TIME VALUE OF MONEY

THEORIES (20 items)

1. In future value or present value problems, unless stated otherwise, cash flows are
assumed to be:
(a) at the end of a time period.
(b) at the beginning of a time period.
(c) in the middle of a time period.
(d) spread out evenly over a time period.

2. When the amount earned on a deposit has become part of the principal at the end of
a specified time period the concept is called
(a) discount interest.
(b) compound interest.
(c) primary interest.
(d) future value.

3. The future value interest factor is:

(a) always greater than 1.0.
(b) sometimes negative.
(c) always less than 0.
(d) never greater than 25.

4. As the interest rate increases for any given period, the future value interest factor will
(a) decrease.
(b) increase.
(c) remain unchanged.
(d) move toward 1.

5. The amount of money that would have to be invested today at a given interest rate
over a specified period in order to equal a future amount is called
(a) future value.
(b) present value.
(c) future value interest factor.
(d) present value interest factor.

6. The present value interest factor of 1 is

(a) between 2.0 and 0.0.
(b) always negative.
(c) always less than 1.0.
(d) a discount rate.

7. The future value of a dollar _________ as the interest rate increases and _________
the farther in the future an initial deposit is to be received.
(a) decreases; decreases
(b) decreases; increases
(c) increases; increases
(d) increases; decreases

8. The annual rate of return is variously referred to as the

(a) discount rate.
(b) opportunity cost.
(c) cost of capital.
(d) all of the above.
9. For a given interest rate, as the length of time until receipt of the funds increases, the
present value interest factor
(a) changes proportionally.
(b) increases.
(c) decreases.
(d) remains unchanged.

10. An annuity with an infinite life is called a(n):

(a) perpetuity.
(b) primia.
(c) indefinite.
(d) deep discount.

11. You have determined the profitability of a planned project by finding the present value
of all the cash flows from that project. Which of the following would cause the project
to look more appealing in terms of the present value of those cash flows?
a. The discount rate decreases.
b. The cash flows are extended over a longer period of time, but the total amount of
the cash flows remains the same.
c. The discount rate increases.
d. Statements b and c are correct.

12. Which of the following statements is most correct?

a. A 5-year $100 annuity due will have a higher present value than a 5-year $100
ordinary annuity.
b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of
the same amount and same interest rate.
c. If an investment pays 10 percent interest compounded annually, its effective rate
will also be 10 percent.
d. All of the statements above are correct

13. Which of the following statements is most correct?

a. The present value of an annuity due will exceed the present value of an ordinary
annuity (assuming all else equal).
b. The future value of an annuity due will exceed the future value of an ordinary
annuity (assuming all else equal).
c. The nominal interest rate will always be greater than or equal to the effective
annual interest rate.
d. Statements a and b are correct.

14. Time value of money indicates that

a) A unit of money obtained today is worth more than a unit of money obtained in
future
b) A unit of money obtained today is worth less than a unit of money obtained in
future
c) There is no difference in the value of money obtained today and tomorrow
d) None of the above

15. Time value of money supports the comparison of cash flows recorded at different
time period by
a) Discounting all cash flows to a common point of time
b) Compounding all cash flows to a common point of time
c) Using either a or b
d) None of the above

16. Relationship between annual nominal rate of interest and annual effective rate of
interest, if frequency of compounding is greater than one:
 a) Effective rate > Nominal rate
b) Effective rate < Nominal rate
c) Effective rate = Nominal rate
d) None of the above

17. Heterogeneous cash flows can be made comparable by

a) Discounting technique
b) Compounding technique
c) Either a or b
d) None of the above

18. Money has time value because:

a) Money today is more certain than money tomorrow
b) Money today is wroth more than money tomorrow in terms of purchasing
power.
c) There is a possibility of earning risk free return on money invested today.
d) All of the above

19. Interest paid (earned) on only the original principal borrowed (lent) is often referred to
as?
a. Future value
b. Present value
c. Compound interest
d. Simple interest

20. The concept of compound interest refers to?

a) The process of gradually retiring a debt through periodic payments of principal and
interest
b) The process of servicing a debt with regular interest payments, followed lump sum
payment of principal and interest at the end of the loan term
c) The process of converting future lump sums and annuities into present values at a
stated interest rate
d) The process of earning interest on an original amount, plus interest on interest
previously earned

PROBLEMS (15 items)

1. The present value of a $20,000 perpetuity at a 7 percent discount rate is
(a) $186,915.
(b) $285,714.
(c) $140,000.
(d) $325,000.

20,000 / .07 = 285,714

2. The future value of a $2,000 annuity due deposited at 8 percent compounded annually for
each of the next 10 years is
(a) $28,974.
(b) $31,292.
(c) $14,494.
(d) $13,420.
(10)
(1.08) −1
2000 x ( ) x 1.08
.08
Basic calcu:
Press 1.08 then press multiply 2 times, then press the equal sign for 9 times, minus
1, divided by 8%, multiply by 1.08, then multiply by 2,000.

3. The future value of a $10,000 annuity due deposited at 12 percent compounded annually for
each of the next 5 years is
(a) $36,050.
 (b) $63,530.
(c) $40,376.
(d) $71,154.

5
(1.12) −1
10,000 x ( ¿ x 1.12
.12
Basic calcu:
Press 1.12 then press multiply 2 times, then press the equal sign for 4 times, minus
1, divided by 12%, multiply by 1.12, then multiply by 10,000.

4. The future value of an ordinary annuity of $1,000 each year for 10 years, deposited at 3
percent, is
(a) $11,808.
(b) $11,464.
(c) $ 8,530.
(d) $10,000.

10
(1.03) −1
1,000 x ( ¿
0.10
Basic calcu:
Press 1.03, press multiply 2 times, then press equals for 9 times, minus 1, divided by 3%,
multiply by 1,000.
5. The future value of an ordinary annuity of $2,000 each year for 10 years, deposited at 12
percent, is
(a) $35,098.
(b) $20,000.
(c) $39,310.
(d) $11,300.
10
(1.12) −1
2,000 x ( ¿
0.12
Basic calcu:
Press 1.12, press multiply 2 times, then press equals for 9 times, minus 1, divided by 12%,
multiply by 2,000.

6. A college received a contribution to its endowment fund of $2 million. They can never touch
the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how
much can the college earn to help its operations each year?
(a) $95,000
(b) $19,000
(c) $190,000
(d) $18,000
2,000,000 x 9.5%
7. The present value of an ordinary annuity of $350 each year for five years, assuming an
opportunity cost of 4 percent, is
(a) $288.
(b) $1,896.
(c) $1,750.
(d) $1,558
1−(1.04)5
350 x
0.04
Basic calcu:
Press 1.04, press divide 2 times, then:
 If your calcu shows “1” also known as the PV for year 0 when pressed the
equal once, press the equal sign 6 times
 If your calcu shows “0.96…” also known as the PV for year 1, press the equal
sign for 5 times; then
o If your calcu has “GT”, press GT then minus 1 then multiply by 350
 o If your calcu does NOT have “GT”, after getting the PV for 5 years,
minus 1 then divide by 4%, then multiply by 350.
o
8. The present value of an ordinary annuity of $2,350 each year for eight years, assuming an
opportunity cost of 11 percent, is
(a) $ 1,020.
(b) $27,869.
(c) $18,800.
(d) $12,093.
1−(1.11)8
2,350 x 0.11

Basic calcu:
Press 1.11, press divide 2 times, then:
 If your calcu shows “1” also known as the PV for year 0 when pressed the
equal once, press the equal sign 9 times
 If your calcu shows “0.909…” also known as the PV for year 1, press the
equal sign for 8 times; then
o If your calcu has “GT”, press GT then minus 1 then multiply by 2,350
o If your calcu does NOT have “GT”, after getting the PV for 8 years,
minus 1 then divide by 11%, then multiply by 2,350.

9. Mary will receive $12,000 per year for the next 10 years as royalty for her work on a finance
book. What is the present value of her royalty income if the opportunity cost is 12 percent?
(a) $120,000
(b) $ 67,800
(c) $ 38,640
(d) None of the above.

10
1−(1.12)
12,000 x 0.12

Basic calcu:
Press 1.12, press divide 2 times, then:
 If your calcu shows “1” also known as the PV for year 0 when pressed the
equal once, press the equal sign 11 times
 If your calcu shows “0.892…” also known as the PV for year 1, press the
equal sign for 10 times; then
o If your calcu has “GT”, press GT then minus 1 then multiply by
12,000
o If your calcu does NOT have “GT”, after getting the PV for 10 years,
minus 1 then divide by 12%, then multiply by 12,000.

10. The present value of $1,000 received at the end of year 1, $1,200 received at the end of year
2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is
(a) $2,500.
(b) $3,043.
(c) $6,516.
(d) $2,856.

1,000 x (PV of 1) 0.9345 = 934.5

1,200 x (PV of 2) 0.8734 = 1048.13
1,300 x (PV of 3) 0.8163 = 1,061.19
3,043

11. The future value of $200 received today and deposited at 8 percent compounded semi-
annually for three years is
 (a) $380.
(b) $158.
(c) $253.
(d) $252.
200 x 1.046
Basic calcu:
Press 1.04, press multiply 2 times, then press equals for 5 times, multiply by 200.

12. The future value of an annuity of $1,000 each year for 10 years, deposited at 12 percent
compounded quarterly is
(a) $17,549.
(b) $75,400.
(c) $93,049.
(d) $11,200.
(1.03)(10 x 4) periods −1
¿
(1,000) x ( 0.12
( )
4
13. If a United States Savings bond can be purchased for $29.50 and has a maturity value at the
end of 25 years of $100, what is the annual rate of return on the bond?
(a) 5 percent
(b) 6 percent
(c) 7 percent
(d) 8 percent

*Trial and Error

25
(1.05) −1
29.5 x ( ¿
0.05
Basic calcu:
Press 1.05, press multiply 2 times, then press equals for 24 times, multiply by 29.5.

14. Donna makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest
rate of 13 percent. The original principal amount was
(a) $24,462.
(b) $15,000.
(c) $ 3,092.
(d) $20,175.

4
1−(1.13)
5,043.71 x 0.13

Basic calcu:
Press 1.13, press divide 2 times, then:
 If your calcu shows “1” also known as the PV for year 0 when pressed the
equal once, press the equal sign 5 times
 If your calcu shows “0.8849…” also known as the PV for year 1, press the
equal sign for 4 times; then
o If your calcu has “GT”, press GT then minus 1 then multiply by
5,043.71
o If your calcu does NOT have “GT”, after getting the PV for 4 years,
minus 1 then divide by 13%, then multiply by 5,043.71.

15. Debbie borrows $3,500 from the bank at 12 percent annually compounded interest to be
repaid in four equal annual installments. The interest paid in the first year is
(a) $ 152.
(b) $ 277.
 (c) $ 420.
(d) $1,152.

3,500 x 12%

ANSWER KEY
THEORIES
1. A
2. B
3. A
4. B
5. B
6. C
7. C
8. D
9. C
10. A
11. A
12. D
13. D
14. A
15. C
16. A
17. C
18. D
19. D
20. D

PROBLEMS
1. B
2. B
3. D
4. B
5. A
6. C
7. D
8. D
9. B
WORKING CAPITAL MANAGEMENT
THEORIES (50 items)

1. A company obtaining short-term financing with trade credit will pay a higher
percentage financing cost, everything else being equal, when
i. The discount percentage is lower.
ii. The items purchased have a higher price.
iii. The items purchased have a lower price.
iv. The supplier offers a longer discount period.

2. Short-term financing plans with high liquidity have:

A. high return and high risk
B. moderate return and moderate risk
C. low profit and low risk
D. none of the above

3. Temporary working capital supports

A. the cash needs of the company. C. acquisition of capital equipment.
B payment of long term debt. D. seasonal peaks.

4. The transaction motive for holding cash is for:

A. a safety cushion C. compensating balance requirement
B. daily operating requirements D. none of the above

5. The difference between the cash balance on the firm's books and the balance shown
on the bank statement is called:
A. the compensating balance C. a safety cushion
B. float D. none of the above

6. The length of time between payment for inventory and the collection of cash is
referred to as:
A. payables deferral period C. operating cycle
B. receivables conversion period D. cash conversion cycle

7. As a firm's cash conversion cycle increases, the firm:

A. becomes less profitable
B. increases its investment in working capital
C. reduces its accounts payable period

8. The longer the firm's accounts payable period, the:

A. longer the firm's cash conversion cycle is.
B. shorter the firm's inventory period is.
C. more the delay in the accounts receivable period.
D. less the firm must invest in working capital.

9. The average length of time a peso is tied up in current asset is called the:
A. net working capital. C. receivables conversion period.
B. inventory conversion period. D. cash conversion period.

10. All of these factors are used in credit policy administration except:
A. credit standards C. peso amount of receivables
B. terms of trade D. collection policy

11. Which of the following statements is most correct? If a company lowers its DSO, but
no changes occur in sales or operating costs, then:
A. the company might well end up with a higher debt ratio.
B. the company might well end up with a lower debt ratio.
 C. the company would probably end up with a higher ROE.
D. the company's total asset turnover ratio would probably decline.

12. All but which of the following is considered in determining credit policy?
A. A. Credit standards C. Accounts payable deferral period
B. B. Credit limits D. Collection efforts

13. The use of safety stock by a firm will:

A. reduce inventory costs C. have no effect on inventory costs
B. increase inventory costs D. none of the above

14. 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

15. 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
B. Current order size is less than optimal
C. Per unit carrying costs are too high
D. The optimal order size is currently being used

16. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
A. Three days after the invoice is received.
B. The 8th day is the customer’s decision date.
C. Anytime during the period, 8th to the 30th.
D. The 30th day is the primary decision date.

17. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory
B. opportunity cost of capital
C. aggregate of carrying and shortage costs
D. amount of spoilage or pilferage

18. Zap Company follows an aggressive financing policy in its working capital
management while Zing Corporation follows a conservative financing policy. Which
one of the following statements is correct?
A. Zap has low ratio of short-term debt to total debt while Zing has a high
ratio of short-term debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio.
C. Zap has less liquidity risk while Zing has more liquidity risk.
D. Zap finances short-term assets with long-term debt while Zing finances
short-term assets with short-term debt.

19. Which of the following would increase risk?

A. Raise the level of working capital.
B. Decrease the amount of inventory by formulating an effective inventory
policy.
C. Increase the amount of short-term borrowing.
D. Increase the amount of equity financing.

20. As a company becomes more conservative with respect to working capital policy, it
would tend to have a(n)
A. Increase in the ratio of current liabilities to noncurrent liabilities.
 B. Increase in the operating cycle.
C. Decrease in the operating cycle.
D. Increase in the ratio of current assets to current liabilities.

PROBLEMS

1. A firm has a cash conversion cycle of 60 days. Annual outlays are P12 million and
the cost of negotiated financing is 12 percent. If the firm reduces its average age of
inventory by 10 days, the annual savings is _________.
a. P104,000
b. P144,000
c. P 28,800
d. P40,000
(12,000,000/360days) x 10 days x 12% = 40,000
2. The Steel Works, Inc. is required to carry a minimum of 40 days’ raw steel, which is
250 tons. It takes 15 days between order and delivery. At what level of steel would
Steel Works reorder?
a. 3,750 tons
b. b. 600 tons
c. 667 tons
d. 344 tons
(15 + 40 days) x (250 tons / 40 days) = 344 tons
3. The General Chemical Company uses 150,000 gallons of hydrochloric acid per
month. The cost of carrying the chemical in inventory is 50 cents per gallon per year,
and the cost of ordering the chemical is P150 per order. The firm uses the chemical
at a constant rate throughout the year. The chemical’s economic order quantity is:
a. 32,863 gallons.
b. 11,619 gallons.
c. 9,487 gallons.
d. 1,900 gallons.

2 x ( 150,000 x 12 ) x P 150
√ 0.50
= 32,863 gallons

4. Contex, Inc. uses 800 units of a product per year on a continuous basis. The product
has carrying costs of P50 per unit per year and order costs of P300 per order. It takes
30 days to receive a shipment after an order is placed and the firm requires a safety
stock of 5 days usage in inventory. Calculate the economic order quantity (EOQ).
a. 98 units
b. 69 units
c. 56 units
d. 100 units
2 x ( 800 units ) x P 300
√ 50
= 97.97 units or 98 units

5. Sharon uses 35 baskets each day to pack apples for shipping. It takes 5 days to
receive a shipment of baskets after an order is placed and she would like a safety
stock of 3 days in inventory. At what level of inventory should Sharon place an order
for baskets?
a. 175 units
b. 180 units
c. 260 units
d. 280 units
(35 baskets x 5 days) + (35 baskets x 3 days) = 280 units
 6. Data products, Inc., uses 2,400 units of a product per year on a continuous basis.
The product carrying costs are P60 per year and ordering costs are P250 per order. It
takes 20 days to receive a shipment after an order is placed and the firm requires a
safety stock of 8 days of usage in inventory. Calculate the total cost per year to order
and carry this item.
a. P8,485
b. P8,125
c. P7,560
d. P7,000

(2 x (2,400 units) x P 250)

√ P60
= 141.42 units  2,400 / 141.42 units = 16.97units

P250 x 16.97 = P4,242.68

(141.42 / 2) x P60 = P4,242.6
 P4,242.68 + P4,242.6 = P8,485
7. The General Chemical Company uses 150,000 gallons of hydrochloric acid per
month. The cost of carrying the chemical in inventory is 50 cents per gallon per year,
and the cost of ordering the chemical is P150 per order. The firm uses the chemical
at a constant rate throughout the year. It takes 18 days to receive an order once it is
placed. The reorder point is:

a. 7,500 gallons.
b. 25,000 gallons.
c. 90,000 gallons.
d. 105,000 gallons.
(150,000 units / 30days) x 18days = 90,000
8. 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?
A. 90 days C. 54 days
B. 75 days D. 105 days

60 days + 45 days – 30 days = 75 days

9. A company obtained a short-term loan from a bank. Some information about the
credit line is as follows:
Principal P5,000,000
Stated Interest Rate 10%
Terms 1 year

If the loan is discounted, the effective interest rate is:

a. 10%
b. 11.11%
c. 9.09%
d. 8.89%

5,000,000 – (5,000,000 x 10%) = 4,500,000  500,000 / 4,500,000 = 11.11%

10. Dennis, Inc. purchased an item on credit with terns of 3/10, net 45. Based on a 360-
day year, the company’s interest cost of foregoing the cash discounts and making
payment on the last day of the credit period is:
A. 24.00% C. 24.74%
B. 31.81% D. 30.86%
 3% 360 days
x = 31.81%
1−3 % 45−10 days

11. Flint Company’s average collection period is 20 days. The average daily sales is
P5,000. All of the company’s customers pay by credit card. How much is the
company’s average accounts receivable balance?
a. P0
b. P100,000
c. P50,000
d. P5,000

5,000 x 20 days = P100,000

12. Dennis, Inc. has an inventory conversion period of 60 days, a receivable conversion
period of 35 days, and a payment cycle to 26 days. If its sales for the period just
ended amounted to P972,000, what is the investment in accounts receivable?
(Assume 360 days in a year).
A. P85,200 C. P94,500
B. P72,450 D. P79,600

972,000 x (35/360days) = 94,500

13. Pert Company has the opportunity to increase annual sales by P1 million by selling to
new riskier customers. It has been estimated that uncollectible expenses would be
15% and collection costs, 5%. The manufacturing and selling costs are 70% of sales
and corporate tax is 35%. If they pursue this opportunity, the after-tax profit will:
A. Increase by P35,000 C. Increase by P65,000
B. Increase by P97,500 D. Remain the same.

1,000,000 x (100% - (15% + 5% +70%)) x (100%-35%) = Increase by 65,000

14. Mr. R. Sim assumed the presidency of Green Corp. he instituted new policies with
respect to credit policy. Below is a summary of relevant information:
Credit policy
Old New
Sales P1,800,000 P1,980,000
Average collection period 30 days 36 days

The company requires a rate of return of 10% and a variable cost ratio of 60%. Using
a 360-day year, the pre-tax cost of carrying the additional investment in receivables
under the new policy would be
A. P4,800,000 C. P3,000,000
B. P2,880,000 D. P4,080,000

1,980,000
¿−¿ 1,800,000
( 360 ( ) = 48,000 x 10% x 60% = 2,880
days 360 /30 days
36

*magkasama po pala 14 & 15.

*mali po ata yung test bank, kulang ng zeros sa sales, or sobra po sa MCs hehe

ANSWER KEY:
THEORIES
1. D 5. B 9. D
2. B 6. D 10. C
3. D 7. B 11. B
4. B 8. D 12. C
 13. B 16. B 19. C
14. D 17. C 20. D
15. A 18. B

PROBLEMS
1. D
2. D
3. A
4. A
5. D
6. A
7. C.
8. B
9. B
10. B
11. B
12. C
13. C
14. B
15. C
 16.
FINANCIAL STATEMENTS ANALYSIS
THEORIES (20 items)
1. A limitation in calculating ratios in financial statement analysis is that
A. it requires a calculator.
B. no one other than the management would be interested in them.
C. some account balances may reflect atypical data at year end.
D. they seldom identify problem areas in a company.

2. Which of the following is not a limitation of financial statement analysis?

A. The cost basis. C. The diversification of firms.
B. The use of estimates. D. The availability of information.

3. Which of the following does not represent a problem with financial analysis?
A. Financial statement analysis is an art; it requires judgment decisions on the part
of the analyst.
B. Financial analysis can be used to detect apparent liquidity problems.
C. There are as many ratios for financial analysis as there are pairs of figures.
D. Some industry ratio formulas vary from source to source.

4. When a balance sheet amount is related to an income statement amount in

computing a ratio,
a. The income statement amount should be converted to an average for the
year.
b. Comparisons with industry ratios are not meaningful.
c. The balance sheet amount should be converted to an average for the year.
d. The ratio loses its historical perspective because a beginning-of-the-year
amount is combined with an end-of-the-year amount.
5. How are financial ratios used in decision making?
a. They can help identify the reasons for success and failure in business, but
decision making requires information beyond the ratios.
b. They remove the uncertainty of the business environment.
c. They aren’t useful because decision making is too complex.
d. They give clear signals about the appropriate action to take.
6. A useful tool in financial statement analysis is the common-size financial statement.
What does this tool enable the financial analyst to do?
a. Evaluate financial statements of companies within a given industry of
approximately the same value.
b. Determine which companies in the same industry are at approximately the
same stage of development.
c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a
company over time or between companies within a given industry without
respect to relative size.
d. Ascertain the relative potential of companies of similar size in different
industries.
7. Which of the following is not revealed on a common size balance sheet?
a. The debt structure of a firm.
b. The capital structure of a firm.
c. The peso amount of assets and liabilities.
d. The distribution of assets in which funds are invested.
8. If a transaction causes total liabilities to decrease but does not affect the owners’
equity, what change if any, will occur in total assets?
a. Assets will be increased. c. No change in total assets.
b. Assets will be decreased. d. None of the above.
9. Which of the following generally is the most useful in analyzing companies of different
sizes?
A. comparative statements C. price-level accounting
B. common-sized financial statements D. profitability index

10. In which of the following cases may a percentage change be computed?

A. The trend of the amounts is decreasing but all amounts are positive.
B. There is no amount in the base year.
C. There is a negative amount in the base year and a negative amount in the
subsequent year.
D. There is a negative amount in the base year and a positive amount in the
subsequent year.

11. 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.

12. Which one of the following ratios would provide a best measure of liquidity?
A. Sales minus returns to total debt.
B. Total assets minus goodwill to total equity.
C. Current assets minus inventories to current liabilities.
D. Net profit minus dividends to interest expense.
13. North Bank is analyzing Belle Corp.’s financial statements for a possible extension of
credit. Belle’s quick ratio is significantly better than the industry average. Which of
the following factors should North consider as possible limitation of using this ratio
when evaluating Belle’s creditworthiness?
a. Fluctuating market prices of short-term investments may adversely affect
the ratio.
b. Increasing market prices for Belle’s inventory may adversely affect the
ratio.
c. Belle may need to sell its available-for-sale investments to meet its current
obligations.
d. Belle may need to liquidate its inventory to meet its long-term obligations.

14. The ratio of analytical measurements which measures the productivity of assets
regardless of capital structure is
a. Current ratio. c. Quick (acid test) ratio.

b. Debt ratio. d. Return on total assets.

15. In the near term, the important ratios that provide the information critical to the
short-run operation of the firm are:
A. liquidity, activity, and profitability C. liquidity, activity, and equity
B. liquidity, activity, and debt D. activity, debt, and profitability

16. Which of the following does not belong to the list?

A. Common-size financial statements
B. Peso and percentage changes on financial statements.
C. Financial ratios.
 D. Long-form report.

17. When a balance sheet amount is related to an income statement amount in

computing a ratio:
A. The income statement amount should be converted to an average for the year.
B. Comparison with industry ratios is not meaningful.
C. The balance sheet amount should be converted to an average for the year.
D. The ratio loses its historical perspective because a beginning of the year amount
is combined with an end of the year amount.

18. Securing of funds for investment at a fixed rate of return to fund suppliers to
enhances the well-being of the common stockholders is known as:
A. Financial leverage C. Prudent borrowing
B. Fund management D. Financial arbitrage

19. A measure of the company’s long-term debt paying ability is

A. Return on assets C. Dividend payout.
B. Times interest earned. D. Length of the operating cycle.

20. All of the following statements are correct except:

A. The matching of asset and liability maturities is considered desirable because this
strategy minimizes interest rate risk.
B. Default risk refers to the inability of the firm to pay off its maturing obligations.
C. The matching of assets and liability maturities lowers default risk.
D. An increase in the payables deferral period will lead to reduction in the need to
non-spontaneous funding.

PROBLEMS (15 items)

The following were reflected from the records of Salvacion Company:
Earnings before interest and taxes P1,250,000
Interest expense 250,000
Preferred dividends 200,000
Payout ratio 40 percent
Shares outstanding throughout 2006
Preferred 20,000
Common 25,000
Income tax rate 40 percent
Price earnings ratio 5 times

1. The dividend yield ratio is

A. 0.5 C. 0.4
B. 0.12 D. 0.08

(¿−Preferred Dividends) (1250000−250000−400000 )−200000

EPS =  = 8.88
Average shares outstanding 45,000 shares
Market Price per share Market Price
P/E =  5x =  Market Price per share = 44.4
EPS 8.88
Dividend Per Share Dividend per share
Dividend Payout =  40% =  Dividend per
EPS 8,88
share = 3.552
Dividend per share 3,552
Dividend Yield =  = 0.08
Market Price per share 44,4
Perry Technologies Inc. had the following financial information for the past year:
Sales $860,000 Inventory turnover 8x
Quick ratio 1.5 Current ratio 1.75
2. What were Perry’s current liabilities?
a. $430,000 b. $500,000 c. $107,500 d. $ 61,429

Current ratio – Quick ratio = 0.25 (Inventory Ratio)

If Sales = COGS then: Average Inventory = 860,000 / 8 = 107,500
Quick Assets / CL = 1.5  Quick Assets = CL x 1.5
CA / CL = 1.75  CA = CL x 1.75
Quick Assets + Inventory = Current Assets  1.5CL + 107,500 = 1.75CL  107,500 / .25
CURRENT LIABILITIES = 430,000

3. Earnings per share amount to P10 and the price earnings ratio is 5. If the dividend
yield is 8%,
a. Market price of the stock must be P40.
b. Market value of the stock cannot be determined.
c. The amount of dividend cannot be determined.
d. The dividend is P4 per share.

Market Price per share Market Price per Share

P/E = 5=  Market price per
EPS P 10
share = P50
Dividend per share Dividend per share
Dividend Yield =  8% = = Dividend per
Market Price per share P50
share = P4

4. Manufacturer’s Inc. estimates that its interest charges for this year will be $700 and
its net income will be $3,000. Assuming its average tax rate is 30 percent, what is
the company’s estimated times interest earned ratio?
a. 2.40 b. 4.25 c. 5.33 d. 7.12
EBIT – Interest – (EBT x Tax%) = NI
X – 700 – [(X-700) x 30%] = 3,000  X – 0.3X + 210 = 3700  0.7X = 3,490  X or EBIT = 4,985.71

4,985.71
Times-interest earned ratio =  7.12
700
5. White Knight Enterprises is experiencing a growth rate of 9% with a return on assets
of 12%. If the debt ratio is 36% and the market price of the stock is $38 per share,
what is the return on equity?
A. 7.68% B. 9.0% C. 12.0% D. 18.75%
Asset = 100%
Liabilities = 36%
Equity = 64%
NI = 12%
¿ 12 %
Return on Equity =  18.75%
Equity  64 %
6. The Intelinet Corporation and Comp Inc. have assets of $100,000 each and a return
on common equity of 17%. Intelinet has twice the debt of Comp Inc., while Comp has
half the sales of Intelinet. If Intelinet has net income of $10,000 and a total assets
turnover ratio of 3.5, what is Comp Inc.'s profit margin?
 A. 3.31% B. 7.71% C. 10.00% D. 13.50%

100,000−2(Liabilities)
¿ ¿
ROE =   Liabilities = 20,588
Equity 10,000
¿
100,000−2(20588)
¿ ¿
ROE =   Net Income = 13,500
Equity ¿
¿
Sales = (100,000 x 3.5) = 350,000 / 2 = 175,000
13,500
Profit Margin = = 7.71%
175,000
7. Beatnik Company has a current ratio of 2.5 and a quick ratio of 2.0. If the firm
experienced $2 million in sales and sustains an inventory turnover of 8.0, what are
the firm's current assets?
A. $1,000,000 B. $500,000 C. $1,500,000 D. $1,250,000
Current ratio – Quick ratio = 0.50 (Inventory Ratio)
If Sales = COGS then: Average Inventory = 2,000,000 / 8 = 250,000
Quick Assets / CL = 2  Quick Assets = CL x 2
CA / CL = 2.5  CA = CL x 2.5
Quick Assets + Inventory = Current Assets  2CL + 250,000 = 2.5CL  250,000 / .50
Current liabilities = 500,000
CA / 500,000 = 2.5  1,250,000

8. India Oats pays dividends of $0.62 per quarter, and has annual earnings per share of
$2.80. What is India Oats's dividend yield and dividend payout ratio for 2000,
respectively, if its recent market price is $30.00 and its average market price was
$28.00?
A. 8.27% and 88.6%. C. 8.86% and

88.6%.

B. 8.27% and 22.1%. D. 8.86% and 22.1%.

Dividend per share
Dividend Yield =  (0.62 x 4) / 30 = 8.27%
Market Price per share
Dividend Per Share
Dividend Payout =  (0.62 x 4) / 2.80 = 88.6%
EPS
9. Miller and Rogers Partnership has $3 million in total assets, $1.65 million in equity,
and a $500,000 capital budget. To maintain the same debt-equity ratio, how much
debt should be incurred?
A. $50,000 B. $225,000 C. $275,000 D. $450,000
3,000,000 – 1,650,000 = 1,350,000 (Total Liabilities)
Debt ratio is 45% = 100% (Total Assets Ratio) – 55% (Equity Ratio = 1.65M / 3M)
Capital budget is found in both Assets and Equity thus the new balance of Total Assets is
3,500,000 x 45% = 1,575,000 (Total Liabilities)
1,575,000 – 1,350,000 = 225,000
 10. The Meryl Corporation’s common stock is currently selling at $100 per share, which
represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding,
a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on
total assets (ROA)?
a. 8.0% b. 10.0% c. 12.0% d. 16.7%
Debt Ratio = Liabilities / Assets  Assets = 100%; Equity = 40%
ROE = NI / Equity  20% = NI / 40%  NI = 8%
ROA = 8% / 100% = 8%
11. Net sales are P6,000,000, beginning total assets are P2,800,000, and the asset
turnover is 3.0. What is the ending total asset balance?
A. P2,000,000. C. P2,800,000.
B. P1,200,000. D. P1,600,000.
6,000,000
Net Sales
Asset Turnover Ratio =  3.0 = 2,800,000+ x  1,200,000
Average Assets
2
12. The times interest earned ratio of Mikoto Company is 4.5 times. The interest
expense for the year was P20,000, and the company’s tax rate is 40%. The
company’s net income is:
A. P22,000 C. P54,000
B. P42,000 D. P66,000

Times interest earned ratio = EBIT / Interest Expense  4.5 = EBIT / 20,000  EBIT =
90,000
NI = 90,000 – 20,000 – [(90,000 – 20,000) x 40%] = 42,000

13. What is the market price of a share of stock for a firm with 100,000 shares
outstanding, a book value of equity of P3,000,000, and a market/book ratio of 3.5?
A. P8.57 C. P85.70
B. P30.00 D. P105.00

Market/Book Ratio = Market price per share / BV per share

 3.5 = MV per share / (3,000,000 / 100,000)  MV per share = 105

14. 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% C. 7.5%
B. 22.0% D. 10.0%

P/E Ratio = Market price per share / EPS  10 = Market price per share / 2.20
 Market price per share = 22
Dividend per Share Dividend per Share
Dividend Payout Ratio =  75% =
EPS 2.2
 Dividend per share = 1.65
Dividend per Share
Dividend Yield Ratio = = 1.65 / 22  Dividend Yield Ratio =
Market price per share
7.5%
15. Selected information from the accounting records of Eternity Manufacturing Company
follows:
Net sales P3,600,000
Cost of goods sold 2,400,000
Inventories at January 1 672,000
Inventories at December 31 576,000
What is the number of days’ sales in average inventories for the year?
 A. 102.2 C. 87.6
B. 94.9 D. 68.1

Average Inventory (672,000+576,000)/2

Days in Inventory = COGS  Days in Inventory = 2,400,000
( ) ( )
360 days 360 days
= 94.9 days

ANSWER KEY
THEORIES
1. C 8. B 15. A
2. D 9. B 16. D
3. B 10. A 17. C
4. C 11. D 18. A
5. D 12. C 19. B
6. B 13. A 20. D
7. A 14. D

PROBLEMS
1. D
2. A
3. D
4. D
5. D
6. B
7. D
8. A
9. B
10. A
11. B
12. B
13. D
14. C
15. B
10.
11. B
12. C
13. B
14. A
15. B
16. C