Activity 3

1. Which is not a function of financial manager

a. Financing
b. internal control
c. Capital budgeting
d. Risk Management
2. The profit maximization goal ignores the timing of returns, does not directly consider cash flows,
and ignores risk.
a. TRUE b. False
3. When considering each financial decision alternative or possible action in terms of its impact on the
share price of the firm’s stock, financial managers should accept only those actions that are expected to increase share
price.
a. TRUE b. False
4. A public offering is the sale of a new security issue—typically debt or preferred stock—directly to
an investor or group of investors.
a. TRUE b. False
5. The price-to-earnings (PE) ratio measures the amount common stock investors are willing to pay for each peso of the
firm’s earnings.
a. TRUE b. False
6. Johnson, Inc. has just ended the calendar year making a sale in the amount of P10,000 of merchandise purchased during
the year at a total cost of P7,000. Although the firm paid in full for
the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this
sale for the year are
a. P3,000 and P10,000, respectively.
b. PP,000 and –P7,000, respectively.
c. P7,000 and –P3,000, respectively.
d. P3,000 and P7,000, respectively.
7. Included in the primary activities of the financial manager are
a. financial analysis and planning.
b. making investment decisions.
c. making financing decisions.
d. analyzing and planning cash flows.
e. all of the above.
8. The financial manager may be responsible for any of the following EXCEPT
a. monitoring of quarterly tax payments.
b. analyzing budget and performance reports.
c. determining whether to accept or reject a capital asset acquisition.
d. analyzing the effects of more debt on the firm’s capital structure.
9. Financial analysis and planning involve all of the following EXCEPT
a. transforming data into a form that can be used to monitor the firm’s financial position.
b. evaluating the need for increased or reduced productive capacity.
c. controlling the data processing activities.
d. determining the additional financing needs.
10. The key variables in the owner wealth maximization process are
a. earnings per share and risk.
b. cash flows and risk.
c. earnings per share and share price.
d. profits and risk.
11. As the risk of a stock investment increases
a. return will increase.
b. return will decrease.
c. required rate of return will decrease.
d. required rate of return will increase.
12. A financial manager must choose between three alternative investments. Each asset is expected to provide earnings over a
three-year period as described below. Based on the wealth maximization
goal, the financial manager would
Year Asset 1 Asset 2 Asset 3
 1 P21,000 P 9,000 P 8,000
2 15,000 15,000 21,000
3 9,000 18,000 19,000
P46,000 P41,000 P48,000
a. choose Asset 1.
b. choose Asset 2.
c. choose Asset 3.
d. be indifferent between Asset 1 and Asset 2.

Financial Statement Analysis

13. When managing cash and short-term investments, a corporate treasurer is primarily concerned with
a. Maximizing rate of return
b. Minimizing taxes
c. Investing in treasury bonds since they have no default risk
d. Liquidity and safety
14. In financial statement Analysis, expressing all financial statement items as a percentage of base-year amounts is called
a. Ratio Analysis
b. Vertical analysis
c. Horizontal analysis
d. Cash flow analysis
15. Which of the following would not be considered a liquidity ratio?
a. Quick ratio
b. Current ratio
c. Return on Assets
d. Inventory turnover
16. Which ratio is most helpful in appraising profitability
a. Debt ratio
b. Acid-test ratio
c. Dividend payout
d. Return on assets
17. Which of the following ratios is most relevant to evaluating solvency?
a. Debt-ratio
b. Dividend yield
c. Return on Assets
d. Days’ purchase in accounts payable
18. In ratio analysis, the financial statements being used for comparison should be dated at the same
point in time during the year. If not, the effect of seasonality may produce erroneous conclusions
and decisions.
a. TRUE b. FALSE
19. The primary concern of creditors when assessing the strength of a firm is the firm’s
a. profitability.
b. leverage.
c. short-term liquidity.
d. share price.
20. _________ is where the firm’s ratio values are compared to those of a key competitor or group of
competitors, primarily to identify areas for improvement.
a. Time-series analysis
b. Benchmarking
c. Combined analysis
d. None of the above.
21. A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
a. improve its collection practices, thereby increasing cash and increasing its current and quick
ratios.
b. improve its collection practices and pay accounts payable, thereby decreasing current liabilities
and increasing the current and quick ratios.
c. decrease current liabilities by utilizing more long-term debt, thereby increasing the current and
quick ratios.
d. increase inventory, thereby increasing current assets and the current and quick ratios.
22. If the inventory turnover is divided into 360, it becomes a measure of
 a. sales efficiency.
b. the average age of the inventory.
c. sales turnover.
d. the average collection period.
23. The financial leverage multiplier is an indicator of a corporation utilizing
a. operating leverage.
b. long-term debt.
c. total debt.
d. total assets.
24. As the financial leverage multiplier increases this may result in
a. an increase in the net profit margin and return on investment, due to the decrease in interest
expense as debt decreases.
b. an increase in the net profit margin and return on investment, due to the increase in interest
expense as debt increases.
c. a decrease in the net profit margin and return on investment, due to the increase in interest
expense as debt increases.
d. a decrease in the net profit margin and return on investment, due to the decrease in interest
expense as debt decreases.

Budgeting/Financial Planning

25. In April, a firm had an ending cash balance of P35,000. In May, the firm had total cash receipts of
P40,000 and total cash disbursements of P50,000. The minimum cash balance required by the firm is
P25,000. At the end of May, the firm had
a. an excess cash balance of P25,000.
b. an excess cash balance of P0.
c. required financing of P10,000.
d. required financing of P25,000.
26. In the month of August, a firm had total cash receipts of P10,000, total cash disbursements of
P8,000, depreciation expense of P1,000, a minimum cash balance of P3,000, and a beginning cash
balance of P500. The excess cash balance (required financing) for August is
a. required total financing of P500.
b. excess cash balance of P5,500.
c. excess cash balance of P500.
d. required total financing of P2,500.
27. During 2020, NICO Corporation had EBIT of P100,000, a change in net fixed assets of P400,000, an
increase in net current assets of P100,000, an increase in spontaneous current liabilities of P400,000,
a depreciation expense of P50,000, and a tax rate of 30 percent. Based on this information, NICO’s
free cash flow is
a. –P630,000.
b. –P50,000.
c. P650,000.
28. Calculate a firm’s free cash flow if it has net operating profit after taxes of P100,000, net fixed asset
investment requirement of P40,000, a net current asset requirement of P30,000 and a tax rate of 30 percent.
a. P0.
b. P30,000.
c. –P30,000.
d. none of the above.

Working Capital

29. Working capital management is concerned about the trade-off between

a. Return and financial risk
b. Default risk and conservatism
c. Current ratio and return on equity
d. Profitability and risk of technical short-term insolvency
30. Which of the following characteristics are generally associated with a conservative financial policy?
 a. High current assets relative to sales and low current liabilities relative to total assets
b. High current assets relative to sales and high current liabilities relative to total assets
c. Low current assets relative to sales and high current liabilities relative to total assets
d. Low current assets relative to sales and Low current liabilities relative to total assets
31. A firm has an average age in inventory of 90 days, an average collection period of 40 days, and an average payment period
of 30 days. What is the firm’s Cash Conversion Cycle?
a. 80 days
b. 100 days
c. 130 days
d. 160 days
32. All of the following are means of accelerating collection of accounts receivable, Except
a. Offering cash
b. Shortening credit terms
c. Minimizing negative float
d. Aging of Accounts Receivable
33. Which of the following provides a spontaneous source of financing for a firm?
a. Debentures
b. Accounts payable
c. Mortgage payable
d. Accounts Receivable
34. If current assets go up by P 120,000, current liabilities go down by P 50,000, then net working capital
a. Did not change b. Increased by P 70,000 c. Increased by P 170,000 d. Decreased by P 170,000

35. It is the policy of a company that the current ratio cannot fall below 1.5 to 1.0. Its current liabilities are P 400,000 and the present
current ratio is 2 to 1. How much is the maximum level of new short-term loans it can secure without violating the policy?
a. P 400,000 b. P 300,000 c. P 266,667 d. P 800,000
36. A firm has an average age in inventory of 60 days, an average collection period of 45 days, and an average payment
period of 30 days. What is the number of days in the cash flow cycle?
a. 135 days b. 105 days c. 90 days d. 75 days
37. The company’s cash flow cycle extends up to 50 days. Receivables age is for 20 days. Average age in inventory is
twice as long as days’ receivable. For how long is the company’s payable deferral period?
a. 10 days b. 20 days c. 5 days d. 15 days
38. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from P320,000 to
P410,000, but fixed assets remain constant at P260,000. If the firm follows a maturity matching (or moderate)
working capital financing policy, what is the most likely total of long-term debt plus equity capital?
a. P260,642 b. P274,360
c. P288,800 d. P304,000 e. P320,000
39. Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to
a restricted or maybe to a relaxed policy. The firm’s annual sales are P400,000; its fixed assets are P100,000; its target
capital structure calls for 50% debt and 50% equity; its EBIT is P35,000; the interest rate on its debt is 10%; and its tax
rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be
25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
a. 4.25% b. 4.73% c. 5.25% d. 5.78% e. 6.35%
40. Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Annual sales = P45,000

Annual cost of goods sold = P30,000
Inventory = P4,500
Accounts receivable = P1,800
Accounts payable = P2,500

a. 28 days b. 32 days c. 35 days d. 39 days e. 43 days

For items 41 to 43

Shipping Services has determined several factors relative to its asset and financing mix.
(a) The firm earns 10 percent annually on its current assets.
(b) The firm earns 20 percent annually on its fixed assets.
(c) The firm pays 13 percent annually on current liabilities.
(d) The firm pays 17 percent annually on long-term funds.
(e) The firm’s monthly current, fixed and total asset requirements for the previous year are summarized in the table below:
Table 1
Current Fixed Total
Month Assets Assets Assets
January P45,000 P100,000 P145,000
February 40,000 100,000 140,000
March 50,000 100,000 150,000
April 55,000 100,000 155,000
May 60,000 100,000 160,000
June 75,000 100,000 175,000
July 75,000 100,000 175,000
August 75,000 100,000 175,000
September 60,000 100,000 160,000
October 55,000 100,000 155,000
November 50,000 100,000 150,000
December 50,000 100,000 150,000
41. The firm’s monthly average permanent funds requirement is (See Table 1)
a. P100,000. b. P57,500. c. P140,000. d.P157,500.
42. The firm’s monthly average seasonal funds requirement is (See Table 1)
a. P17,500. b. P57,500. c. P40,000. d. P157,500.

43. The firm’s annual financing costs of the aggressive financing strategy are
a. P21,175. b. P26,075. c. P24,475. d. P22,775.
44. The firm’s annual profits on total assets for the previous year were
a. P20,000. b. P21,500. c. P23,625. d. P25,750.
45. If the firm’s current liabilities in December were P40,000, the net working capital was
a. P140,000. b. P60,000. c. P10,000. d. –P10,000.

46. The Herb Salter Corporation is considering a plant expansion that will increase its sales and net income. The following
data represent management's estimate of the impact the proposal will have on the company:
Current Proposed
Cash P 120,000 P 140,000
Accounts payable 360,000 450,000
Accounts receivable 400,000 550,000
Inventory 360,000 420,000
Marketable securities 180,000 180,000
Mortgage payable (current) 160,000 310,000
Fixed assets 2,300,000 3,200,000
Net income 400,000 550,000
The effect of the plant expansion on Salter's working capital will be a(n)
a. Increase of P240,000 c. Increase of P230,000
b. Decrease of P10,000 d. Increase of P10,000
47. Normal Company has total fixed assets of P100,000 and no current liabilities. The table below displays its wide variation
in current asset components:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Cash P 20,000 P 10,000 P 15,000 P 20,000
Accounts receivable 66,000 25,000 47,000 88,000
Inventory 20,000 65,000 59,000 10,000
Total P106,000 P100,000 P121,000 P118,000
If Normal’s policy is to finance all fixed assets and half the permanent current assets with long-term financing and the rest
with short-term financing, what is the level of long-term financing?
a. P68,000 c. P150,000
b. P100,000 d. P155,625