UNIVERSITY OF SOUTHERN MINDANAO

Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
NAME: Date:
Professor: Year/Course/Section: Score:
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FINAL EXAMINATION (ACC 323B)

Multiple Choice. Encircle the letter of the correct answer.

1. Refer to these statements regarding Capital Budgeting:

I. Analysis of potential additions to fixed assets
II. Long term decisions; involve large expenditures
III. Very important to firm’s future
a. Only one statement is correct.
b. Only two statements are correct.
c. None of the statements are correct.
d. All the statements are correct.

2. The long-term planning process for making and financing investments that affects a company’s financial
results over a number of years is referred to as:
a. Capital budgeting
b. Strategic planning
c. Master budgeting
d. Long-range planning

3. A capital investment decision is essentially a decision to exchange current:

a. assets for current liabilities
b. cash outflow for the promise of receiving future cash inflows
c. cash flows from operating activities for future cash inflows from investing activities
d. cash inflows for future cash outflows

4. Project Apple has an expected cash flow of P1,000,000 at the end of Year 5. Project Samsung has expected
cash flows of P200,000 to be received at the end of each year for the next five years. What can be said to the
NPV of Project Apple compared to Project Samsung?
a. They are the same because both cash flows total P1,000,000 over the lives of the projects
b. Project Apple is preferred because of the largest lump-sum payment in Year 5
c. Project Samsung is preferred because of the periodic payments made consistently throughout
the years and are made earlier
d. Both Project Apple and Project Samsung have the same internal rate of return and either should be
accepted

5. Which of the following would not be included as part of the periodic cash inflows associated with an
investment project?
a. Savings for fixed and variable production costs
b. Savings in selling, general, and administrative costs
c. Receipts from sales
d. Opportunity costs of undertaking the project

6. If a company’s required rate of return is 12% 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%
b. greater than 12%
c. less than 12%
d. dependent on the size of the investment

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
7. Assuming that a project has already been evaluated using the following techniques, the evaluation under
which technique is least likely to be affected by an increase in the estimated residual value of the project?
a. Payback Period
b. Internal Rate of Return
c. Net Present Value
d. Profitability Index

8. Which of the following statements is CORRECT? Assume that the project being considered has normal cash
flows, with one outflow followed by a series of inflows.
a. If Project A has a higher IRR than Project B, then Project A must have the lower NPV.
b. If a project has normal cash flows and its IRR exceeds its WACC, then the project’s NPV
must be positive.
c. If Project A has a higher IRR than Project B, then Project A must also have a higher NPV.
d. The IRR calculation implicitly assumes that cash flows are withdrawn from the business rather than
being reinvested in the business.

9. Projects C and D are mutually exclusive and have normal cash flows. Project C has a higher NPV if the
WACC is less than 12%, whereas Project D has a higher NPV if the WACC exceeds 12%. Which of the
following statements is CORRECT?
a. Project D has a higher IRR.
b. Project D is probably larger in scale than Project C.
c. Project C probably has a faster payback.
d. Project C has a higher IRR.

10. Which of the following statements is CORRECT?

a. The internal rate of return method (IRR) is generally regarded by academics as being the best single
method for evaluating capital budgeting projects.
b. The payback method is generally regarded by academics as being the best single method for
evaluating capital budgeting projects.
c. The discounted payback method is generally regarded by academics asbeing the best single method
for evaluating capital budgeting projects.
d. The net present value method (NPV) is generally regarded by academics as being the best
single method for evaluating capital budgeting projects.

11. Which of the following statements is CORRECT?

a. The NPV method was once the favorite of academics and business executives, but today most
authorities regard the MIRR as being the best indicator of a project’s profitability.
b. If the cost of capital declines, this lowers a project’s NPV.
c. The NPV method is regarded by most academics as being the best indicator of a project’s
profitability, hence most academics recommend that firms use only this one method.
d. The NPV and IRR methods may give different recommendations regarding which of two
mutually exclusive projects should be accepted, but they always give the same
recommendation regarding the acceptability of a normal, independent project.

12. Projects A and B both have an initial cost of P10,000, followed by a series of positive cash inflows. Project
A’s undiscounted net cash flows total to P20,000, while B’s total undiscounted flows are P30,000. At a
WACC of 10%, the two projects have identical NPVs. Which project’s NPV is more sensitive to changes in
the WACC?
a. Project A.
b. Project B.
c. Both projects are equally sensitive to changes in the WACC since their NPVs are equal at all costs
of capital.
d. Neither project is sensitive to changes in the discount rate, since both have NPV profiles that are
horizontal.

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
13. Refer to these statements regarding Working Capital Management:
IV. The administration of the firm’s current assets and the financing needed to support current
assets
V. Concerned with the problems that arise in attempting to manage the current assets, current
liabilities, and the interrelations that exists between them
VI. Goal is to manage the firm’s current assets and liabilities
a. Only one statement is correct.
b. Only two statements are correct.
c. None of the statements are correct.
d. All the statements are correct.

14. Chanel Company follows an aggressive financing policy in its working capital management while Celine
Corporation follows a conservative financing policy. Which one of the following statements is correct?
a. Chanel has a low ratio of short-term debt to total debt while Celine has a high ratio of short-term
debt to total debt.
b. Chanel has a low current ratio while Celine has a high current ratio.
c. Chanel has less liquidity risk while Celine has more liquidity risk.
d. Chanel finances short-term assets with long term debt while Celine finances short-term assets with
short term debt.

15. Which of the following actions is likely to reduce the length of a firm’s cash conversion cycle?
a. Adopting a new inventory system that reduces the inventory conversion period.
b. Adopting a new inventory system that increases the inventory conversion period.
c. Increasing the average days sales outstanding on its accounts receivable.
d. Reducing the amount of time the firm takes to pay its supplier.

16. Tiffany & Co. has current assets of P4,000,000 and current liabilities of P3,000,000. Which of the following
transactions would increase its working capital?
a. Prepayment of P50,000 of next year’s rent
b. Refinancing P500,000 of short term debt with long term debt
c. Acquisition of land valued at P1,000,000 by issuing new common stock
d. Purchase of P50,000 marketable securities for cash

17. Dior Inc. has current ratio of .95 is to 1.00. which of the following would raise the company’s current ratio?
a. Payment of accounts payable
b. Purchase merchandise in a 2/10, net 30 open account
c. Collection of accounts receivable
d. Declaration of cash dividend

18. The goal of managing working capital, such as inventory, should be to minimize the
a. Costs of carrying inventory
b. Aggregate of carrying and shortage costs
c. Amount of spoilage or pilferage
d. Opportunity cost of capital

19. Which of the following statements is most correct? If a company lowers its DSO, but no changes occur un
sales or operating costs, then the
a. company might well end up with a lower debt ratio
b. company might well end up with a higher debt ratio
c. company would probably end up with a higher ROE
d. company’s total asset turnover ratio would probably decline

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
20. Firms that maintain very low to no inventory levels have
a. higher ordering and carrying costs
b. higher carrying costs
c. higher ordering costs
d. lower ordering and carrying costs

21. Which of the following statements is CORRECT?

a. The capital structure that maximizes expected EPS also maximizes the price per share of common
stock.
b. The capital structure that minimizes the interest rate on debt also maximizes the expected EPS.
c. The capital structure that minimizes the required return on equity also maximizes the stock price.
d. The capital structure that minimizes the WACC also maximizes the price per share of
common stock.

22. Which of the following statements best describes the optimal capital structure?
a. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes the
company’s earnings per share (EPS).
b. The optimal capital structure is the mix of debt, equity, and preferred stock that maximizes
the company’s stock price.
c. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the
company’s cost of equity.
d. The optimal capital structure is the mix of debt, equity, and preferred stock that minimizes the
company’s cost of debt.

23. A company is forecasting an increase in sales and is using the AFN model to forecast the additional capital
that they need to raise. Which of the following factors are likely to increase the additional funds needed
(AFN)?
a. The company has a lot of excess capacity.
b. The company has a high dividend payout ratio.
c. The company has a lot of spontaneous liabilities that increase as sales increase.
d. The company has a high profit margin.

24. The percent of sales method is based on which of the following assumptions?
I. All balance sheet accounts are tied directly to sales.
II. Most balance sheet accounts are tied directly to sales.
III. The current level of total assets is optimal for the current sales level.
a. Only one statement is correct.
b. Only two statements are correct.
c. None of the statements are correct.
d. All the statements are correct.

25. Which of the following statements is most correct?

a. One of the key steps in the development of pro forma financial statements is to identify those assets
and liabilities that increase spontaneously with net income.
b. The first, and most critical, step in constructing a set of pro forma financial statements is
establishing the sales forecast.
c. Pro forma financial statements as discussed in the text are used primarily to assess a firm’s historical
performance.
d. The percent of sales method produces accurate results when fixed assets are lumpy and when
economies of scale are present.

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
26. Which of the following is not discussed in the text as a method for analyzing risk in capital budgeting?
a. Sensitivity analysis
b. Monte Carlo Simulation
c. Scenario analysis
d. None of the choices

27. Which of the following statements is most correct?

a. When evaluating corporate projects, it is important to include all sunk costs in the estimated cash
flows.
b. When evaluating corporate projects, it is important to include all relevant externalities in the
estimated cash flows.
c. Interest expenses should be included in project cash flows.
d. Statements a and b are correct.

28. When evaluating a new project, the firm should consider all of the following factors except:
a. Previous expenditures associated with a market test to determine the feasibility of the project,
if the expenditures have been expensed for tax purposes.
b. Changes in net operating working capital attributable to the project.
c. Current rental income of a building owned by the firm if it is not used for this project.
d. The decline in sales of an existing product directly attributable to this project.

29. If the internal rate of return on an investment is zero:

a. its NPV is positive
b. its annual cash flows equal its required investment
c. it is generally a wise investment
d. its cash flows decrease over its life

30. The length of time needed for a long-term project to recapture its initial investment amount is called the
a. Discount period
b. Present value
c. Payback period
d. Internal rate of return

31. H&M Company has an inventory conversion period of 60days, a receivables conversion period of 45days,
and a payment cycle of 30days. What is the length of the firm’s cash conversion cycle?
a. 90 days
b. 75 days
c. 54 days
d. 105 days

Cash conversion cycle = ave. collection period + inventory cycle days – ave. accounts payable payment days

Inventory cycle in days 60 days

Ave. collection period 45 days
Operating cycle 105 days
Deduct accounts payable payment days 30 days
Cash conversion cycle 75 days

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
32. Prada Inc. has P5,000,000 in inventory and P2,000,000 in accounts receivable. Its average daily sales are
P100,000. The company has P1,500,000 in accounts payable. Its average daily purchases are P50,000. What
is the length of the company’s inventory conversion period? (Assume 360days in a year)
a. 50 days
b. 90 days
c. 120 days
d. 40 days
Annual sales 360 days x 100k 36M
Inventory turnover 36M/5M 7.2x

Inventory conversion period 360/7.2 50days

33. Refer to the preceding number. What is the length of the company’s cash conversion period?
a. 50 days
b. 20 days
c. 30 days
d. 40 days

Inv conversion period (see#2) 50 days

Ave collection period 2M/100k 20 days
Operating cycle 70 days
Less: Ave AP payment days 1.5M/50k 30 days
Cash conversion period 40 days

34. Nike Inc. recently reported the following income statement:

2021
Sales P 3,500,000
Operating costs 2,500,000
EBIT 1,000,000
Interest 200,000
EBT 800,000
Taxes (40%) 320,000
Net Income 480,000

Dividends (40%) 192,000

Addition to RE 288,000

This year the company is forecasting a 40% increase in sales, and it expects that its year-end operating costs
will decline to 60% of sales. Nike’s tax rate, interest expense, and dividend payout ratio are all expected to
remain constant. What is Nike’s projected 2022 net income?

a. P 931
b. P 1,056
c. P 775
d. P 1,254

2021 Forecast basis 2022

Sales 3,500,000 x 1.40 4,900,000
Operating costs 2,500,000 x 0.60 (S1) 2,940,000
EBIT 1,000,000 1,960,000
Interest 200,000 200,000
EBT 800,000 1,760,000
Taxes 40% 320,000 704,000
Net income 480,000 1,056,000

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
35. Starbucks Company’s management is considering an advertising program that would require an initial
expenditure of P165,500 and bring in additional sales over the next five years. The cost of advertising is
immediately recognized as expense. The projected additional sales revenue in Year 1 is P75,000 with
associated expenses of P25,000. The additional sales revenue and expenses from the advertising program are
projected to increase by 10% each year. Starbucks’ tax rate is 40%.

The present value of 1 at 10%, end of each period:

Period Present value of 1
1 0.90909
2 0.82645
3 0.75131
4 0.68301
5 0.62092

The payback period for the advertising program is

a. 4.6 years
b. 1.9 years
c. 3.0 years
d. 2.5 years

Cash inflows Investment

Period 0 (165,500 x .60) (99,300)
Period 1 (75,000-25,000) x .6 30,000 (69,300)
Period 2 (30,000 x 1.10) 33,000 (36,300)
Period 3 (33,000 x 1.10) 36,300 -0-

At the end of the 3rd year, investment is fully recovered. Net investment of 99,300 is net of tax benefit.

36. Refer to the preceding number. The NPV of the advertising program would be
a. P 37,064
b. (P 37,064)
c. P 29,136
d. (P 29,136)

PV of cash returns (30,000 x 0.90909) x 5periods 136,364

Net investment 99,300
NPV 37,064

Note: Because the constant growth rate and the discount rate are both 10%, the PV value for each period is
constant.

37. National Book Store sells paperback books for P7 each. The variable cost per book is P5. At current annual
sales of 200,000 books, the publisher is just breaking even. It is estimated that if the authors' royalties are
reduced, the variable cost per book will drop by P1. Assume authors' royalties are reduced and sales remain
constant; how much more money can the publisher put into advertising (a fixed cost) and still break even?
a. P 600,000
b. P 466,667
c. P 333,333
d. P 200,000

7(200,000) − 5(200,000) − F = 0; F = 400,000

7(200,000) − 4(200,000) − F = 0; F = 600,000.
600,000 − 400,000 = 200,000

Page 7 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
38. Louis Vuitton Company has identified two methods for producing playing cards. One method involves using
a machine having a fixed cost of P10,000 and variable costs of P1.00 per deck of cards. The other method
would use a less expensive machine (fixed cost = P5,000), but it would require greater variable costs (P1.50
per deck of cards). If the selling price per deck of cards will be the same under each method, at what level
of output will the two methods produce the same net operating income (EBIT)?
a. 5,000 decks
b. 10,000 decks
c. 15,000 decks
d. 20,000 decks

Total cost Method 1 = 1.00Q + 10,000

Total cost Method 2 = 1.50Q + 5,000

Set equal and solve for Q:

Q + 10,000 = 1.50Q + 5,000; 5,000 = 0.5Q
Q = 10,000

Questions 39 through 41 will be based on the following data:

39. Uniqlo Company is considering changing its credit terms from 2/15, net 30 to 3/10 net 30 in order to speed
collections. At present, 40% of Uniqlo’s customers take the 2% discount. Under the new term, discount
customers are expected to rise to 50%. Regardless of the credit terms, half of the customers who do not take
the discount are expected to pay on time, whereas the reminder will pay 10 days late. The change does not
involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above the present
2% level. However, the more generous cash discount terms are expected to increase sales from P2,000,000
to P2,600,000 per year. Uniqlo’s variable cost ratio is 75%, the interest rate on funds invested in accounts
receivable is 9%, and the firm’s income tax rate is 40%. (Assume 360days in a year)

What are the days sales outstanding (DSO) before and after the change of credit policy?
a. 27.0 days and 22.5 days, respectively
b. 22.5 days and 27.0 days, respectively
c. 22.5 days and 21.5 days, respectively
d. 21.5 days and 22.5 days, respectively

Days sales outstanding (DSO):

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

40. The incremental carrying cost on receivable is

a. P 843.75
b. P 8,889.00
c. P 643.75
d. P 6,667.00

Average receivable
New policy 2.6M/360 x 22.5 162,500
Old policy 2M/260 x 27 150,000
Incremental AR 12,500

Incremental carrying cost on AR (12,500 x .75 x .09) 843.75

Page 8 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
41. The incremental after-tax profit from the change in credit terms is
a. P 68,493
b. P 65,640
c. P 60,615
d. P 57,615

Incremental sales 600,000

Variable cost (.75 x 600,000) (450,000)
Add’l bad debts (600,000 x 2%) (12,000)
Add’l carrying cost (844)
Add’l discounts (2.6M x .5 x .03) – (2M x .4 x .02) (23,000)
Before tax increase in income 114,156
Less tax (45,663)
Incremental income 68,493

42. Data on Rolex Inc. for 2008 are shown below, along with the days sales outstanding of the firms against
which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to
reduce its DSO to the benchmarks’ average. If this were done, by how much would receivables decline?
Use a 365-day year.

Sales P 110,000
Accounts receivable 16,000

Days sales outstanding (DSO) 53.09

Benchmark DSO 20.00

a. P 8,078
b. P 8,975
c. P 9,973
d. P 10,970

Original Benchmark AR at
Data Related DSO DSO benchmark level
Sales 110,000
Receivables and DSO 16,000 53.09 20.00
New receivables = 20 x (110,000/365) 6,027
Reduction in receivables = Orig AR – New AR 9,973

43. Tommy Hilfiger Company is considering a purchase of any of two types of machinery. The first machine
costs P50,000 more than the second machine. During the two-year life of these two alternatives, the first
machine has a P155,000 more cash flow in year one and a P110,000 less cash flow in year two than the
second machine. All cash flows occur at year-end. The present value of 1 at 15% end 1 period and 2 periods
are 0.86957 and 0.75614, respectively. The present value of 1 at 8% end of period 1 is 0.92593 and period 2
is 0.85734.

Which machine should be purchased if the relevant discount rates are 15% and 8%, respectively?

15% Discount 8% Discount

a. Machine 1 Machine 1
b. Machine 2 Machine 2
c. Machine 1 Machine 2
d. Machine 2 Machine 1

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
15% discount rate
Machine 1 Machine 2
PV of difference in after tax cash flow 134,783.35 (134,783.35)
Year 1 (155,000 x 0.86957) (83,175.40) 83,175.40
Year 2 (110,000 x 0.75614) 51,607.95 (51,607.95)
Net difference (50,000.00) 50,000.00
Difference in investment 1,607.95 (1,607.95)
NPV

At 15% discount rate, Machine 1 is more acceptable.

8% discount rate
Machine 1 Machine 2
PV of difference in after tax cash flow 143,519.15 (143,519.15)
Year 1 (155,000 x 0.92593) (94,307.40) 94,307.40
Year 2 (110,000 x 0.85734) 49,211.75 (49,211.75)
Net difference (50,000.00) 50,000.00
Difference in investment (788.25) 788.25
NPV

At 8% discount rate, Machine 2 is more acceptable.

44. Your consulting firm was recently hired to improve the performance of Gucci Inc, which is highly profitable
but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want
to determine the firm’s cash conversion cycle. Using the following information and a 365-day year, what is
the firm’s present cash conversion cycle?

Average inventory P 75,000

Annual sales 600,000
Annual cost of goods sold 360,000
Average accounts receivable 160,000
Average accounts payable 25,000

a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 148.0 days

Avg. inventory 75,000 Annual sales 600,000

Avg. receivables 160,000 Annual COGS 360,000
Avg. payables 25,000 Days in year 365

Inv. conv. period = Inv./(COGS/365) 76.0

=+ DSO = Receivables/(Sales/365) 97.3
– Payables deferral = Payables/(COGS/365) -25.3
Cash conversion cycle (CCC) 148.0

Page 10 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
45. Armani’s cost of goods sold (COGS) averages P2,000,000 per month, and it keeps inventory equal to 50%
of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?
a. 11.7 days
b. 13.0 days
c. 14.4 days
d. 15.2 days

Monthly COGS 2,000,000

Inventory/COGS 50.0%
Annual COGS (2M x 12mos) 24,000,000
Avg. inventory 1,000,000

Inv. conv. period = Inv./COGS per day = Inv./(Annual COGS/365)

(1M / (24M/365) 15.2 days

46. Michael Kors recently reported sales of P100 million, and net income equal to P5 million. The company has
P70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales.
Since the company is at full capacity, its assets must increase in proportion to sales. The company also
estimates that if sales increase 20 percent, spontaneous liabilities will increase by P2 million. If the
company’s sales increase, its profit margin will remain at its current level. The company’s dividend payout
ratio is 40 percent. Based on the AFN formula, how much additional capital must the company raise in order
to support the 20 percent increase in sales?
a. P 2,000,000
b. P 6,000,000
c. P 8,400,000
d. P 9,600,000

AFN = Required asset increase – Spontaneous liability increase – Increase in RE

= (70M/100M) (20M) – 2M – (5M) (1.2 increase in sales) (0.6 net of div payout)
= 14M – 2M – 3.6M
= 8,400,000

47. It is the start of the year and Dolce & Gabbana Company plans to replace its old equipment. The following
information is made available to the management:
OLD NEW
Equipment cost P70,000 P120,000
Current salvage value 14,000 -
Salvage value, end of useful life 5,000 16,000
Annual operating costs 44,000 32,000
Accumulated depreciation 55,300 -
Estimated useful life 10 years 10 years

The company is not subject to tax and its cost of capital is 12%.
What is the present value of all the relevant cash flows at time zero?
a. (P 54,000)
b. (P 120,000)
c. (P 106,000)
d. (P 124,700)

There are 2 cash flows at time zero:

120,000 outflow 14,000 inflow

Net cash outflow (120,000 – 14,000) 106,000

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 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
48. Coca-Cola is considering a machine that will cost P50,000 at Time 0 and that can be sold after 3 years for
P10,000. P12,000 must be invested at Time 0 in inventories and receivables; these funds will be recovered
when the operation is closed at the end of Year 3. The facility will produce sales revenues of P50,000 per
year for 3 years and variable operating costs (excluding depreciation) will be 40 percent of sales. No fixed
costs will be incurred. Operating cash inflows will begin 1 year from today (at t = 1). By an act of Congress,
the machine will have depreciation expenses of P40,000, P5,000, and P5,000 in Years 1, 2, and 3,
respectively. The company has a 40 percent tax rate, enough taxable income from other assets to enable it to
get a tax refund on this project if the project’s income is negative, and a 15 percent cost of capital. Inflation
is zero. What is the project’s NPV?
a. P 7,673.71
b. P 12,851.75
c. P 17,436.84
d. 24,989.67

Year 0 Year 1 Year 2 Year 3

Cost (50,000)
Sales 50,000 50,000 50,000
Variable cost (20,000) (20,000) (20,000)
Depreciation (40,000) (5,000) (5,000)
Income before taxes (10,000) 25,000 25,000
Taxes 40% (4,000) (10,000) (10,000)
Income after taxes (6,000) 15,000 15,000
Depreciation 40,000 5,000 5,000
Operating cash flows 34,000 20,000 20,000
Net operating working capital (12,000) 12,000
AT salvage 6,000
Net cash flows (62,000) 34,000 20,000 38,000

NPV = (62,000) + (34,000/1.15) + (20,000/1.152) +(38,000/1.153) = 7,673.71

49. Disney Inc. has fixed operating costs of P470,000, variable costs of P2.80 per unit produced, and its products
sell for P4.00 per unit. What is the company's breakeven point, i.e., at what unit sales volume would income
equal costs?
a. 391,667
b. 411,250
c. 431,813
d. 453,403

Fixed operating costs 470,000

Variable costs per unit 2.80
Sales price per unit 4.00

Breakeven volume (units) = FC/(P−VC) = 391,667

Page 12 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
Questions 50 through 54 will be based on the following data:
Coca-Cola Company is considering the purchase of a special purpose bottling machine for P280,000. It is
expected to have a useful life of 7 years with a zero terminal disposal price. The plant manager estimates the
following savings in cash-operating costs:
Year Annual Cash Savings
1 P 140,000
2 110,000
3 80,000
4 60,000
5 40,000
6 30,000
7 30,000

Coca-Cola uses a required rate of return of 12% in its capital budgeting decisions. Incremental tax rate is
40%. The company uses straight-line depreciation. The PV of annuity of 1, at 12% for 7 years is 4.56376.
the details of the PV at 12% in 7 years are:
Year Annual Cash Savings
1 0.89286
2 0.79719
3 0.71178
4 0.63552
5 0.56743
6 0.50663
7 0.45235

50. The number of years to recover the amount of investment is

a. 4.83 years
b. 3.65 years
c. 2.38 years
d. 4.00 years

Year After tax cash flows

1 100,000
2 82,000
3 64,000
4 52,000
5 40,000
6 34,000
7 34,000

Year Inflow Outflow

(280,000)
1 100,000 (180,000
2 82,000 (98,000)
3 64,000 (34,000)

Payback period: 3 years + (outflows still to be recovered / 4th cash inflow

3 +(34,000 / 52,000) 3.65 years

Page 13 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
51. What is the amount of after-tax cash flow in year 7?
a. P 30,000
b. P 34,000
c. P 36,400
d. P 22,000

Year After tax cash flows

1 100,000
2 82,000
3 64,000
4 52,000
5 40,000
6 34,000
7 34,000

52. What is the NPV for this investment?

a. P 4,723
b. (P 2,159)
c. P 8,559
d. P 0

Year ATCF PV factor Present values

1 100,000 0.89286 89,286
2 82,000 0.79719 65,370
3 64,000 0.71178 45,554
4 52,000 0.63552 33,047
5 40,000 0.56743 22,697
6 34,000 0.50663 17,225
7 34,000 0.45235 15,380
Total 288,559
Investment 280,000
NPV 8,559

53. What is the accounting rate of return based in initial investment?

a. 6.43%
b. 12.86%
c. 20.71%
d. 41.42%

Ave savings: (140,000 + 110,000 + 80,000 + 60,000 + 40,000 + 30,000 + 30,000) / 7 70,000
Ave net income: (70,000 – 40,000) x 0.6 18,000

Acctg rate of return based on initial investment = ave net income / initial investment
= 18,000 / 280,000 6.43%

Page 14 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
54. What is the net advantage of applying sum-of-the-years’s-digits method instead of using straight line
depreciation?
a. P 6,379
b. P 8,188
c. P 4,154
d. P 2,491

PV of tax shield – straight line method: (40,000 x 0.40 x 4.56376) 73,020

PV of tax shield – sum of years’ digits method:

Year SYD depreciation PV factor PV of depreciation
1 70000 0.89286 62,500
2 60000 0.79719 47,831
3 50000 0.71178 35,589
4 40000 0.63552 25,421
5 30000 0.56743 17,023
6 20000 0.50663 10,133
7 10000 0.45235 4,524
Total 203,020
Tax rate 0.40
PV of tax shield 81,208

Advantage of SYD over straight line method: (81,208 – 73,020) 8,188

55. Amazon Ventures is considering starting a new company to produce stereos. The sales price would be set at
1.5 times the variable cost per unit; the VC/unit is estimated to be P2.50; and fixed costs are estimated at
P120,000. What sales volume would be required in order to break even, i.e., to have an EBIT of zero for the
stereo business?
a. 86,640
b. 91,200
c. 96,000
d. 100,800

VC/unit 2.50
Price multiple over VC 1.50
Price 3.75
Fixed costs 120,000

Breakeven volume (units) = FC/(P − VC) = 96,000

Page 15 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
Use the following information to answer the next items.

The balance sheet and income statement shown below are for McDonald’s Inc. Note that the firm has no amortization
charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable
will be rolled over.

56. What is the firm's days sales outstanding? Assume a 365-day year for this calculation.
a. 39.07
b. 41.13
c. 43.29
d. 45.57
e. 47.97
11,500 / (87,500/365) = 47.97
57. What is the firm's total assets turnover?
a. 1.12
b. 1.40
c. 1.75
d. 2.10
e. 2.52
87,500 / 50,000 = 1.75
58. What is the firm's inventory turnover ratio?
a. 5.47
b. 5.74
c. 6.03
d. 6.33
e. 6.65
87,500 / 16,000 = 5.47

Page 16 of 17
 UNIVERSITY OF SOUTHERN MINDANAO
Kabacan, Cotabato
Philippines
FINANCIAL MANAGEMENT
59. What is the firm's debt/assets ratio?
a. 48.55%
b. 53.95%
c. 59.94%
d. 66.60%
e. 74.00%
37,000 / 50,000 = 74%

60. What is the firm's ROA?

a. 3.62%
b. 3.98%
c. 4.37%
d. 4.81%
e. 5.29%
1,808 / 50,000 = 3.62%

Page 17 of 17