January 24, 2023

Financial Management

Orientation:

1. Opening Prayer
- Randomly picked
2. About the subject
- Internal decision making of the company

Class Rules:

1. Mute your mic

2. Open cam during enter and Q&A
3. Participate
4. Respect
5. Proper Clothing
6. Fix internet, camera, mic and charge

Quizzes:

1. To be announced
2. Grading system to be announced

Major Exam:

1. Departmental

Recitation:

1. Must have an answer even though you are not sure

LESSON 1

Deals with capital structure – debt and equity of the company

Tools and analysis utilized –

Finance Manager – analyze

 A. External Financing – Loan and Investment

Advantages:

1. Other allocation of finances (like investing to other company or projects with big returns)
2. Internal Investing can pay your debts – increase credit standing
3. Can use them to purchase capital assets (like machines, PPE)

Disadvantages:

1. Interest Rate
2. Investors have ownership in you company (Investors vs. Finance Manager)

B. Capital Budgeting – Benefit (return) is greater than costs.

C. Financial Management
Objectives:
1. Procure the financial resources
2. Allocate financial resources
3. Control financial resources
D. Corporate Governance
Shareholders –
Stakeholders – internal and external affects by the company’s decisions
 E. Risk Management
Rule:
1. Identify the risk
2. Analyze
3. Decide (accept the risk or avoid)

END GOAL: MAXIMIZATION OF WEALTH

Compound
LESSON 3

Composition of day-to-day operation

Proper capital management means you have a profit.

Working capital – Cash, Inventory, Accounts Receivable, Accounts Payable

LESSON 2:

Debt and Equity Ratio

High equity – high risk for you lenders/investors.

Optimal Capital Structure:

- goal is to maximize the value of the firm (benefit > cost)

- minimize the cost of capital (debt has a lowest cost of capital)

Capital Restructure:

- increase debt/equity ratio you need long term loans, bonds

- decrease debt/equity ratio you need to issue stocks

Approach:

- maximize the value of the firm

- minimize the cost of capital

1. Net Income Approach:

- Exclusive debts
- Maximize borrowing
 Assumption:
- No corporate taxes
- Cost of debt < Cost of equity 1 share
- Cost of debt and cost of equity is constant at all level of leverage (leverage means amount of
debt)
- Only employ 2 types of capital debt and equity

E – Market Value (MV) of equity

D – MV of debt

V – MV of firm (D+E)

KS – cost of equity

KD – Cost of debt

KA – Overall cost of capital

PROBLEM:
2.
Kd – constant

Decrease debt – decrease equity

Increase debt – increase equity

3. Traditional Approach – value of firm increases if debt increases

- Beyond the limit , debt increases while Ka and V decreases

Points: Initially – Ks constant after increase D

- Kd and Ks constant
- Ka fall

Beyond the limit – Kd constant because of tax savings while Ks increases

No totally affect in shareholders’ dividends in increase of debt.

Stages Kd Ks Ka
1 Constant Constant Constant (at the certain
extent)
2 Constant Gradually Increase Constant ( slightly
(means increase risk for declining)
investors)
3 Gradually increasing Increasing (faster rate) Increase

How?

Exclusive equity – Ka less Ks

Exclusively Debt - Ka= Kd

Traditional – Ka = Kd plus Ks

Assuming problem:
Financial Management - Prelim
Examination
pinedamaryelisha.07@gmail.com Switch account

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What of the following is not a function of financial management?

*
Financing
Risk Management
Internal Control
Capital Budgeting

A decrease in the debt ratio will least likely affect:

*
Financial risk
Business risk
Systematic or market risk
Total risk

Which of the following accounting problems does not involve a present value
calculation?
*
The determination of the market price of a bond.
The determination of the declining-balance depreciation expense.
The determination of the amount to report for long-term notes payable.
The determination of the amount to report for lease liability.

During the year, Mason Company's current assets increased by P130, current
liabilities decreased by P60, and net working capital (E)
*
Increased by $70.
. Did not change.
Decreased by $190.
Increased by $190.

A negative cash conversion cycle basically means

*
The firm collects on sales more quickly than it pays its payables.
The firm is illiquid, with serious cash flow problems
The firm collects on sales more slowly than it pays its payables
The firm’s current cash balance is negative.

Parents want to save P100,000 for their child’s college education. They plan to
make 15 equal year-end payments and expect an 8% annual interest rate. How much
they will have to invest annually to accumulate the required education fund?
*
P2,542
P6,139
P3,683
P7,285

Which of the following changes would tend to decrease the company cost of capital for
a traditional firm?
*
Decrease the proportion of equity financing.
Increase the market value of the debt.
Decrease the proportion of debt financing.
Decrease the market value of the equity.

The cash manager should seek to

*
Maximize disbursement float and maximize collection float.
Minimize disbursement float and minimize collection float.
Maximize disbursement float and minimize collection float.
. Minimize disbursement float and maximize collection float

Which of the following statements is not true?

*
Operating leverage refers to the extent to which a company’s net income reacts to a given
change in sales.
When a company’s sales revenue is decreasing, high operating leverage is good because it
means that profits will decrease at a slower pace than revenues decrease
When a company’s sales revenue is increasing, high operating leverage is good because it
means that profits will increase rapidly.
Companies that have higher fixed costs relative to variable costs have higher operating
leverage.
 When managing cash and short term investments, a corporate treasurer is primarily
concerned with
*
Maximizing the rate of return
Minimizing taxes
Investing in treasury bonds since they have no default risk
Liquidity and safety

When establishing their optimal capital structure, firms should strive to:
*
Minimize the weighted average cost of capital
Minimize the amount of debt financing used
Maximize the marginal cost of capital
None of the above

Park Jin Co. has current assets of P 400,000 and current liabilities of P 500,000.
Current ratio will be increased by
*
The purchase of P 100,000 of inventory on account
The payment of P 100,000 of accounts payable
The collection of P 100,000 of accounts receivable
Refinancing a P 100,000 long-term loan with short-term debt

Cost of capital is
*
The amount the company must pay for its plant assets.
The dividends a company must pay on its equity securities.
The cost the company must incur to obtain its capital resources.
The cost the company is charged by investment bankers who handle the issuance of equity or
long-term debt securities.

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

During the year, Matrix Company’s current assets increased by P120, current
liabilities decreased by P50, and net working capital
*
Increased by P70
Did not change
Decreased by P170
Increased by P170

What can a company do to shorten its cash conversion cycle?

*
Turn inventory over as slowly as possible
Collect accounts receivables as quickly as possible
Pay accounts as quickly as possible
All answers are correct

If the pro forma balance sheet shows that total assets must increase by P400,000
while retaining a debt-equity ratio of .75 then:
*
Debt must increase by P300,000.
Equity must increase by the full P400,000.
Debt must increase by P171,428.
Equity must increase by P100,000

What is the present value of a 10 year P1,000 ordinary annuity discounted at 6%?
*
P7,360
P4,886
P6,145
P10,000

Which of the following provides a spontaneous source of financing for a firm?

*
Accounts payable
Mortgage bonds
Accounts receivable
Debentures

Determining the appropriate level of working capital for a firm requires

*
Evaluating risks associated with various levels of fixed assets and the types of debt used to
finance these assets
Changing the capital capital structure and dividend policy of the firm
Maintaining short term debt at the lowest possible level because it is generally more expensive
than the long term debt
Offsetting the benefit of current assets and current liabilities against the probability of technical
insolvency

Which of the following, considered independently of the others, would increase the
cash conversion cycle?
*
An increase in accounts payable turnover
A decrease in average age of inventory
An increase in inventory turnover
An increase in accounts receivable turnover

Net working capital is the difference between

*
Current assets and current liabilities
Fixed asset and current liabilities
Shareholders’ investment and cash
Total assets and total liabilities

State Company had determined its earnings before interest and taxes (EBIT) in four
possible states of the world. In the Great State, EBIT will be P3,000,000 and in the
Good, Normal and Poor States EBIT will be P2,000,000, P1,500,000, and P1,000,000 in
that order. If each state has an equal probability of occurring, then what is State
Company’s expected EBIT?
*
P3,000,000
P2,500,000
P1,875,000
None of the above

Financial risk refers to the

*
risk of owning equity securities
risk faced by equity holders when debt is used
general business risk of the firm
possibility that interest rates will increase

Inventory used as collateral should generally not be highly

*
Perishable
Marketable
Identifiable
Durable
The length of time between the acquisition of inventory payment and payment for it is
called the
*
Operating cycle
inventory conversion period
accounts receivable period
accounts payable deferral period

What is the future value of P1,000 compounded annually at 8% for 5 years?

*
P1,080
P1,400
P1,469
P1,800

Luke Company has an inventory conversion period of 60 days, a receivables

conversion period of 45 days, and a payments cycle of 30 days. What is the length of
the firm’s cash conversion cycle?
*
90 days
75 days
54 days
105 days

If a company’s cash conversion cycle increases, then the company:

*
Becomes more profitable
Incurs more shortage or stockout costs
Increases its investment in working capital
Reduces its payable deferral period (age of payable)

What is the inventory period for a firm with an annual cost of goods sold of P8
million, P1.5 million in average inventory, and a cash conversion cycle of 75 days? (Use
360 days)
*
6.56 days
18.75 days
52.60 days
67.50 days
 MBC Corporation had income before taxes of P60,000 for the year. Included in this
amount was depreciation of P5,000, a charge of P6,000 for amortization of bonds
discount, and P4,000 for interest expense. The estimated cash flow for the period is
*
P60,000
P71,000
P66,000
P49,000

Suzy Douglas has been offered the opportunity of investing P91,925 now. The
investment will earn 8% per year and at the end of its life will return P250,000 to Suzy.
How many years must Suzy wait to receive the P250,000?
*
10
11
. 12
13

If the single amount of P1,500 is to be received in 2 years and discounted at 11%, its
present value is
*
P1,363.65.
P1,217.43.
P1,351.35.
P1,239.68.

Section:*
BSA III - Obedience
BSA III - Meekness
BSA III - Diligence

Common sources of short-term financing include

*
Stretching payables
Issuing bonds
Reducing inventory
All of the above

You want to buy a new plasma television in 3 years, when you think prices will have
gone down to a more reasonable level. You anticipate that the television will cost you
P2,500. If you can invest your money at 8% compounded monthly, how much do you
need to put aside today?
*
P1,895.37
P1,968.14
P1,984.58
P2,158.42

What is the present value of P1,000 to be received in 8 years discounted at 9%?

*
P500
P502
P550
P607

Name: (Surname, Given Name)*

The operating cycle is the length of time from the receipt of inventory until the
*
Collection of cash from sales.
Beginning of the cash conversion cycle.
End of the cash conversion cycle.
Payment of accounts payable.

Which class of leverage causes earnings before interest and taxes to be more
sensitive to changes in sales?
*
Credit.
Financial.
Operating.
Intrinsic.

A company has just borrowed P2,000,000 from a bank. The stated rate of interest is
10%. If the loan is discounted and is repayable in one year, the effective rate on the
loan is approximately
*
8.89%
11.11%
10%
9.09%

A company is experiencing a sharp increase in sales activity and a steady increase in

production, so management has adopted an aggressive working capital policy.
Therefore, the company’s current level of net working capital.

*
Would most likely be the same as in any other type of business condition as business cycles
tend to balance out over time.
Would most likely be lower than under other business conditions in order that the company can
maximize profits while minimizing working capital investment.
Would most likely be higher than under other business conditions so that there will be sufficient
funds to replenish assets.
Would most likely be higher than under other business conditions as the company’s profits are
increasing.

Which of the following is best described as unsecured (without collateral), short-term

borrowing by very large, creditworthy firms?
*
Eurodollars
Commercial papers
Banker’s acceptances
Repurchase agreements

Hazel Company has just purchased equipment that requires annual payments of
P20,000 to be paid at the end of each of the next 4 years. The appropriate discount rate
is 15%. What is the present value of the payments?
*
P57,099.60
P80,000.00
P23,487.28
P75,067.12

Finman Company’s bank requires a compensating balance of 20% on a P100,000

loan. If the stated interest on the loan is 7%, what is the effective cost of the loan?
*
5.83%
7%
8.40%
8.75%
 If the average age of inventory is 60 days, the average age of the accounts payable
is 30 days, and the average age of accounts receivable is 45 days, the number of days
in the cash flow cycle is?
*
135 days
75 days
90 days
105 days

If P25,000 is put in a savings account paying interest of 4% compounded annually, what

amount will be in the account at the end of 5 years?
*
P20,548.25
P30,000.00
P30,387.75
P30,416.25

If a firm increases its use of financial leverage, then what would we generally expect
for the shareholders of that firm to
*
Increase their demand for return on their investment.
Lower their demand for return on their investment.
Remain indifferent with respect to their return on investment.
It is not possible to tell what will happen.

A firm often factors its accounts receivable. Its finance company requires a 6%
reserve and charges a 1.4% commission on the amount of receivables. The remaining
amount to be advanced is further reduced by an annual interest charge of 15%. What
proceeds will frim receive from the finance company at the time a P100,000 account
due in 60 days is factored? (use 360 days)
*
P90,285
P92,600
P96,135
P85,000

Costs associated with the requirement that management divert its attention away
from strategically managing a corporation in favor of spending time with financial
attorneys could be best described as
*
Direct bankruptcy costs.
Indirect bankruptcy costs.
Managerial-shareholder related agency costs.
None of the above.

The degree of operating leverage

*
Is computed by dividing total contribution margin by net income.
Does not provide a reliable measure of a company’s earnings volatility.
Cannot be used to compare companies.
Measures how much of each sales dollar is available to cover fixed expenses.

Perdue Company has purchased equipment that requires annual payments of

P25,000 to be paid at the end of each of the next 6 years. The appropriate discount rate
is 12%. What amount will be used to record the equipment?
*
P150,000.00
P102,785.25
P138,143.40
P96,374.50
Midterms

Cost of Capital – how much need to achieve the project? Cost of using funds

Weighted average cost of capital (WACC) – debts and capital are included

Example:

Dividend Growth Model (DGM)

Problem
March 14, 2023
Maximize the Positive Float

Minimize the Negative Float

If the question is about Units:
RISK
Level of units na babantayan mo and if you reached that level, need to re-order na.
226,800 – (25,000,00 * 30% *3)

=25,200
2,400,000 * 1.25 = 3,000,000

2,400,000 * 25% = 600,000

600,000 / 10 = 60,000
CM * increase in units

3 * 60,000 = 180,000

April 4, 2023
Annual Rate = 6% / 2 = 3%

Years = 2