De La Salle Araneta University
QUIZ#2 – MANAGEMENT ADVISORY SERVICES
1. Ignoring cost and other effects on the firm, which of the following measures
would tend to reduce the cash conversion cycle?
A) Maintain the level of receivables as sales decrease.
B) Buy more raw materials to take advantage of price breaks.
C) Take discounts when offered.
D) Forgo discounts that are currently being taken.
2. All of the following are valid reasons for a business to hold cash and
marketable securities except to
A) Satisfy compensating balance requirements.
B) Maintain adequate cash needed for transactions.
C) Meet future needs.
D) Earn maximum returns on investment assets.
3. "Float" is the term given to
A) differences between the cash balance and the balance of cash plus
marketable securities.
B) differences between the cash balance in the ledger and the funds
available in the firm's checking account.
C) the period between the date an invoice is received and the date on which
it must be paid.
D) the practice of deliberately delaying payments beyond the due date.
4. If a company is profitable and is effectively using leverage, which one of the
following ratios is likely to be the largest?
A) Return on total assets
B) Return on operating assets
C) Return on common equity
D) Return on total equity
5. Accruals and accounts payable are _________ sources of short-term financing
A) negotiated, secured
B) negotiated, unsecured
C) spontaneous, secured
D) spontaneous, unsecured
6. Which of the following is the correct method of determining discretionary
financing needed (DFN)?
A) Projected change in assets, divided by projected change in liabilities,
plus projected change in owner’s equity
B) Projected change in assets, times projected change in owner’s equity,
minus projected change in liabilities
C) Projected change in owner’s equity, minus projected change in
liabilities, plus projected change in assets
D) Projected change in assets, minus projected change in liabilities, minus
projected change in owner’s equity
7. The major objectives of any budget system are to
A) Define responsibility centers, provide a framework for performance
evaluation, and promote communication and coordination among organization
segments.
B) Define responsibility centers, facilitate the fixing of blame for missed
budget predictions, and ensure goal congruence between superiors and
subordinates.
C) Foster the planning of operations, provide a framework for performance
evaluation, and promote communication and coordination among organization
segments.
D) Foster the planning of operations, facilitate the fixing of blame for
missed budget predictions, and ensure goal congruence between superiors
and subordinates.
8. Which one of the following would increase the working capital of a company?
A) Cash payment of payroll taxes payable.
B) Refinancing a short-term note payable with a two year note payable.
C) Cash collection of accounts receivable.
D) Payment of a 20-year mortgage payable with cash.
9. An internal management tool that aids in the control of the financial
management function is a cash budget. The principal aim of a cash budget is
to:
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A) Ensure that sufficient funds are available at all times to satisfy
maturing liabilities.
B) Measure adherence to company budgetary procedures.
C) Prevent the posting of cash receipts and disbursements to incorrect
accounts.
D) Assure that the accounting for cash receipts and disbursements is
consistent from year to year.
10. All of the following are the main component of the DuPont system, except for:
A) Total Asset Turnover
B) Net Profit Margin
C) Sustainable Growth Rate
D) Leverage
11. Desktop Co. presently has a current ratio of 1.2 to 1 and an acid-test ratio
of 0.8 to 1. Prepaying next year's office rent of P50,000 will
A) have no effect on either the company's current ratio or its acid-test
ratio.
B) have no effect on the company's current ratio but will decrease its acid-
test ratio.
C) decrease the company's current ratio and decrease its acid-test ratio.
D) increase the company's current ratio and increase its acid-test ratio.
12. A high turnover of accounts receivable, which implies a very short days-sales
outstanding, could indicate that the firm
A) Has a relaxed (lenient) credit policy.
B) Offers small discounts.
C) Uses a lockbox system, synchronizes cash flows, and has short credit
terms.
D) Has an inefficient credit and collection department.
13. Compared to other firms in the industry, a company that maintains a
conservative working capital policy will tend to have a
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.
14. The theory underlying the cost of capital is primarily concerned with the cost
of
A) Long-term funds and old funds.
B) Short-term funds and new funds.
C) Long-term funds and new funds.
D) Any combination of old or new, short-term or long-term funds.
15. Tugas Corporation 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. The company is
operating at full capacity and estimates that if sales increase by 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 DFN formula, how much
discretionary funds must the company raise in order to support the 20 percent
increase in sales
A) P2.0 million C) P8.4 million
B) P6.0 million D) P9.6 million
16. BSA Co. has the following balance sheet as of December 31, 2018.
Assets: Liabilities and Equity:
Current assets P 600,000 Accounts payable P 100,000
Fixed assets 400,000 Accruals 100,000
Notes payable 100,000
Total current liabilities P 300,000
Long-term debt 300,000
Total equity 400,000
Total assets P1,000,000 Total liabilities and equityP1,000,000
In 2018, the company reported sales of P5 million, net income of
P100,000, and dividends of P60,000. The company anticipates its sales
will increase 20 percent in 2019 and its dividend payout will remain at
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60 percent. Assume the company is operating at full capacity.
The company uses the DFN formula and all additional funds needed (DFN) will
come from issuing new long-term debt. Given its forecast, how much long-term
debt will the company have to issue in 2019?
A) P60,000 C) P92,000
B) P88,000 D) P112,000
17. Below are relevant information about Jonathan Binaluyo Corporation, a
manufacturer and distributor of office supplies:
Actual dividends for 2018 is P20 million
2019 projected dividends is P21 million
Total assets for 2018 is P300 million
Total revenues for 2018 is P45 million
Return on equity for 2018 is 25%
Assuming that the company is expected to grow at sustainable growth rate, find
the company’s 2018 equity multiplier. (NOTE: For IGR & SGR computations, use
the following formula: IGR = ROAxRR; SGR = ROExRR)
A) 1.5x C) 2.5x
B) 2.0x D) 3.0x
18. An analyst is reconstructing his records for Gamma Corporation. Equity
multiplier, 4.0; total assets turnover, 2.50; cash dividends per share, P10;
payout ratio, 50%; market capitalization, P100 million; share price, P200; ret
on assets, 5%. Applying the DuPont system, the company’s return on equity is
closest to:
A) 20%. C) 8%.
B) 10%. D) 2.5%.
19. Andres Corporation is expected to sell 150,000 board games. During the month of
November, the company’s master budget contained the following data related to
the sale of its board games:
Revenues P2,400,000
Direct Materials 675,000
Direct Labor 300,000
Variable Overhead 450,000
Contribution Margin 975,000
Fixed Overhead 250,000
Fixed Selling and 500,000
Administration
Operating Income P225,000
Actual sales during November were 180,000 board games. Using a flexible budget,
the company expects the operating income for the month of November to be:
A) P225,000 C) P420,000
B) P270,000 D) P510,000
20. A bank lends a firm P1,000,000 for one year at 12 percent on a discounted basis
and requires compensating balances of 10 percent of the face value of the loan.
The effective annual interest rate associated with this loan is
A) 12 percent. C) 13.6 percent.
B) 13.3 percent. D) 15.4 percent.
21. Michelle Ang Company will generate P12 million in credit sales next year.
Collection of these credit sales will occur evenly over this period.
Currently, the firm's processing system ties up four days' worth of remittance
checks. A recent report from a financial consultant suggested procedures that
will enable the company to reduce processing float by two full days. Assume a
270-working year. If the firm invests the released funds to earn 6 percent, how
much will the firm earn?
A) P44,444. C) P45,333.
B) P5,333. D) P12,000,000.
22. Casie Company turns out 200 calculators a day at a cost of P250 per calculator
for materials and variable conversion cost. It takes the firm 18 days to
convert raw materials into calculator. Casie’s usual credit terms extended to
its customers is 30 days, and the firm generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working capital must Casie
Company finance?
A) P900,000 C) P1,400,000
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B) P1,800,000 D) P2,400,000
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23. Acfina Co. expects steady cash outlays for next year of P50,000,000. The firm
has opportunity cost of 10%. It will incur a cost of P500 each time it
withdraws from its pool of marketable securities. Using the Baumol model, the
total cost (transaction cost and opportunity cost) of implementing the economic
conversion quantity (ECQ) is
A) P70,710 C) P7,905.70
B) P22,360 D) P31,663
24. Cool and Clean Company purchases 50,000 gallons of distilled water each year.
Ordering costs are P100 per order, and the carrying cost, as a percentage of
inventory value, is 80 percent. The purchase price to CCC is P0.50 per gallon.
Management currently orders the EOQ each time an order is placed. No safety
stock is carried. The supplier is now offering a quantity discount of P0.03
per gallon if CCC orders 10,000 gallons at a time. Should CCC take the
discount?
A) No, the cost exceeds the benefit by P500.
B) Yes, the benefit exceeds the cost by P1,120.
C) No, the cost exceeds the benefit by P1,000.
D) Yes, the benefit exceeds the cost by P500.
25. Wasting Resource Co. has annual credit sales of P4 million. Its average
collection period is 40 days and bad debts are 5% of sales. The credit and
collection manager is considering instituting a stricter collection policy,
whereby bad debts would be reduced to 2% of total sales, and the average
collection period would fall to 30 days. However, sales would also fall by an
estimated P500,000 annually. Variable costs are 60% of sales and the cost of
carrying receivables is 12%. Assuming a tax rate of 35% and 360 days a year,
the incremental change in the profitability of the company if stricter policy
would be implemented would be
A) Zero as the positive and negative effects offset each other.
B) A reduction in net income by P70,000.
C) A reduction in net income by P38,350.
D) A reduction in net income by P35,400.
26. The Sales Director of Can Can Co. suggests that certain credit terms be
modified. He estimates the following effects:
Sales will increase by at least 20%.
Accounts receivable turnover will be reduced to 8 times from the present
turnover of 10 times.
Bad debts, now at 1% of sales will increase to 1.5%. Sales before the
proposed changes is at P900,000. Variable cost ratio is 55% and desired rate
of return is 20%. Fixed expenses amount to P150,000.
Should the company allow the revision of its credit terms?
A) Yes, because income will increase by P68,850.
B) Yes, because losses will be reduced by P78,800.
C) No, because income will be reduced by P13,000.
D) No, because losses will increase by P28,000.
27. Bully Corporation purchases raw materials on July 1. It converts the raw
materials into inventory by September 30. However, Bully pays for the materials
on July 20. On October 31, it sells the finished goods inventory. Then, the
firm collects cash from the sale 1 month later on November 30. If this sequence
accurately represents the average working capital cycle, what is the firm's
cash conversion cycle in days?
A) 92 days. C) 123 days.
B) 133 days. D) 153 days.
28. Prest Corp. plans to tighten its credit policy. Below is the summary of
changes:
Old New
Average number of days collection 75 50
Ratio of credit sales to total sales 70% 60%
Projected sales for the coming year is P100 million and it is estimated that
the new policy will result in a 5% loss if the new policy is implemented.
Assuming a 360-day year, what is the effect of the new policy on accounts
receivable?
A) Decrease of P13 million. C) Decrease of P5 million
B) No change. D) Decrease of P 6.67 million.
29. ABC Company finances all of its seasonal inventory needs from the local bank at
an effective interest cost of 9%. The firm’s supplier promises to extend trade
credit on terms that will match the 9% bank credit rate. What terms would the
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supplier have to offer (approximately)?
A) 2/10, n/60. C) 2/10, n/90.
B) 2/10, n/100. D) 3/10, n/60.
30. 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 discount 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. C) Riley Manufacturing Co.
B) Fort Co. D) Shad, Inc.
31. The expected returns, standard deviations, and beta coefficients of four stocks
are given below:
Expected Return Standard Deviation Beta Coefficient
M 18% .65 .9
N 20% .9 1.2
O 20% .4 1.5
Q 21% 1.2 1.7
Given an expected return on the market portfolio of 18% and a risk-free rate of
12%, which stock(s) is(are) overvalued or undervalued?
A) M and N are undervalued; O and Q are overvalued.
B) M is undervalued; N, O, and Q are overvalued.
C) M, N, O, and Q are overvalued.
D) M, N, O, and Q are undervalued.
32. Heavy Metal Corp. is a steel manufacturer that finances its operations with 40
percent debt, 10 percent preferred stock, and 50 percent equity. The interest
rate on the company’s debt is 11 percent. The preferred stock pays an annual
dividend of P2 and sells for P20 a share. The company’s common stock trades at
P30 a share, and its current dividend (D0) of P2 a share is expected to grow at
a constant rate of 8 percent per year. The flotation cost of external equity is
15 percent of the peso amount issued, while the flotation cost on preferred
stock is 10 percent. The company estimates that its WACC is 12.30 percent.
Assume that the firm will not have enough retained earnings to fund the equity
portion of its capital budget. What is the company’s tax rate?
A) 30.33% C) 35.75%
B) 32.87% D) 38.12%
Use the following information for the next three items:
The January 31, 2018 balance sheet of CPA Oil Corp. follows:
Cash P 8,000
Accounts receivable (net of allowance for bad debts of P2,000) 38,000
Inventory 16,000
PPE (net of accumulated depreciation of P60,000) 40,000
Total Assets P102,000
Accounts Payable P 82,500
Common Stock 50,000
Retained Earnings (Deficit) ( 30,500)
Total Equity P102,000
Additional Information:
· Sales are budgeted as follows: February P110,000; March P120,000
· Collections are expected to be 60% in the month of sale, 38% the next month
and 2% uncollectible.
· The gross margin is 25% of sales. Purchases each month are 75% of the next
month's projected sales.
· Purchases are paid in full the following month.
· Other expenses for each month paid in cash are expected to be P16,500.
· Depreciation each month is P5,000
33. How much is the budgeted cash collections for February?
A) P63,800 C) P101,800
B) P66,000 D) P104,000
34. How much is the pro-forma income (loss) before income taxes for February?
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A) P3,700) C) P3,800
B) P1,500) D) P6,000
35. How much is the projected balance in accounts payable on February 28, 2018?
A) P82,500 C) P86,250
B) P90,000 D) P106,500
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