OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM

Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

QUIZ ON FINANCIAL RISK MANAGEMENT AND FS ANALYSIS

Multiple Choice Questions
Identify the choice that best completes the statement or answers the question. Mark your answer in the answer sheet provided for that purpose. No
erasure is allowed on the answer sheets. This examination is good for 90 minutes. No need to submit supporting computations.

1. Which one of the following statements about the payback method of investments analysis is correct? The payback method
a. Does not consider the time value of money. c. Uses discounted cash flow techniques.
b. Considers cash flows after the payback has been reached. d. Is rarely used in practice.

2. An investment project is expected to yield P10,000 in annual revenues, will incur P2,000 in fixed cost per year, and requires an initial
inventory of P5,000. Given a cost of goods sold of 60% of sales and ignoring taxes, what is the payback period in years?
a. 2.50
b. 5.00
c. 2.00
d. 1.25

3. Mary Company recently acquired a machine at a cost of P64,000. It will be depreciated on a straight-line basis over eight years with no
estimated salvage value. Mary estimates that this machine will produce an annual net cash inflow (before income taxes) of P18,000.
Assuming an income tax rate of 35%, what is the approximate payback period on the investment?
a. 4.4 years. c. 7.1 years
b. 12.8 years. d. 3.6 years

4. Which of the following is necessary in order to calculate the payback period for a project?
a. Useful life. c. Net present value.
b. Minimum desired rate of return. d. Annual cash flow.

5. Given these data:

· Net after tax inflows are: P24,000 for year 1, P30,000 for year 2, P36,000 for year 3, and P30,000 for year 4.
· Initial investment outlay is P60,000.
· Cost of capital is 18%.
Determine the payback period for this investment:
a. 2.5 years. c. 3.00 years.
b. 2.17 years. d. 3.17 years.

6. The method that divides a project’s annual after tax net income by the average investment cost to measure the estimated performance of a
capital investment is the
a. Internal rate of return method. c. Payback method.
b. Accounting rate of the return method. d. Net present value (NPV) method.

7. The method of project selection which considers the time value of money in a capital budgeting decision is accomplished by computing the
a. Accounting rate of return on initial investment.
b. Payback period.
c. Accounting rate of return on average investment.
d. Discounted cash flow.

8. All of the following items are included in discounted cash flow analysis except
a. Future operating cash savings.
b. The disposal prices of the current and future assets.
c. The future assets depreciation.
d. The tax effects of future assets depreciation.
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9. When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors
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generally is not important?

 OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM
Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

a. The method of financing the project under consideration.

b. The impact of the project on income taxes to be paid.
c. The timing of cash flows relating to the project.
d. The amount of cash flows relating to the project.

10. A proposed project has an expected economic life of eight years. In the calculation of the net present value of the proposed project, salvage
value would be
a. Excluded from the calculation of the net present value.
b. Included in a cash inflow at the estimated salvage value.
c. Included as a cash inflow at the present value of the estimated salvage value.
d. Included as a cash inflow at the future amount of the estimated salvage value. (aicpa)

11. Your company is purchasing a transport equipment as part of its territorial expansion strategy. The technical services department indicated
that this equipment needs overhauling in year 4 or year 5 of its useful life. The overhauling cost will be expected during the year the
overhauling is done. The Finance Officer insists that the overhauling be done in year 4, not in year 5. The most likely reason is:
a. There is lower tax rate in year 5.
b. There is higher tax rate in the year 5.
c. The time value of money is considered.
d. Due to statements A and C above.

12. Sensitivity analysis, if applied in capital budgeting evaluation,

a. Is used extensively when cash flows are known with certainty.
b. Is “what if” techniques that ask how a given outcome will change if the original estimates of the capital budgeting model are changed.
c. Measures the amount of time it will take for a project to recover its initial capital outflow.
d. Is a technique used to rank capital expenditures request.

13. You have determined the profitability of a planned project by finding the present value of all cash flows from that project. Which of the
following would cause the project to look less appealing, that is, have a lower present value?
a. The discount rate increases.
b. The cash flows are extended over a longer period of time.
c. The investment cost decreases without affecting the expected income and life of the project.
d. The cash flows are accelerated, and the project life is correspondingly shortened.

14. Velasquez & Company is considering an investment proposal for P10 million yielding a net present value of P450,000. The project has a life
of 7 years with salvage value of P200,000. The company uses a discount rate of 12%. Which of the following would decrease the net
present value?
a. Extend the project life and associated cash inflows.
b. Increase the discount rate to 15%.
c. Decrease the initial investment amount to P9.0 million.
d. Increase the salvage value.

15. The net present value of a proposed project represents the

a. Cash flows less the present value of the cash flows.
b. Cash flows less the original investment.
c. Present value of the cash flows plus the present value of the original investment less the original investment.
d. Present value of the cash flows less the original investment.

16. You have been consulted to advice CPA Corporation on the projected acquisition of another production line costing P1 million. The line has
an expected useful life of 5 years without any salvage value. The company’s hurdle rate is 20% and the following additional information
were made available to you.
Estimated Annual Present Value of 3 200,000 .63
Year Cashflow P1 at 20% 4 200,000 .53
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1 P 600,000 0.91 5 200,000 .44

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2 300,000 .76 P1,500,000 3.27

 OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM
Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

Assuming that the cash flow is generated evenly during the year, your advice is
a. To invest due to net present value of P94,000.
b. To invest due to net present value of P541,280.
c. To invest due to net present value of P635,000.
d. To invest due to net advantage of P500,000.

17. Junio Assembly Inc. is considering the purchase automatic wirebonder which costs P750,000. It has ten-year life without any salvage value.
Junio would save P200,000 in labor cost annually as a result of the use of the new machine. Power cost would however increase by
P25,000 annually. The cost of capital is 16%. The present value factor for 10 years at 16% is 4.8332. The present value of the net annual
cost savings is:
a. P845,810 c. P745,810
b. P575,000 d. P966,640

18. A number of techniques are commonly used in the analysis of capital budgeting decisions. Each method involves the measurement of cash
flows, except the:
a. Internal rate of return method. c. Average rate of return method.
b. Payback period method. d. Net present value method.

19. Lenders, Inc. is considering an investment that has a positive net present value based on its 16% hurdle rate. The internal rate of return
would be
a. More than 16%. c. 16%.
b. Less than 16%. d. Zero.

20. Kipling Company invested in an eight-year project. It is expected that the amount of cash flows from the project, net of income taxes, will be
P20,000. Information on present value factors is as follows:
Present value of P1 at 12% for eight periods 0.404
Present value of an ordinary annuity of P1 at 125 for eight months 4.968

Assuming that Kipling based its investment on an internal rate of return of 12%, how much did the project cost?
a. P100,000 b. P 99,360 c. P80,800 d. P64,640

21. Tracy Corporation is planning to invest P80,000 in a three- year project. Tracy’s expected rate of return is 10%. The present value of P1 at
10% for one year is .909, for two years is .826, and for three years is .751. The cash flow, net of income taxes, will be P30,000 for the first
year (present value of P27,270) an P36,000 for the second year (present value of P29,736. Assuming the rate of return is exactly 10%,
what will the cash flow, net of income taxes, be for the third year?
a. P17,268 c. P22,294
b. P22,000 d. P30,618

22. Which of the following characteristics represent an advantage of the internal rate of return technique over the accounting rate of return
technique in evaluating a project?
I. Recognition of the project’s salvage value.
II. Emphasis on cash flows.
III. Recognition of the time value of money.
a. I only.
b. I and II.
c. II and III.
d. I, II and III.

23. A weakness of the internal rate of return (IRR) approach for determining the acceptability of investment is that it:
a. Does not consider the time value of money.
b. Is no longer a straightforward decision criterion.
c. Implicitly assumes that the firm is able to reinvest project cash flows at the firm’s cost of capital.
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d. Implicitly assumes that the firm is able to reinvest project cash flows at the project’s internal rate of return.
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 OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM
Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

24. Universal Corporation is reviewing a capital budgeting decision regarding the acquisition of a capital equipment. Below are the relevant
information:
Investment P300,000
Excess PV of net cash inflows 200,000
Cash-flow tax shield from depreciation 100,000
The company is used to have as benchmark for similar projects an excess present value index of 0.50, that is, the project’s index should be
no less than 0.50. Should this project be pursued?
a. No, since the excess present value index is 0.33.
b. Yes, since the excess present value index is 0.67.
c. No, since the excess present value index is less than 0.50.
d. Yes, since the excess present value index is 1.50.

25. The technique that reflects the time value of money and is calculated by dividing the present value of the future net after-tax cash inflows
that have been discounted at the desired cost of capital by the initial cash outlay for an investment is the
a. Net present value method.
b. Capital rationing method.
c. Accounting rate of return method.
d. Profitability index method.

26. .The profitability index (present value index)

a. Represents the ratio of the discounted net cash outflows to cash inflows.
b. Is the relationship between the net discounted cash inflows minus the discounted cash outflows, divided by
the discounted cash outflows.
c. Is calculated by dividing the discounted profits by the cash outflows.
d. Is the ratio of the discounted net cash inflows to discounted by the cash outflows.

27. Friendly Corporation’s Project Sky has a net investment of P1.2 million. The present value of all future net cash inflows is P2.4 million. The
company’s tax rate is 40%. The profitability index is
a. 0.50
b. 1.20
c. 0.83
d. 2.00

28. The profitability index approach to investment analysis

a. Fails to consider the timing of project cash flows.
b. Considers only the project’s contribution to net income and does not consider cash flows effects.
c. Always yields the same accept/ reject decisions for independent projects as the net present value method.
d. Always yields the same accept/reject decisions for mutually exclusive projects as the net present value method.

29. When determining net present value in an inflationary environment, adjustments should be made to
a. Increase the discount rate only.
b. Increase the estimated cash inflows and increase the discount rate.
c. Decrease the estimated cash inflows and increase the discount rate.
d. Increase the estimated cash inflows and decrease the discount rate.

30. A company’s marginal cost of new capital (MCC) is 10% up to P600,000. MCC Increases .5% for the next P400,000 and another .5%
thereafter. Several proposed capital projects are under consideration, with projected cost and internal rates of return (IRR) as follows:
Project Cost IRR
A P100,000 10.5%
B 300.000 14.0
C 450.000 10.8
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D 350,000 13.5
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E 400,000 12.0
 OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM
Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

What should the company’s capital budget be?

a. P 0
b. P1,050,000
c. P1,500,000
d. P1,600,000

31. Mr. Al Berbano is contemplating to buy a machine to increase the capacity of his manufacturing operations. He consults you for advise on
the alternatives of leasing or buying the equipment. If purchased, the straight line depreciation expense will be P18,700 annually over its life
of 5 years. The annual lease payment will amount to P29,000 payable at the end of each of the 5 years. Cost of money is 18%. Tax rate is
35%. There is no salvage value. Present value of P1 received annually for 5 years at 18% is 3.127. Present value of P1 due in 5 years at
18% is .437. What will you recommend and why?
a. Lease the machine because leasing saves P2,817 per year.
b. Lease the machine because leasing saves P4,506 per year.
c. Buy the machine because depreciation saves P16,545 each year.
d. Lease the machine because outlay is less by P58,944.

32. Which of the following statements is correct?

a. One key shortcoming of discounted cash flow method is that they ignore the recovery of original investment.
b. Although a cash outlay for non-current assets such as a machine would be considered, in a capital budgeting analysis, a cash outlay
for working capital item such as inventory would not be considered.
c. To be acceptable, a project’s time adjusted rate of return cannot be less than the company’s cost of capital
d. If the net present value of an investment is zero, then the project should be rejected since it is not providing any return on the
investment.

Logg Company is planning to buy a coin-operated machine costing P40,000. For tax purposes, this machine will be depreciated over a
five-year period using the straight-line method and no salvage value. Assume that the investment tax credit is not applicable to this
purchase. Logg estimates that this machine will yield an annual cash inflow, net of depreciation and income taxes, of P12,000. At the
following discount rates, the net present values of the investment is this machine are:
Discount Net present
rate value
12% + P3,258
14% + 1,197
16% - 708
18% - 2,474
Logg’s desired rate of return on its investment is 12%.

33. Logg’s accounting rate of return on its initial investment in this machine is expected to be
a. 30% b. 15% c. 12% d. 10%

34. Logg’s expected internal rate of return on its investment in this machine is
a. 3.3% c. 12.0%
b. 10.0% d. 15.3%

35. The return paid for the use of borrowed capital is referred to as
a. Cash dividends. c. Interest.
b. Stock dividends. d. Principal payment.

36. Which of the following techniques is used to value stock options?

a. Black-Scholes method.
b. Zero-coupon method.
c. Weighted-average method.
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d. Expected earnings method.

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 OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM
Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

37. A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor. However, it is
somewhat concerned that the market price of this stock could decrease over the short run. The company could hedge against the possible
decline in the stock’s market price by
a. Purchasing a call option on that stock. c. Selling a put option on that stock.
b. Purchasing a put option on that stock. d. Obtaining a warrant option on that stock.

38. The risk of loss because of fluctuations in the relative value of foreign currencies is called
a. Expropriation risk. c. Multinational beta.
b. Sovereign risk. d. Exchange rate risk.

39. All of the following capital budgeting analysis techniques use cash flows as the primary basis for the calculation except for the
a. Net present value. c. Discounted payback period.
b. Payback period. d. Accounting rate of return.

40. Lin Co. is buying machinery it expects will increase average annual operating income by P40,000. The initial increase in the required
investment is P60,000, and the average increase in required investment is P30,000. To compute the accrual accounting rate of return, what
amount should be used as the numerator in the ratio?
a. P20,000 c. P40,000
b. P30,000 d. P60,000

41. For the next two years, a lease is estimated to have an operating net cash inflow of P7,500 per annum, before adjusting for P5,000 per
annum tax basis lease amortization, and a 40% tax rate. The present value of an ordinary annuity of P1 per year at 10% for two years is
1.74. What is the lease’s after-tax present value using a 10% discount factor?
a. P 2,610 b. P 4,350 c. P 9,570 d. P11,310

42. The discount rate (hurdle rate of return) must be determined in advance for the
a. Payback period method. c. Net present value method.
b. Time-adjusted rate of return method. d. Internal rate of return method.

43. The internal rate of return is the

a. Rate of interest that equates the present value of cash outflows and the present value of cash inflows.
b. Minimum acceptable rate of return for a proposed investment.
c. Risk-adjusted rate of return.
d. Required rate of return.

44. Bennet Inc. uses the net present value method to evaluate capital projects. Bennet? ’s required rate of return is 10%. Bennet is considering
two mutually exclusive projects for its
manufacturing business. Both projects require an initial outlay of P120,000 and are expected to have a useful life of four years. The
projected after-tax cash flows associated with these projects are as follows:
Year Project X Project Y
1 P40,000 P10,000
2 40,000 20,000
3 40,000 60,000
4 40,000 80,000
Total P160,000 P170,000
Assuming adequate funds are available, which of the following project options would you recommend that Bennet? ’s management
undertake?
a. Project X only. c. Projects X and Y.
b. Project Y only. d. Neither project.

45. The balanced scorecard and value-based management are techniques that are being used by a number of corporations. In comparison to
the balanced scorecard, value-based management focuses on
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a. Nonfinancial measures. c. Both financial and nonfinancial measures.

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b. Financial measures. d. Quality measures.

 OUR LADY OF FATIMA UNIVERSITY (OLFU) SYSTEM
Cabanatuan Laguna  Antipolo  Valenzuela  Pampanga  Fairview

46. Management has identified a relationship between customer satisfaction and return on investment. This relationship could be depicted in a
a. Strategy map.
b. Value chain.
c. Customer perspectives chart.
d. Strategic initiatives list.

47. In the balanced scorecard framework, a survey of employee satisfaction is a potential measure in which of the four perspectives?
a. Financial.
b. Customer.
c. Internal business processes.
d. Learning and growth.

48. A target in the balanced scorecard framework is

a. A statement of what the strategy must achieve and what is critical to its success.
b. A key action program required to achieve strategic objectives.
c. A diagram of the cause-and-effect relationships between strategic objectives.
d. The level of performance or rate of improvement needed in the performance measure.

The following is selected data for the Consumer Products division of Arron Corporations for 200X:
Sales P50,000,000
Average invested capital (assets) 20,000,000
Net income 2,000,000
Cost of capital 8%

49. What is the asset turnover ratio for the division?

a. .25
b. 10
c. 2.5
d. 8

The following is available for Cara Corp. for 2009:

Sales P2,000,000
Average invested capital 500,000
Net income 300,000
Required rate of return 18%

50. What is the residual income for Cara Corp.?

a. P0
b. P200,000
c. P210,000
d. P246,000
=end of quizzer=
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