MAS 3 – LAST QUIZ

PART 1: MCQ
1. Compared to other firms in the industry, a company that maintains a conservative working capital policy will tend to
have:
A. Greater percentage of short-term financing
B. Greater risk of needing to sell current assets to repay debt
C. Higher ratio of current assets to fixed assets
D. Higher total asset turnover

2. If a firm had been extending trade credit on a 2/10, net/30 basis, what change would be expected on the balance sheet of
its customer if the firm went to a net cash 30 policy?
A. Increased payables and increased bank loan.
B. Increased receivables.
C. Decreased receivables.
D. Decrease in cash.

3. Merkle, Inc. has a temporary need for funds. Management is trying to decide between not taking discounts from one of
their three biggest suppliers, or a 14.75% per annum renewable Cdiscount loan from its bank for 3 months. The suppliers'
terms are as follows:
Fort Co. 1/10, net 30
Riley Manufacturing Co. 2/15, net 60
Shad, Inc. 3/15, net 90
Using a 360-day year, the cheapest source of short-term financing in this situation is
A. The bank.
B. Riley Manufacturing Co.
C. Fort Co.
D. Shad, Inc.

4. A company obtaining short-term financing with trade credit will pay a higher percentage financing cost, everything else
being equal, when?
A. The discount percentage is lower.
B. The items purchased have a higher price.
C. The items purchased have a lower price.
D. The supplier offers a longer discount period.

5. The two major sources of short-term financing are

A. a line of credit and accounts payable.
B. accounts payable and accruals.
C. a line of credit and accruals.
D. accounts receivable and notes payable.

6. Statement I: Secured Loans carry lower interest rates, and the quantum of the loan amount is normally high in these cases.
The majority of the lending is normally secured.
Statement II: Unsecured Loans carry higher interest rates, and the quantum of the loan amount is normally low in this case
due to the inherent high-risk structure of such loans. Unsecured Loans form a small proportion of the lending portfolio in
the majority of the full- scale commercial banks
A. True; True
B. True; False
C. False; False
D. False; True
 MAS 3 – LAST QUIZ

7. are the major source of unsecured short-term financing for business firms.
A. Accounts receivable
B. Accruals
C. Notes payable
D. Accounts payable

8. A line of credit guaranteed to a borrower by a commercial bank regardless of the scarcity of money.
A. Credit Scoreline
B. Operating Change Restrictions
C. Compensating Balance
D. Revolving Credit Agreement

9. 1/15 net 30 date of invoice translates as

A. A 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due in 30 days after
the middle of the month.
B. A 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after
the invoice date.
C. A 1 percent cash discount may be taken if paid in 15 days; if no cash discount is taken, the balance is due 30 days after
the end of the month.
D. A 1 percent discount may be taken on 15 percent of the purchase if the account is paid within 30 days after the end of
the month.

10. If the firm decides to take the cash discount that is offered on goods purchased on credit, the firm should:
A. pay as soon as possible.
B. pay on the last day of the credit period.
C. take the discount no matter when the firm actually pays.
D. pay on the last day of the discount period.

11. Catherine & Co. has extra cash at the end of the year and is analyzing the best way to invest the funds. The company
should invest in a project only if?
A. The expected return on the project exceeds the return on investments of comparable risk.
B. The return on investments of comparable risk exceeds the expected return on the project.
C. The expected return on the project is equal to the return on investments of comparable risk.
D. The return on investments of comparable risk equals the expected return on the project.

12. Long-term government bonds have:

A. Interest rate risk
B. Default risk
C. Market risk
D. None of the above

13. The risk that securities cannot be sold at a reasonable price on short notice is called
A. Default risk.
B. Interest-rate risk.
C. Purchasing-power risk.
D. Liquidity risk.
 MAS 3 – LAST QUIZ

14. S1: The cost of new common stock is normally greater than any other long-term financing cost.
S2: The weighted average cost that reflects the interrelationship of financing decisions can be obtained by weighing the
cost of each source of financing by its target proportion in the firm's capital structure.
A. True; False
B. True; True
C. False; True
D. False; False

15. In general, it is more expensive for a company to finance with equity than with debt because
A. The interest on debt is a legal obligation.
B. Equity capital is in greater demand than debt capital.
C. Investors are exposed to greater risk with equity capital.
D. Long-term bonds have a maturity date and must, therefore, be repaid in the future.

16. Debt is generally the least expensive source of capital. This is primarily due to
A. fixed interest payments.
B. its position in the priority of claims on assets and earnings in the event of liquidation.
C. the tax deductibility of interest payments.
D. the secured nature of a debt obligation.

17. Statement I: A firm may face increases in the weighted average cost of capital either when retained earnings have been
exhausted or due to increases in debt, preferred stock, and common equity costs as additional new funds are required.
Statement II: Since retained earnings is a more expensive source of financing than debt and preferred stock, the weighted T
average cost of capital will fall once retained earnings have been exhausted.
A. True; False
B. True; True
C. False; True
D. False; False

18. A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can
A. increase the proportion of long-term debt to decrease the cost of capital.
B. increase short-term debt to decrease the cost of capital.
C. decrease the proportion of common stock equity to decrease financial risk.
D. increase the proportion of common stock equity to decrease financial risk.

19. The from the sale of a security are the funds actually received from the sale after. issuing and selling the security, which
have been subtracted from the total proceeds.
A. gross proceeds; the after-tax costs
B. gross proceeds; the flotation costs
C. net proceeds; the flotation costs
D. net proceeds; the after-tax costs

20. Statement I: In using the cost of capital, it is important that it reflects the historical cost of raising funds over the long
run. Statement II: As the cumulative amount of money invested in a firm's capital projects increases, its returns on the
projects will increase.
A. True; False
B. True; True
C. False; True
D. False; False
 MAS 3 – LAST QUIZ

21. Which of the following is not a major assumption underlying CVP analysis?
A. All costs incurred by a firm can be separated into their fixed and variable components
B. The product selling price per unit is constant at all volume levels
C. Operating efficiency and employee productivity are constant at all volume levels
D. For multi-product situations, the sales mix can vary at all volume levels

22. According to CVP analysis, a company could never incur a loss that exceeded its total
A. Variable costs,
B. Fixed costs
C. Costs
D. Contribution margin

23. A company that desires to lower its break-even point should strive to
A. Decrease selling prices
B. Reduce variable costs
C. Increase fixed costs
D. Sell more units

24. The contribution margin ratio always increases when the

A. Variable costs as a percentage of net sales increase
B. Variable costs as a percentage of net sales decrease
C. Break-even point increases
D. Break-even point decreases

25. The margin of safety would be negative if a company

A. Was presently operating at a volume that is below the break-even point
B. Present fixed costs were less than its contribution margin
C. Variable costs exceeded its fixed costs
D. Degree of operating leverage is greater than 100

26. The margin of safety is a key concept of CVP analysis. The margin of safety is the
A. Contribution margin rate
B. Difference between budgeted contribution margin and actual contribution margin
C. Difference between budgeted contribution margin and break-even contribution margin
D. Difference between budgeted sales and break-even sales

27. Which of the following is the correct calculation for the degree of operating leverage?
A. Net operating income divided by total expenses
B. Net operating income divided by total contribution margin
C. Total contribution margin divided by net operating income
D. Variable expense divided by total contribution margin
 MAS 3 – LAST QUIZ

For items 28-30, refer to the image below:

28. What is the shaded part? - Choices:

A. Sales
B. Variable Costs
C. Profit
D. Total Costs
E. Contribution Margin

29. What do you call the line inside the box? - Choices:
A. Sales line
B. Variable Costs line
C. Profit line
D. Total Costs line
E. Contribution Margin line

30. What is the shaded part? - Choices:

A. Break-even point
B. Variable Costs
C. Loss
D. Total Costs
E. Fixed Costs
 MAS 3 – LAST QUIZ

PART 2: Supply the Answer

31. Suppose the credit terms offered to your firm by its suppliers are 2/10 net 30 days. Your firm is not offering discounts
but is paying after 25 days instead of waiting until day 30.
What is the annual cost of giving up the cash discount? (round off your final answer to two decimal places)

32. A company has accounts payable of $5 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 less than by what amount?

33. Suppose you borrow P2,000,000 from a bank for one year at a stated annual interest rate of 14%, with interest prepaid
(a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20% of the initial
loan value. What effective annual interest rate are you being charged? (round off your final answer to two decimal places)

34. Remar Industries sends an invoice of $1,500,000 to a customer that is due in six months. They decide to factor this
invoice through Mr. James, who offers an advance rate of 85% and charges a 12% fee on the amount advanced. Compute
the Founding Amount.

35. What is the effective annual interest rate on a 9% annual percentage rate automobile loan that has monthly payments?

36. Your firm buys on credit terms of 2/10, net 45, and it always pays on Day 45 if you calculate that this policy effectively
costs your firm $157,500 each year, what is the firm's average accounts payable balance?

37. A company obtained a short-term bank loan of P250,000 at an annual interest of 6%. As a condition of the loan, the
company is required to maintain a compensating balance of P50,000 in its checking account. The company's checking
account earns interest at an annual rate of 2%. Ordinarily, the company maintains a balance of P25,000 in its checking
account for transaction purposes. What is the effective interest rate of the loan? (round off your final answer to two decimal
places)

38. CBA Corp. obtained a short-term bank loan for P1 million at an annual interest of 12%. As a condition of the loan, the
company is required to maintain a compensating balance of P200,000 in its savings account which earns interest an annual
rate of 6%. The company would otherwise maintain only P100,000 on the savings account for transactional purposes. The
effective cost of the loan is

39. NOP Co. has agreed to the following loan proposal by a bank: Stated interest rate of 10% on a one-year discounted note.
15% of the loan as compensating balance with zero-interest current account to be maintained with the bank. The loan will
have net proceeds of P1,500,000. How much is the principal amount of the loan?

40. Quennie Company recently borrowed P500,000 from a bank. The bank loan is for a period of 120 days at an annual rate
of 6%. (assume a 360-day year).
How much is the total interest expense for this loan?

41. Calculate the DFL for a firm with EBIT of 6,000,000, fixed cost of 3,000,000, interest expense of 1,000,000, preferred
stock dividends of 800,000 and a 40% tax rate. (round off your final answer to two decimal places)

42. The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt in the
weighted average cost of capital if the firm's tax rate is 34%? (round off your final answer to two decimal places)

43. A firm has determined its cost of each source of capital and optimal capital structure, which is composed of the following
sources and target market value proportions:
SOURCE OF CAPITAL TARGET MARKET PROPORTION AFTER-TAX COST
LONG TERM DEBT 40% 6%
PREFERRED STOCK 10% 12%
COMMON STOCK EQUITY 50% 15%

The effective tax rate for the current period is 25%.

 MAS 3 – LAST QUIZ
The Weighted Average Cost of Capital (WACC) is?
44. A company currently sells 400,000 pairs of shoes each year. Each pair of shoe costs P0.84 to produce and sells for P1.00.
Fixed costs are P28,000 per year. The company has annual interest expense of P6,000, preferred stock dividends of P2,000
per year, and a 40% tax rate.
The Degree of Operating Leverage (DOL) for the Company is?

45. Dawn Winery, which has no current debt, has a beta of 0.95 for its common stock. Management is considering a change
in capital structure to 30% debt and 70% equity. This change would increase the beta on the stock to 1.05, and the after-tax
cost of debt would be 7.5%. The expected return on equity is 16%, and the risk-free rate is 6%. Compute the change in
Weighted Average Cost of Capital:

46. XYZ Corporation has a beta of 1.38 and a cost of equity of 14.94%. The risk-free rate of return is 4.25%. What discount
rate should the firm assign to a new project that has a beta of 1.25? (round off your final answer to two decimal places)

47. The following data are available: rRF = 5.00%; RPM = 6.00%; and b = 1.05. What is the firm's cost of retained earnings
based on the CAPM?
48. Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with
the following data: D1 = $1.45; PO = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of
common equity assuming no flotation costs? (round off your final answer to two decimal places)

49. A company has determined that its optimal capital structure consists of 40% debt and 60% equity. Assume the firm will
not have enough retained earnings to fund the equity portion of its capital budget. Also, assume the firm accounts for
flotation costs by adjusting the cost of capital.
Cost of debt 8%
Net income 40,000
Dividend payout ratio 50%
Tax rate 40%
Stock price 25
Growth 0%
Shares outstanding 10,000
Flotation cost on additional equity 15%

Given the following information, the firm's weighted average cost of capital is closest to what amount?

50. Klein Corp. can issue P1,000 par value bond that pays P90 per year in interest at a price of P980. The bond will have a
10- year life. The firm is in a 35% tax bracket.
What is the before-tax cost of debt?

51. Nina Corporation is a single product firm with the following selling price and cost structure for next year:
Selling price per unit. P1.80
Contribution margin ratio 40%
Total fixed expenses for the year… P218,700
How many units will it have to sell next year in order to break even?

52. Delila company makes a single product that it sells for P16 per unit. Fixed costs are P76,800 per month and the product
has a contribution margin ratio of 40%. If the company's actual sales are P224,000, its margin of safety is:
 MAS 3 – LAST QUIZ
53. The following data are available for Erwin Company for a recent month:

PRODUCT A PRODUCT B PRODUCT C TOTAL

SALES 150K 130K 90K 370K
V.EXP 91K 104K 27K 222K
CM 59K 26K 63K 148K
F.EXP 55K
Net O.Income 93K

The break-even sales for the month for the company are:

For items 54-57: Below is an income statement for Philip Company:

SALES 400,000
VARIABLE COST 125,000
CONTRIBUTION MARGIN 275,000
FIXED COST 200,000
PROFIT BEFORE TAXES 75,000

54. Based on the cost and revenue structure on the income statement, what was the break-even point in pesos? (round to
nearest peso)

55. What was the margin of safety? (round to nearest peso)

56. Assuming that the fixed costs are expected to remain at P200,000 for the coming year and the sales price per unit and
variable costs per unit are also expected to remain constant, how much profit before taxes will be produced if the company
anticipates sales for the coming year rising to 130 percent of the current year's level?

57. What is the degree of operating leverage? (round off your final answer to two decimal places)

For items 58-59:

Mary Joy Company manufactures and sells three products: A, B, and C. Annual fixed costs are P3,315,000,and data about
the three products follow.
A B C
Sales mix in units 3 5 2
SP 250 350 500
VC 100 150 250

58. Determine the weighted average contribution margin.

59. What is the breakeven point in units for product C?

60. The following information relates to financial projections of Folk Company:

Projected sales 60,000 units

Projected variable costs 2.00 per unit
Projected fixed costs 50,000 per year
Projected unit sales price 7.00

How many units would Folk Company need to sell to earn a profit before taxes of $10,000?