounting rate of return on initial investment is:
 10%
Refer to # 27, in estimating the internal rate of return, the factors in the table of present values of an
annuity should be taken from the columns closest to:
 5.00
Refer to # 29, if ABC fails to take the discount and pays on the 40th day, what effective rate of
 37.11%
Sage Company is planning to purchase a new machine for P600,000. Depreciation for tax purposes
will be P100,000 annually for 6 years. The new machine is expected to produce cash flow from
operations, net of income taxes, of P150,000 a year in each of next 6 years. The accounting rate of
return on the initial investment is expected to be;
 8.3%
Short-term financing plans with high liquidity have:
 moderate return and moderate risk
Smile Corporation has a total annual cash requirement of P9,075,000 which are to paid uniformly.
Smile has the opportunity to invest the money at 24% per annum. The company spends, on the
average, P40for every cash conversion to marketable securities. What is the optimal cash
conversion size?
 P55,000
Stock splits:
 increase the number of shares of ordinary equity shares outstanding
Synergy in merger or acquisition is the working together of two or more firms to produce a
combined value that is greater than the sum of their individual values.
 False
Tam Company is negotiating for the purchase of equipment that would cost P100,000 with the
expectation that P20,000 per year could be saved in after-tax cash costs if the equipment were
acquired. The equipment's estimated useful life is 10 years with no residual value and would be
depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is
12%. present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of P1 due in 10
years at 12% is .322. Net present value is: (27)
 P13,000
Tanya Corporation issued preference stocks for P120 per share. The issue price is P20 more than
the stock's par value. The company incurred underwriting fees of P10 per share. The stocks will
earn annual dividends of P12 per share. If the tax rate is 30%, the cost of preference stock is:
 10.91%
The bailout payback period is:
 the length of time for payback using cash flows plus the salvage value to recover the original
investment
The difference between the cash balance on the firm's books and the balance shown on the bank
statement is called:
 a float
The discount rate that makes the present value of a bond's payments equal to its price is termed as:
 yield to maturity
The discount rate (hurdle rate of return) must be determined in advance for the
 net present value method
The final approval of a firm's dividend policy comes from:
 the board of directors
The internal rate of return is
 all of the above
The length of time between the acquisition of inventory and payment for it is called the:
 accounts payable deferral period
The longer the firm's accounts payable period, the:
 less the firm must invest in working capital
The minimum return that a project must earn for a company in order to leave the value of the
company unchanged is the
 cost of capital
The most important considerations with respect to short-term investments are:
 risk and liquidity
The payback capital budgeting technique considers
 no to income over entire life of the project and no to time value of money
The payback measures
 how quickly investment pesos maybe recovered
The procedures followed by the firm for ensuring payment of its accounts receivables are called its:
 collection policy
The transaction motive for holding cash is the:
 daily operating requirements
The use of safety stock by a firm will:
 increase inventory costs
The use of warrants in financing would:
 lower the cost of debt
The weighted average cost of capital approach to decision making is not affected by the:
 current budget for expansion
The weighted-average cost of capital is equal to the:
 rate of return on assets that covers the costs associated with the funds employed
Using the data in # 27, payback period is:
 5 years
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's experiences a carrying cost of
P0.80 per bag.
 4,000 bags
What is the effective annual interest rate on a 9% annual percentage rate automobile loan that has
monthly payments?
 9.38%
What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% compensating
balance? assume 360 days per year.
 17.4%
What is the weighted average cost of capital for a firm using 30% ordinary equity with a return of
14%; 50% debt with a return of 12% ; 20% preference stock with a return of 10% and a tax rate of
35%?
 10.40%
Which changes in costs are most conducive to switching from a traditional inventory ordering
system to a just-in-time ordering system?
 cost per purchase order will decrease and inventory unit carrying cost will increase
Which of the capital budgeting methods require use of present value table?
 net present value and time-adjusted rate of return
Which of the following actions is likely to reduce the length of a firm's cash conversion cycle?
 Adopting a new inventory system that reduces the inventory conversion period.
Which of the following best identifies the reason for using probabilities in capital budgeting decisions:
 uncertainties
Which of the following brings in additional capital to the firm?
 exercise of warrants
Which of the following capital expenditure planning and control techniques has been criticized because it
fails to consider investment profitability?
 payback method
Which of the following is necessary in order to calculate the payback period of a project?
 annual cash flow
Which of the following is not a measure of cost of capital?
 cost of sales
Which of the following is not a source of long-term financing?
 floating lien
Which one of the following is a debt instrument that generally has a maturity of 10 years or more?
 A bond
With credit terms of 3/8, n/30, what is the customer's payment decision date?
 the 8th day is the customer's decision date
Working capital management involves investment and financing decisions related to:
 current assets and current liabilities
You are planning to invest in ordinary stock of ABC Company. Lately, the firm paid a dividend of
P12.00. You have projected that dividends will grow at a rate of 10% per year indefinitely. If you
want an annual return of 15%, what is the most you should pay for the stock now?
 P264.00
You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10% nominal
or stated rate on a one-year loan. What is the effective interest rate if the loan is a discount loan?
 24%
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ABC Company has an inventory conversion period of 60 days; a receivable conversion period of 45

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