pB. WORKING CAPITAL MANAGEMENT D. Increase in the ratio of current assets to current liabilities.

Moderate
THEORIES: 3. Short-term financing plans with high liquidity have:
Working capital management A. high return and high risk
1. Working capital management involves investment and financing decisions related to: B. moderate return and moderate risk
A. plant and equipment and current liabilities. C. low profit and low risk
B. current assets and capital structure. D. none of the above
C. current assets and current liabilities.
D. sales and credit. Temporary & Permanent working capital
4. Temporary working capital supports
17. The goal of managing working capital, such as inventory, should be to minimize the: A. the cash needs of the company. C. acquisition of capital equipment.
A. costs of carrying inventory B. payment of long term debt. D. seasonal peaks.
B. opportunity cost of capital
C. aggregate of carrying and shortage costs Cash Management
D. amount of spoilage or pilferage Motives for holding cash
7. The transaction motive for holding cash is for:
Working capital financing policy A. a safety cushion C. compensating balance
Aggressive requirements
5. Zap Company follows an aggressive financing policy in its working capital management B. daily operating requirements D. none of the above
while Zing Corporation follows a conservative financing policy. Which one of the
following statements is correct? Float
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of 8. The difference between the cash balance on the firm's books and the balance shown
short-term debt to total debt. on the bank statement is called:
B. Zap has a low current ratio while Zing has a high current ratio. A, the compensating balance C. a safety cushion
C. Zap has less liquidity risk while Zing has more liquidity risk. B. float D. none of the above
D. Zap finances short-term assets with long-term debt while Zing finances short-
term assets with short-term debt. Cash conversion cycle
9. The length of time between payment for inventory and the collection of cash is referred
6. Which of the following would increase risk? to as:
A. Raise the level of working capital. A. payables deferral period C. operating cycle
B. Decrease the amount of inventory by formulating an effective inventory policy. B. receivables conversion period D. cash conversion cycle
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing. 10. As a firm's cash conversion cycle increases, the firm:
A. becomes less profitable
Conservative B. increases its investment in working capital
2. As a company becomes more conservative with respect to working capital policy, it C. reduces its accounts payable period
would tend to have a(n) D. incurs more shortage costs
A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Increase in the operating cycle. 11. The longer the firm's accounts payable period, the:
C. Decrease in the operating cycle.
 B. Current order size is less than optimal
A. longer the firm's cash conversion cycle is. C. Per unit carrying costs are too high
B. shorter the firm's inventory period is. D. The optimal order size is currently being used
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital. Trade credit
20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
12. The average length of time a peso is tied up in current asset is called the: A. Three days after the invoice is received.
A. net working capital. C. receivables conversion period. B. The 8th day is the customer’s decision date.
B. inventory conversion period. D. cash conversion period. C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.
Receivables management
13. All of these factors are used in credit policy administration except: PROBLEMS
A. credit standards C. peso amount of receivables Working capital financing
i
B. terms of trade D. collection policy . Casie Company turns out 200 calculators a day at a cost of P250 per calculator for
materials and variable conversion cost. It takes the firm 18 days to convert raw
14. Which of the following statements is most correct? If a company lowers its DSO, but no materials into calculator. Casie’s usual credit terms extended to its customers is 30
changes occur in sales or operating costs, then: days, and the firm generally pays its suppliers in 20 days.
A. the company might well end up with a higher debt ratio. If the foregoing cycles are constant, what amount of working capital must Casie
B. the company might well end up with a lower debt ratio. Company finance?
C. the company would probably end up with a higher ROE. A. P1,400,000 C. P 900,000
D. the company's total asset turnover ratio would probably decline. B. P2,400,000 D. P1,800,000

15. All but which of the following is considered in determining credit policy? Cash conversion cycle
ii
A. Credit standards C. Accounts payable deferral period . Luke Company has an inventory conversion period of 60 days, a receivables
B. Credit limits D. Collection efforts conversion period of 45 days, and a payments cycle of 30 days. What is the length
of the firm’s cash conversion cycle?
Inventory management A. 90 days C. 54 days
16. The use of safety stock by a firm will: B. 75 days D. 105 days
A. reduce inventory costs C. have no effect on inventory costs
iii
B. increase inventory costs D. none of the above . The Spades Company has an inventory conversion period of 75 days, a receivables
conversion period of 38 days, and a payable payment period of 30 days. What is the
18. When a specified level of safety stock is carried for an item in inventory, the average length of the firm’s cash conversion cycle?
inventory level for that item A. 83 days C. 67 days
A. decreases by the amount of the safety stock. B. 113 days D. 45 days
B. is one-half the level of the safety stock.
iv
C. Increases by one-half the amount of the safety stock. . Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts
D. Increases by the number of units of the safety stock. receivable. Its average daily sales are P100,000. The company has P1.5 million in accounts
payable. Its average
19. Which of the following statements is correct for a firm that currently has total costs of
carrying and ordering inventory that are 50% higher than total carrying costs?
A. Current order size is greater than optimal
daily purchases are P50,000. What is the length of the company’s cash conversion period? B. P 13,125 D. P300,000
A. 50 days C. 30 days
B. 20 days D. 40 days Receivables management
Carrying cost
x
Days inventory . The Camp Company has an inventory conversion period of 60 days, a receivable
v
. What is the inventory period for a firm with an annual cost of goods sold of P8 million, conversion period of 30 days, and a payable payment period of 45 days. The
P1.5 million in average inventory, and a cash conversion cycle of 75 days? Camp’s variable cost ratio is 60 percent and annual fixed costs of P600,000. The
A. 6.56 days C. 52.60 days current cost of capital for Camp is 12%.
B. 18.75 days D. 67.50 days If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s
carrying cost on accounts receivable, using 360 days year?
vi
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts A. P281,250 C. P 20,250
receivable. Its average daily sales are P100,000. The company has P1.5 million in B. P168,750 D. P 56,250
accounts payable. Its average daily purchases are P50,000. What is the length of the
company’s inventory conversion period? Average receivables
xi
A. 50 days C. 120 days . Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000.
B. 90 days D. 40 days Forty percent of the customers pay on the tenth day and take discounts; the other 60
percent pay, on average, 45 days after their purchases.
Cash management What is the average amount of receivables?
Economic conversion quantity (ECQ) A. P70,000 C. P77,200
vii
. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid B. P77,500 D. P67,500
uniformly. Simile has the opportunity to invest the money at 24% per annum. The
xii
company spends, on the average, P40 for every cash conversion to marketable . Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80%
securities. are expected to be credit sales at terms of n/30. Palm estimates that a proposed
What is the optimal cash conversion size? relaxation of credit standards will increase credit sales by 20% and increase the
A. P60,000 C. P45,000 average collection period from 30 days to 40 days. Based on a 360-day year, the
B. P55,000 D. P72,500 proposed relaxation of credit to standards will result in an expected increase in the
average accounts receivable balance of
Opportunity cost A. P 540,000 C. P2,700,000
viii
. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 B. P 900,000 D. P1,620,000
which are to be paid uniformly. Hyperbole has the opportunity to invest the money at
9% per annum. The company spends, on the average, P25 for every cash Investment in receivables
xiii
conversion to marketable securities and vice versa. . Currently, La Carlota Company has annual sales of P2,500,000. Its average
What is the opportunity cost of keeping cash in the bank account? collection period is 45 days, and bad debts are 3 percent of sales. The credit and
A. P3,825.00 C. P4,190.00 collection manager is considering instituting a stricter collection policy, whereby bad
B. P1,912.50 D. P 188.55 debts would be reduced to 1.5 percent of total sales, and the average collection
period would fall to 30 days. However, sales would also fall by an estimated
Annual savings P300,000 annually. Variable costs are 75 percent of sales and the cost of carrying
ix
. What are the expected annual savings from a lock-box system that collects 150 checks receivables is 10 percent. Assume a tax rate of 40 percent and 360 days per year.
per day averaging P500 each, and reduces mailing and processing times by 2.5 and What would be the decrease in investment in receivables if the change were made?
1.5 days respectively, if the annual interest rate is 7%? A. P 9,688 C. P 96,875
A. P 5,250 C. P 21,000 B. P 12,988 D. P129,975
Comprehensive Cost to carry one unit for one year P 4
Question Nos. 14 through 16 are based on the following data: What is Marsman’s estimated annual usage in units?
Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net A. 1,000,000 C. 500,000
30 in order to speed collections. At present, 40 percent of Sonata Company‘s customers B. 2,000,000 D. 1,500,000
take the 2 percent discount. Under the new term, discount customers are expected to
rise to 50 percent. Regardless of the credit terms, half of the customers who do not take Required annual return on investment
xix
the discount are expected to pay on time, whereas the remainder will pay 10 days late. . BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which
The change does not involve a relaxation of credit standards; therefore bad debt losses sells blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at
are not expected to rise above their present 2 percent level. However, the more P300.00 per tape; tapes are shipped in packages of 20. BIBO Company pays all
generous cash discount terms are expected to increase sales from P2 million to P2.6 incoming freight, and Pirate Mart does not inspect the tapes due to BIBO Company's
million per year. Sonata Company’s variable cost ratio is 75 percent, the interest rate on reputation for high quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes
funds invested in accounts receivable is 9 percent, and the firm’s income tax rate is 40 per week. Pirate Mart earns 20% on its cash investments. The purchase-order lead
percent. time is two weeks.
xiv
. What are the days sales outstanding (DSO) before and after the change of credit The following cost data are available:
policy? Relevant ordering costs per purchase order P80 P90.50
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, Carrying costs per package per year
respectively Relevant insurance, materials handling, breakage, etc., per year 2 P 4.50
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days What is the required annual return on investment per package?
respectively A. P6,000 C. P1,200
B. P 250 D. P 600
xv
. The incremental carrying cost on receivable is
A. P 843.75 C. P 643.75 Order quantity
xx
B. P8,889.00 D. P6,667.00 . For Raw Material L12, a company maintains a safety stock of 5,000 pounds. Its
average inventory (taking into account the safety stock) is 12,000 pounds. What is
xvi
. The incremental after tax profit from the change in credit terms is the apparent order quantity?
A. P68,493 C. P60,615 A. 18,000 lbs. C. 14,000 lbs.
B. P65,640 D. P57,615 B. 6,000 lbs. D. 24,000 lbs

Inventory management Optimal safety stock level

xxi
EOQ . Each stockout of a product sold by Arnis Co. costs P1,750 per occurrence.
xvii
. What is the economic order quantity for the following inventory policy: A firm sells The company’s carrying cost per unit of inventory is P5 per year, and the
32,000 bags of premium sugar per year. The cost per order is P200 and the firm company orders 1,500 units of product 20 times a year at a cost of P100 per
experiences a carrying cost of P0.80 per bag. order. The probabilities of a stockout at various levels of safety stock are:
A. 2,000 bags C. 8,000 bags
Units of Safety Stock Probability of Stockout
B. 4,000 bags D. 16,000 bags
0. 0.50
100. 0.30
Annual demand
xviii 200. 0.14
. Marsman Co. has determined the following for a given year:
300. 0.05
Economic order quantity (standard order size) 5,000 units
400. 0.01
Total cost to place purchase orders for the year P40,000
Cost to place one purchase order P 100 The optimal safety stock level for the company based on the units of safety stock
 level above is Opportunity cost
xxv
A. 200 units C. 100 units . Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of
B. 300 units D. 400 units high selling products for the coming year. Its supplier quoted a price of P25 per
zipper. Diesel planned to purchase 7,500 units per month but its supplier could not
xxii
. Paeng Company uses the EOQ model for inventory control. The company has an guarantee this delivery schedule. In order to ensure availability of these zippers,
annual demand of 50,000 units for part number 6702 and has computed an optimal lot Diesel is considering the purchase of all these 90,000 units on January 1. Assuming
size of 6,250 units. Per-unit carrying costs and stockout costs are P9 and P4, Diesel can invest cash at 12%, the company’s opportunity cost of purchasing the
respectively. The following data have been gathered in an attempt to determine an 90,000 units at the beginning of the year is
appropriate safety stock level: A. P127,500 C. P123,750
B. P135,000 D. P264,000
Units Short Because of Excess Number of Times Short
Demand during the Lead Time Period in the last 40 Reorder Cycles
100 8 Trade credit
200 10
300 14 xxvi
. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to
400 8 take the discount is:
What is the optimal safety stock level? A. 2.0%. C. 36.7%
A. 100 units C. 200 units B. 30.0%. D. 10.0%.
B. 300 units D. 400 units
xxvii
. The cost of discounts missed on credit terms of 2/10, n/60 is
Annual inventory costs A. 2.0 percent C. 12.4 percent
xxiii
. Durable Furniture Company uses about 200,000 yards of a particular fabric each B. 14.9 percent D. 21.2 percent
year. The fabric costs P25 per yard. The current policy is to order the fabric four
times a year. Incremental ordering costs are about P200 per order, and incremental Bank loans
carrying costs are about P0.75 per yard, much of which represents the opportunity Discount loan
cost of the funds tied up in inventory. xxviii
. You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10
How much total annual costs are associated with the current inventory policy? percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if
A. P19,550 C. P38,300 the loan is a discount loan?
B. P18,750 D. P62,500 A. 10.00% C. 12.45%
B. 11.11% D. 14.56%
Maximum interest rate
xxiv
. Narra Company is considering a switch to level production. Cost efficiencies Discount loan with compensating balance
will occur under level production and after tax cost would decline by P70,000 xxix
. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10%
but inventory would increase from P1,000,000 to P1,800,000. Narra would compensating balance? Assume 360 days per year.
have to finance the extra inventory at a cost of 10.5 percent. A. 20.0% C. 17.4%
B. 15.0% D. 22.2%
What is the maximum interest rate that makes level production feasible?
A. 7.00 percent C. 8.75 percent Compensating balance with interest
xxx
. The Premiere Company obtained a short-term bank loan for P1,000,000 at an
B. 5.83 percent D. 10.00 percent annual interest rate 12%. As a condition of the loan, Premiere is required to maintain
a compensating balance of P300,000 in its checking account. The checking account
 earns interest at an annual rate of 3%. Premiere would otherwise maintain only maintained by Island Corporation with Peninsula Commercial Bank.
P100,000 in its checking account for transactional purposes. Premiere’s effective The loan requires a net proceeds of P1.5 million. What is the principal amount of loan
interest costs of the loan is applied for as part of the loan agreement?
A. 12.00% C. 16.30%
A.P1,666,667 C. P1,764,706
B. 14.25% D. 15.86%
Add-on B.P2,000,000 D. P1,125,000
xxxi
. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged
a 12% stated rate in an add-on arrangement, payable in 12 equal monthly
installments.
A. 22.15% C. 25.05%
B. 24.00% D. 12.70%

Financing alternative
xxxii
. A company has accounts payable of P5 million with terms of 2% discount within
15 days, net 30 days (2/15 net 30). It can borrow funds from a bank at an annual rate
of 12%, or it can wait until the 30th day when it will receive revenues to cover the
payment. If it borrows funds on the last day of the discount period in order to obtain
the discount, its total cost will be
A. P 51,000 less C. P 75,500 less
B. P100,000 less D. P 24,500 more
xxxiii
. Every 15 days a company receives P10,000 worth of raw materials from its suppliers.
The credit terms for these purchases are 2/10, net 30, and payment is made on the
30th day after each delivery. Thus, the company is considering a 1-year bank loan for
P9,800 (98% of the invoice amount). If the effective annual interest rate on this loan
is 12%, what will be the net peso savings over the year by borrowing and then taking
the discount on the materials?
A. P3,624 C. P4,800
B. P1,176 D. P1,224
xxxiv
. 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. C. Pay on the 40th
B. Pay on the 10th D. Pay on the 60th

xxxv
. The Peninsula Commercial Bank and Island Corporation agreed to the following loan
proposal:
 Stated interest rate of 10% on a one-year discounted loan; and
 15% of the loan as compensating balance on zero-interest current account to be
i
.Answer: A
Daily working capital required: 200 x 250 50,000
Total working capital needed: 28 days x 50,000 1,400,000
CCC = 18 + 30 – 20 28 days

ii
.Answer: B
Cash Conversion Cycle = Ave. collection period + Inventory cycle days – Ave. Accounts Payable payment days
Inventory cycle in days 60 days
Average collection period 45 days
Operating cycle 105 days
Deduct Accounts payable payment days 30 days
Cash conversion cycle 75 days

iii
.Answer: A
Inventory cycle in days 75 days
Average collection period 38 days
Operating cycle 113 days
Deduct Accounts payable payment days 30 days
Cash conversion cycle 83 days

iv
.Answer: D
Inventory conversion period (See #4) 50.0 days
Average collection period (2M/0.1M) 20.0 days
Operating cycle 70.0 days
Less: Ave. Accounts Payable payment days (1.5M/0.5M) 30.0 days
Cash conversion period 40.0 days

v
.Answer: D
Inventory turnover:
Cost of goods sold/Ave. Inventory (8M/1.5M) 5.33x
Inventory conversion period (360 days/5.33) 67.5 days

vi
.Answer: A
Annual sales 360 days x 100,000 36.0M
Inventory turnover 36M/5M 7.2x
Inventory conversion period 360/7.2 50.0 days

vii
.Answer: B
Optimal cash conversion size = (9,075,000 x 40 / 0.24)^1/2 = 55,000

viii
.Answer: B
OTS: (2 x P3,251,250 x P25 ÷ 0.09)^1/2 = P42,500
Opportunity cost: P42,500 ÷ 2 x 0.09 P 1,912.50

ix
.Answer: C
Reduction in cash float (2.5 + 1.5) 4.0 days
Additional free cash (4 days x 150 x P500) P300,000
Annual savings (P300,000 x 0.07) P 21,000

x
.Answer: C
Average AR 3,375,000/360 x 30 days 281,250
Average investment: 281,250 x 0.60 168,750
Carrying cost: 168,750 x 0.12 20,250

xi
.Answer: B
 DSO = (.4 x 10) + (.60 x 45) 31 days
Average AR: 900,000/360x31 days P77,500

xii
.Answer: D
Credit sale = 40,500,000 x 80% = 32,400,000
Increased credit sales: 32,400,000 x 1.2 = 38,880,000
New Average AR 38,880,000/360 x 40 = 4,320,000
Old Average AR 32,400,000/360 x 30 = 2,700,000
Increase in Average AR 1,620,000

xiii
.Answer: C
Change in average accounts receivables:
Planned: 2,200,000/360x30 183,333
Present: 2,500,000/360x45 312,500
Decrease in AR balance 129,667
Variable cost ratio 75%
Decrease in investment in AR 96,875

xiv
.Answer: A
Days’ sales outstanding
Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days

xv
.Answer: A
Average receivable
New policy: 2.6M/360 x 22.5 162,500
Old policy: 2.0M/360 x 27 150,000
Incremental Accounts Receivable 12,500
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09 843.75

xvi
.Answer: A
Incremental sales 600,000
Variable cost (.75 x 600,000) ( 450,000)
Additional bad debts (600,000 x 2%) ( 12,000)
Additional carrying cost ( 844)
Additional discounts (2,600,000 x .5 x 03) –(2,000,000 x .4 x .02) ( 23,000)
Before tax increase in income 114,156
Less tax 45,663
Incremental income 68,493

xvii
.Answer: B
EOQ = (2 x 32,000 x 20  0.8)^1/2 = 4,000 bags

xviii
.Answer: B
Number of orders made 40,000/100 400
Annual requirement 400 x 5,000 2,000,000

xix
.Answer: C
Investment in 1 package (20 x P300) P6,000
Required annual return: P6,000 x 0.2 P1,200

xx
.Answer: C
Average inventory units 12,000
Less safety units 5,000
Average inventory based on EOQ 7,000
 Order size 7,000 x 2 14,000

xxi
.Answer: D
Safety stock Stock out Costs (1) Carrying Costs @ P5 Total
100 10,500 500 P11,000
200 4,900 1,000 5,900
300 1,750 1,500 3,250
400 350 2,000 2,350

Stockout Costs
100 1750 x .30 x 20 orders = 10,500
200 1750 x .05 x 20 = 4,900
300 1750 x .05 x 20 = 1750
400 1750 x .01 x 20 = 350
Optimal safety stock is 400-unit level with a cost of only P2,350 cost.

xxii
.Answer: B
The optimal safety stock level represents the level that gives the lowest sum of stock out costs and additional
carrying costs. Based on the computation below, the lowest combined costs is P3,340, corresponding to 300-unit
level
First compute the stockout costs based on given probability of demand. Starting with 100-unit level as safety
stock, if the additional demand is 200, the company has stockout of 100 units.
100: (100 x 32* x 0.25) + (200 x 32 x 0.35) + (300 x 32 x 0.20) + (100 x 9) 4,960
200: (100 x 32 x 0.35) + (200 x 32 x 0.20) + (200 x 9) 4,200
300: (100 x 31 x 0.20) + (300 x 9) 3,340
400: (400 x 9) 3,600
stockout per unit x 8 orders per year.

xxiii
.Answer: A
Ordering costs 4 x P200 800
Carrying costs (50,000 ÷ 2 x 0.75 18,750
Total 19,550

xxiv
.Answer: C
Savings in Expenses/additional Investment in Inventory = Maximum Interest Rate
70,000 / (1,800,000 – 1,000,000) = 8.75%

xxv
.Answer: C
Number of units to be purchased in advance: 90,000 – 7,500 82,500
Average investments in working capital: 82,500 x 0.5* x P25 1,031,250
Opportunity cost 1,031,250 x 0.12 123,750
*The average investment is one-half (82,500 + 0) ÷ 2

xxvi
.Answer: C
k = (2  98) x (360  20 = 36.7%
The solution assumes that the company foregoes the discount only once during the year.

xxvii
.Answer: B
With credit terms of 2/10, n/60 one must pay on the 10th day choosing to finance the net payment (invoice price
minus the cash discount) at the rate of 2 percent for 50 days, paying the loan on the 60th day. The annualized rate
of foregoing the discount is 14.9 percent.
k = 2/98 x 365/50 = 14.9%

xxviii
.Answer: B
k = 10 ÷ (100 – 10) = 11.11%
xxix
.Answer: C
Principal 200,000
Less: Discount 200,000 x 0.15 x 90/360 ( 7,500)
Compensating balance ( 20,000)
Net proceeds 172,500
Effective rate: (7,500/172,500) x 360/90 17.4%

xxx
.Answer: B
Interest expense 1M x 0.12 120,000
Less interest income on additional CA balance (200,000 x 0.03) 6,000
Net interest cost 114,000
Effective interest rate 114,000/(1,000,000 – 200,000) 14.25%

xxxi
.Answer: A
Interest for 1 year 1M x 12% 120,000
Average Principal: [1M + (1M/12)] ÷ 2 541,667
Estimated effective rate 120,000/541,667 22.15%
Alternative solution for approximate effective rate:
(2 x No. of payments x Interest) ÷ [(1 + No. of payments) x Principal]
(2 x 12 x P120,000) ÷ (13 x P1M) = 22.15%

xxxii
.Answer: C
Discount 5M x 0.02 100,000
Interest (5M x 0.98 x 0.12) x 15/360 = 24,500
Savings = 75,500

xxxiii
.Answer: A
Purchase discount 10,000 x 0.02 x 200 purchases 4,800
Interest on borrowed money 9,800 x 0.12 1,176
Savings 3,624
Number of purchases: 360 days/15-day interval 200

xxxiv
.Answer: B
The cost of discounts missed is 12.3% which is more than the 8 percent that the bank charges. The company
should borrow on the 10th, pay the invoice, and finance at 8% for the next 30 days (pay off the bank on the 40th).
Cost of foregoing discount: (1  99) x (360  30) = 12.31%

xxxv
.Answer; B
Net proceeds in pesos P1,500,000
Divided by net proceeds percentage 1.00 – 0.1 – 0.15 0.75
Principal amount P2,000,000