1. Which of the following is not a function of financial management?

a. Financing
b. Internal control
c. Capital budgeting
d. Risk management

2. One of the responsibilities of a financial manager is to make efficient use of idle cash for short
periods of time. Which one of the following would not qualify as satisfactory investment for idle
cash?
a. Common stocks of Manila corporations.
b. Bangko Sentral Treasury bills.
c. Prime commercial paper
d. Negotiable certificates of deposit

3. In 2019, MJP Corporation’s net income was P 800,000 and in 2020 it was P 200,000. What
percentage increase in net income must MPX achieve in 2021 to offset the 2020 decline in net
income?
a. 60%
b. 600%
c. 400%
d. 300%
Solution:

The change in net income in 2020 is P 600,000. The percentage increase in 2021 to offset the same
change in net income shall be 300% (P 600,000/200,000).

4. Horizontal analysis is a technique for evaluating a series of financial statement data over a period of
time
a. that has been arranged from the highest number to the lowest number.
b. that has been arranged from the lowest number to the highest number.
c. to determine which items are in error.
d. to determine the amount and/or percentage increase or decrease that has taken place.

5. An aircraft company would most likely have

a. a low inventory turnover.
b. a high inventory turnover.
c. a low profit margin.
d. high volume.

6. Long-term creditors are usually most interested in evaluating

a. liquidity.
b. solvency.
c. marketability.
d. profitability.

7. During 2007, Tarlac Company purchased P960,000 of inventory. The cost of goods sold for 2007
was P900,000, and the ending inventory at December 31, 2007 was P180,000. What was the
inventory turnover for 2007?
a. 6.4
 b. 5.3
c. 6.0
d. 5.0

Solution:

Inventory Turnover:  Cost of Goods Sold ÷ Average Inventory

Cost of goods sold P   900,000
Add Ending inventory     180,000
Total cost available for sales   1,080,000
Deduct cost of purchases     960,000
Beginning inventory P   120,000
Average Inventory:  (P120,000 + P180,000) ÷ 2 P 150,000
Inventory Turnover:  (P900,000 ÷ P150,000) 6 times

An alternative computation of the inventory turnover is to use Net Sales instead of Cost of Goods
Sold.

8. Selected data from Mildred Company’s year-end financial statements are presented below.  The
difference between average and ending inventory is immaterial.
Current ratio 2.0
Quick ratio 1.5
Current liabilities   P 120,000
Inventory turnover (based on cost of sales)       8 times
Gross profit margin           40%
Mildred’s net sales for the year were
a. P   800,000
b. P   480,000
c. P   672,000
d. P 1,200,000

Inventory balance  (P120,000 x (2.0 – 1.5) P  60,000

Cost of goods sold  60,000 x 8 P480,000
Sales  (P480,000 ÷  0.60) P800,000

9. Recto Co. has  a price earnings ratio of 10,  earnings per share of P2.20, and a pay out ratio of 75%.
The dividend yield is
a. 25.0%
b. 7.5%
c. 22.0%
d. 10.0%

Dividend per share:  0.75 x P2.20 P 1.65

Market price:  10 x 2.20 22.00
Dividend yield:  P1.65 ÷ P22.00 = 7.5%

10. Net sales are P 6,000,000, beginning total assets are P 2,800,000, and the asset turnover is 3.0.  What
is the ending total asset balance?
a. P 2,000,000.
b. P 1,200,000.
c. P 2,800,000.
 d. P 1,600,000.

Asset Turnover = Net Sales/ Average Asset

3 = 6,000,000/ Average Asset
Average Asset = 6,000,000/3
Average Asset = 2,000,000

Average Asset = Beginning Balance + Ending Balance

2
2,000,000 = 2,800,000 + Ending Balance
2
4,000,000 = 2,800,000 +Ending Balance
4,000,000 – 2,800,000 = 1,200,000 (ending balance)

11. Which of the following actions will increase a firm's current ratio if it is now less than 1.0?
a. Convert marketable securities to cash.
b. Pay accounts payable with cash.
c. Buy inventory with short term credit (i.e. accounts payable).
d. Sell inventory at cost

12. You observe that a firm’s profit margin and debt ratio are below the industry average, while its return
on equity exceeds the industry average. What can you conclude?
a. Return on assets is above the industry average.
b. Total assets turnover is above the industry average.
c. Total assets turnover is below the industry average.
d. Statements a and b are correct.

13. Working capital management involves investment and financing decisions related to:
a. plant and equipment and current liabilities.
b. current assets and capital structure.
c. current assets and current liabilities.
d. sales and credit.

14. Which of the following could lead to cash flow problems?

a. Obsolete inventory, accounts receivable of inferior quality, easing of credit by suppliers.
b. Slow-moving inventory, accounts receivable of inferior quality, tightening of credit by
suppliers.
c. Obsolete inventory, increasing notes payable, easing of credit of suppliers.
d. Obsolete inventory, improved quality of accounts receivable, easing of credit by suppliers.

15. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Simile
has the opportunity to invest the money at 24% per annum. The company spends, on the average, P40
for every cash conversion to marketable securities. What is the optimal cash conversion size?
a. P 60,000
b. P 45,000
c. P 55,000
d. P 72,500

16. When a specified level of safety stock is carried for an item in inventory, the average inventory level
for that item
a. decreases by the amount of the safety stock.
 b. is one-half the level of the safety stock.
c. Increases by one-half the amount of the safety stock.
d. Increases by the number of units of the safety stock.

17. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent can be
arranged at any time. When should the customer pay the invoice?
a. Pay on the 1st.
b. Pay on the 40th
c. Pay on the 10th
d. Pay on the 60th

18. Working capital is important for all the following reasons except that is
a. Consists of a large portion of a firm’s total assets
b. Affects a firm’s liquidity and profitability
c. Consumes a small portion of the financial manager’s time
d. Consists of those assets that are most manageable

19. An increase in a firm’s collection period means

a. The firm’s current ratio is increasing
b. The firm’s receivable turnover ratio is increasing 
c. The firm’s collection expenses have fallen
d. The firm has become less efficient in the collection of its receivable

20. A firm has daily cash receipts of P 100,000 and collection time of 2 days. A bank has offered to
reduce the collection time on the firm’s deposits by 2 days for a monthly fee of P 500. If money
market rates are expected to average 6% during the year, the net annual benefit (loss) from having
this service is
a. P 3,000
b. P 12,000
c. P 0
d. P 6,000

Solution:
The benefit arises from reduced collection time by days in which cash may be invested at an average
return of 6% per year. The cost of the accelerated collection period is the bank monthly charge of P 500.
The net benefit is determined as follows:

Benefit from accelerated collection (100,000 x 2 days x 6%) 12,000

Bank charges (500 x 12)   6,000
Net benefit from reduced collection time   6,000

21. If a firm purchases raw materials from its supplier on a 2/10, net 40, cash discount basis, the
equivalent annual interest rate (using 360-day year) of foregoing the cash discount and making
payment on the 40th day is
a. 2%
b. 18.36%
c. 24.49%
d. 36.72% 

360/ 30 x 2%/98% = 24.49%

22. Marsman Co. has determined the following for a given year:
Economic order quantity (standard order size)   5,000 units
Total cost to place purchase orders for the year       P 40,000
Cost to place one purchase order       P     100
Cost to carry one unit for one year         P        4
What is Marsman’s estimated annual usage in units?
a. 1,000,000
b. 500,000
c. 2,000,000
d. 1,500,000

Number of orders made 40,000/100 400

Annual requirement  400 x 5,000 2,000,000

23. All of the following items are included in discounted cash flow analysis except
a. Future operating cash savings
b. The disposal prices of the current and future assets
c. The future assets depreciation
d. The tax effects of future assets depreciation

24. Nakane Company is planning to purchase a new machine for P 500,000. The new machine is
expected to produce cash flows from operations, before income taxes, of P 135,000 a year in each of
the next five years. Deprecation of P 100,000 a year will be charged to income for each of the next
five years. Assume that the income tax rate is 40%. The payback period would be approximately
a. 2.2 years
b. 3.4 years
c. 3.7 years
d. 4.1 years

Cash flow from operations 135,000

Less depreciation 100,000
ebit   35,000
Tax40%   14,000
ni   21,000
Add: depreciation 100,000
Net cash inflows 121,000
Payback = 500,000/121000
= 4.1 years

25. Friendly Corporation’s Project Sky has a net investment of P 1.2 million. The present value of all
future net cash inflows is P 2.4 million. The company’s tax rate is 40%. The profitability index is
a. 0.50
b. 1.20
c. 0.83
d. 2.00
Present value of all future net cash inflows 2,400,000
Net investment 1,200,000

26. In capital budgeting, sensitivity analysis is used

a. to determine whether an investment is profitable.
 b. to see how a decision would be affected by changes in variables.
c. to test the relationship of the IRR and NPV.
d. to evaluate mutually exclusive investments.

27. If a company’s required rate of return is 12 percent and in using the profitability index method, a
project’s index is greater than 1.0, this indicates that the project’s rate of return is
a. equal to 12 percent.
b. less than 12 percent.
c. greater than 12 percent.
d. dependent on the size of the investment.

28. Mark Company purchased a new machine on January 1 of this year for an amount of P 90,000, with
an estimated useful life of 5 years and a salvage value of P 10,000. The machine will be depreciated
using the straight-line method. The machine is expected to produce cash flows from operations, net of
income taxes, of P 36,000 a year in each of the next 5 years. The new machine’s salvage value is P
20,000 in years 1 and 2, and P 15,000 in years 3 and 4. What will be the bailout period (rounded) for
this new machine?
a. 1.4 years
b. 2.2 years
c. 1.9 years
d. 3.4 years

Solution:
Period Net cash inflows Cash to date Salvage value Total cash Payback bailout
years
01 P 36,000 P 36,000 P 20,000 P 56,000 1
02   36,000   72,000   20,000   90,000 0.9
Total 1.9

The fraction of the payback period in the second year of operations is computed as [(P 90,000 – P
36,000 – P 20,000)/ P 36,000]. This indicates that the needed cash in the second year amounting to P
54,000 (i.e., P 90,000 – P 36,000) is taken first from the salvage value, then the balance of P 34,000
(i.e., P 54,000 – P 20,000) is recovered from the cash generated in the second year. 

29. The following terms are included in the computation of net cost of investment, except:
a. The initial cash outlay covering all expenditures on the investment project up to the time
when it is ready for use or operation.
b. The book value of the old asset replaced.
c. Working capital requirement to operate the capital investment project.
d. Avoidable cost of immediate repairs on old asset to be replaced, net of tax.

30. Kipling Company has invested in a project that has an eight-year life. It is expected that the annual cash inflow
from the project will be P20,000. Assuming that the project has a internal rate of return of 12%, how much was
the initial investment in the project if the present value of annuity of 1 for 8 periods is 4.968 and the present value
of 1 is 0.404?
a. P 160,000
b. P  80,800
c. P  99,360
d. P  64,640
 The payback period that corresponds to the project’s internal rate of return of 12 percent is 4.968.  Therefore, the
amount of investment must equal the product of the payback period and the net cash flows:
Investment:   (4.968 x 20,000) = P99,360

31. Techniques such as hedging, forward contracts and options can

a. Reduce risk
b. Increase risk
c. Totally eliminate risk
d. Are purely for speculation

32. In capital markets, the primary market is concerned with the provision of the new funds for
capital investments through
a. New issues of bonds and stock securities
b. Exchanges of existing bond and stock securities
c. The sale of forward or future commodities contracts
d. New issues of bond and stock securities and exchanges of existing bond and stock
securities

For numbers 33 to 36

Hector Corporation’s capital structure is as follows:

Bonds payable, 10 years 10% P 1,000,000
10% preferred stocks, P 200 par value, 10,000 shares issued and outstanding
    2,000,000
Common stocks, P 50 per share, 30,000 shares issued and outstanding
    1,500,000
Retained earnings
      500,000
Total
P 5,000,000

The company’s earnings per common share (EPS) is P 12. The common shares’ current market
price is P 60, while that of preferred shares is P 250. The income tax rate is 32%.

1. For purposes of computing the company’s overall cost of capital, the cost of common stocks and
retained earnings is
a. 24%
b. 16.32%
c. 20%
d. 13.6%
Earnings per share P12 = 20%
Current market price     60

2. The cost of debt is

a. 6.8%
 b. 10%
c. 14.71%
d. 7.58%

After tax rate of interest = 10% ( 1-0.32) = 6.80%

3. The cost of preferred stocks is

a. 10%
b. 6.8%
c. 8%
d. 5.44%

Cost of preferred stock = dps / net issuance

200*10%/250 = 8%

4. What is the weighted average cost of capital?

a. 34.80%
b. 23.66%
c. 8.54%
d. 12.56%
BONDS 6.80 1/5 1.36%
PREFERRED STOCK 8.00 2/5 3.20%
COMMON STOCK 20.00 2/5 8.00%
COST OF CAPITAL 12.56%