608

MULTIPLE CHOICE:

1. Which of the following statements is correct?

a. The stockhoiders' equity is a major component of working

capital.

b. Net working capital is the difference between quick assets

and current liabilities.

C. Working capital is a measure of long-term solvency.

d. Net working capital is the difference between current assets

and current liabilities.

2. The primary objective of working capital management is to

maximize the company's total current assets.

b. minimize the company's total current liabilities.

balance the amount of current assets and current liabilities.

d. achieve a balance between risk and return.

a.

3. In a conservative or relaxed working capital financing policy,

a. operations are conducted on a minimum amount of working

capital.

b. operations are operated with too much working capital.

short-term liabilities are used to finance not only termporary

current assets, but also part or all of the permanent current

asset requirements.

d. the company is exposed to risk of illiquidity because of low

working capital position.

4. Financing inventory build-up with long-term debt is an example of

a conservative working capital policy.

b. matching policy.

an aggressive working capital policy.

d. hedging policy.

a.

a. the use of long-term debt to finance current assets.

b. the use of short-term debt to finance non-current assets,

5. The hedging approach to financing involves

e matching maturities of debt with specific financing needs.

issuance of common stocks to raise funds for working capital

d.

requirements.

6. Which of the following is incorrect?

a. Profitability varies directly with liquidity.

b. The greater the risk, the greater is the potential for larger retum,

C. Long-term financing has less liquidity risk than short-term

financing, but has a higher explicit cost, hence lower return.

d. More current assets lead to greater liquidity, but yield lower

returns.

7. Which of the following statements is true?

a. Short-term debt is usually more expensive than long-term debt.

b. Liquid assets do not ordinarily earn higher returns relative to

long-term assets, so holding the former will maximize the

return on total assets.

C. A conservative working capital policy is characterized by

higher current ratio and acid-test ratio.

d. Determining the appropriate level of working capital for a firm

requires changing the firm's capital structure and dividend policy.

8. The length of time it takes for the initial cash outflows for goods

and services to be realized as cash inflows from sales is called

a. product life cycle.

b. manufacturing cycle.

vicious cycle.

d. cash conversion cycle.

9.

If the average age of accounts payable is 15 days, the average

age of accounts receivables is 60 days, and the average age of

inventory is 10 days, the number of days in the operating cash

conversion cycle is

a. 70 days.

b. 85 days.

c. 55 days.

d. 60 days.

10. The following data are taken from the records of Apple

Corporation for the year ended December 31, 200B:

Net credit sales

Average materials inventory

Average finished goods inventory

Average accounts receivable

Average accounts payable

Net credit purchases

Raw materials used

Gross profit rate

P576,000

000'

P96,000

%5%

What is the average number of days in the company's operating

cash conversion cycle? (Use a 360-day year)

a. 50 days

b. 75 days

C. 105 days

45 days

11. An objective of cash management is to

maximize the cash balance to avoid the risk of illiquidity.

b. minimize the cash balance to maximize the return from idle

cash.

c. invest cash for a return while retaining sufficient liquidity to

satisfy future needs.

d. reserve as much cash as possible for potential investment

opportunities.

12. In cash management, the difference between the bank balance for
a firm's account and the cash balance that the firm shows on its

own books is called

al float.

b. bank charges.

C. interest income.

d. reconciling item.

13. Banks sometimes require its borrowers to maintain a certain

percentage of the face amount of a loan which the bank requires

its borrowers to keep in a non-interest bearing current account.

This is called compensating balance, which

a, decreases the effective rate of interest paid by the borrower.

b. compensates the bank for services rendered by providing it

with deposits of funds.

C. represents prepaid interest on a loan.

d. cannot be used for disbursements by both the borrower and

the bank.

14. A working capital technique that increases the payable float and

therefore delays the outflow of cash is

a. electronic data interchange (EDI).

b. automatic fund transfer (AFT).

C. a draft.

d. Baumol Cash Management Model.

5. CompanyA grants credit terms of 30 days to Company B.

operating cycle of Company B is 20 days. In this case, Company A

The
a. is, in effect, financing more than Company B's inventory needs.

b. is, in effect, financing less than Company B's inventory needs.

C. will have a lower level of accounts receivable than those

companies granting shorter credit terms.

d. can be sure that Company B will be able to convert its

inventories into cash before payment is due.

16. A change in a seller's credit policy has caused the following:

Sales decreased

Discounts taken decreased

Investment in accounts receivable increased

The number of doubtful accounts increased

Based on this information, we can say that

a. the company increased the rate of discount offered.

b. net profit has decreased.

C. gross profit has increased.

d. the average collection period has increased.

17. For a manufacturing firm, the most direct way of preparing a cash

budget requires incorporation of the following, except

a. sales projections and credit terms.

b. collection percentages and other cash receipts.

estimated purchases and payment terms and other cash

disbursements.

d. projected net income and depreciation expenses.

18. Belle Company's average monthly cash receipts is P1,500,000. Its

average collection period is ten (10) days. A collection agency has

offered to be the company's collector and shorten collection period

to four (4) days for a monthly fee of P1,500. The company can

invest its excess funds in money market placement at a rate of 8%.

If the collection agency's offer is accepted, Belle Company's net

annual benefit (loss) is

P6,000.

b. (P6,000).

C. P270,000.

d. P500.

A Qror Corporation had income before tax of P100,000 for the year.

bcluded in this amount was depreciation expese of P20,000, bond

iscount amortination of P18,000, and the amount paid for salaries

and woges of P30,000. The estimated cash ftow for the year is

e P138,000,

d. P120,000.

20 Annabelle Corporation is engaged in a multi-level marketing

business that presently requires all sales agents to mail checks to

its Manila office An average of three days is required for mailed

checks to be received, one day for Annabelle Corporation to

process them and three days to clear through its banks.

The company's treasurer proposed a change in the system, where

the checks will no longer be mailed to Manila office. Instead,

checks collected will be deposited on-line in any branch of the

company's depository bank, and the deposit slips, as well as the

other pertinent documents will be sent by fax or e-mail to the

Manila office on the same day, The original deposit slips and other

documents will be submitted by the sales agents to Manila when

they attend the Sales Agents' Monthly Meeting.

The new system will eliminate the mailing float and the processing

Annabelle Corporation has an average daily collection of

PS0,000.

If the new system is implemented, Annabelle Corporation's

average cash balance will increase by

a. P 50,000.

b. P150,000.

C P350,000.

d. P200,000.

Majority of Aning Company's customers are farmers from remote

rural areas, Farmers Bank has offered to provice Aning Company

a lockbox system at a fixed fee of P300 per month and a variable

fee of P2 for each payment processed by the bank.

Aning Company receives 30 payments per day, averaging P5,000

per payment. With the lockbox system, the company's collection

Tioat will decrease by 3 days. Money market securities earn 5%

per annum.

4.

Should Aning Company accept Farmers Bank's offer to provide a

lockbox system? (Use 360 days in a year.)

a. Yes, because it would earn additional income of P22,500 per

year.

b. Yes, because it would earn net benefit of P2,700 from the

lockbox system.

C. No, because the cost of the lockbox system is P2,700 more

than the expected return on money market placements.

d. No, because the lockbox system would require the company

to spend P25,200 per year.

EMS 22 and 23 ARE BASED ON THE FOLLOWING INFORMATION:

Ben Corporation uses the Baumol Cash Management Model to

determine its optimal cash balance.

For the coming year, the expected cash disbursements total P432,000.

The interest rate on marketable securities is 5% per annum. The fixed

cost of selling marketable securities is P8 per transaction.

2. Using the Baumol Cash Management Model, the company's

optimal cash balance is

a. P11,757.55.

b. P 5,878.78.

P142,000.00.

d. P

1,175.76.

3. Using the Baumol Cash Management Model, the average cash

balance is

a. P11,757.55.

b. P 5,878.78.

C. P142,000.00.
d. P 1,175.76.

4. Which of the following items is not a marketable security?

a. Treasury Bills

b. Commercial Papers

Central Bank Certificate of Indebtedness (CBCIS)

d. Convertible Bonds

5. When managing cash and short-term investments in marketable

securities, the treasurer of a corporation is primarily concerned with

a. liquidity and safety.

b. maximizing the rate of return.

maximizing risk.

tax avoidance.

26 An objective of accounts receivable management is to have both

the optimal amounts of receivables outstanding and bad debts.

This balance requires the trade-off between the benefit of more

credit sales and

the cost of sales.

more bad debts.

C. the cost of accounts receivables, such as collection, interest

and cost of bad debts.

d. a high accounts receivable turnover.

b.

27. Following are ways of accelerating collection of accounts

receivabies, except

shorten credit terms.

minimize negative float.

C. age accounts receivables.

d. offer special discounts to those who pay promptly.

a.

b.

28. The average collection period for a firm measures the number of

days after a typical credit sale is made until the firm receives the

payment. It should be related to the firm's credit terms.

example, a firm that allows terms of 2/10, net 30 should have an

average collection period of

a. thirty days.

b. ten days.

For

C. twenty days.

d. somewhere between 10

days and 30 days.

29. Which of the following represents a firm's average gross receivables

balance?

I. Average age in days of receivables x average daily sales

II. Average daily sales x average collection period

III. Annual credit sales + accounts receivable turnover

C. II only

d. I, II, and III

a. I only

b. I and II only
. A change in credit policy accelerated the collection of accounts

receivable. As a result, the company experienced the following, except

an increase in discounts taken by customers.

D. an increase in the average collection period.

a decrease in the receivables balance.

d. a decrease in bad debts.

ITEMS 31 and 32 ARE BASED ON THE FOLLOWING INFORMATION:

Elaine Corporation is planning to introduce changes in its collection

procedures.

collection period longer by 10 days, although there will be no

change in bad debts.

The new procedures are expected to make the

For the coming year, Elaine Corporation's budgeted sales is

P32,400,000 or P90,000 per day. Short-term interest rates are

expected to average at 9% per annum.

31. As a result of the changes in collection procedures, Elaine Corporation's

average accounts receivable balance will increase (decrease) by

a. P900,000.

b. P 90,000.

d.

P32,400,000.

32. To make the changes in collection procedures cost beneficial, the

minimum savings in collection costs for the coming year should be

a. P900,000.

b.
P 8,100.

d. P90,000.

81,000.

33. A company's president requested the credit and collection

manager to submit proposals on how to change the company's

credit policy.

The credit and collection manager submitted two proposals. In

both proposals, sales, profits, and collection periods will change

although by different figures. Bad debts experience will remain

the same despite the proposed changes.

In making a decision on which proposal should be implemented,

the president should consider the following factors, except

a. the impact of the proposed changes on the current

customers of the company.

b, the cost of short-term credit.

/c. the company's current bad debts experience.

d. the change in credit terms to be imposed by banks which

provide short-term financing to the company.

EMS 34 and 35 ARE BASED ON THE FOLLOWING INFORMATION:

Che-Che Corporation is planning to change its credit policy. The

proposed change is expected to:

shorten the collection period from 50 days to 30 days.

increase the ratio of cash sales to total sales from 20% to

30%.

decrease total sales by 10%.

34. If projected sales for the coming year is P40M, what is the peso

impact on the average accounts receivable balance of the

proposed change in credit policy? (Use 360 days in a year.)

a. P2,344,444 decrease

b. P2,100,000 decrease

P 6,800,000 decrease

d. P18,889 decrease

35. What is the impact of the proposed credit policy on the company's

accounts receivable turnover?

Decrease by 7.2

b. Increase by 4.8

C.

Decrease by 20 days

d. Increase to 4.8 times

36. Donny Traders sells on credit terms of 2/10, net 30. Average daily

credit sales is P50,000. On the average, 70% of the customers

avail of the discount and pay on the 10th day after purchase, while

the rest pays on the last day of the credit term. How much is the

company's accounts receivable balance?

a. P1,500,000

b. P 450,000

c.

P 800,000

d. P1,050,000

37. 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. PO

b. P100,000

C. P50,000

d. P 5,000

38. May Corporation's average daily sales is P6,400,000, 10% of which

is cash sales. The variable cost ratio is 60%. Starting next year,

May Corporation will relax its credit standards. The relaxation in

credit standards is expected to cause the following changes:

Total credit sales will increase by 20%.

The collection period for incremental sales is 60 days. (The

payment behavior of the existing customers will not change.)

The variable cost ratio, even for the incremental sales, will be the

same as in the past. The cost of borrowing is estimated at 25% per

year. The company uses 360 days in a year in all its computations.

What is May Corporation's expected benefit (loss) from the

planned relaxation in credit policy?

a. P1,152,000

b. P 460,800

C.

(P 27,520)

d. P432,000

39. Sisa Corporation has the following data:

Selling price per unit

Variable cost per unit

Annual credit sales - units

Collection period

Rate of return

P70

P45

50,400

30 days

%0%

Sisa Corporation is considering easing its credit standards. If it

does, sales will increase by 25%; collection period will increase to

45 days; bad debts losses are anticipated to be 4% of the

incremental sales; and collection costs will increase by P31,645.

If the proposed relaxation in credit standards is implemented, the

net benefit (loss) for Sisa Corporation is

a. P215,000.

b. P315,000.

C. (P 33,075).

d. (P100,000).

40. Inventory management is the formulation and administration of

plans and policies to efficiently and satisfactorily meet production

and merchandising requirements and minimize costs relative to

inventories. One of its objectives is to

maximize the units in inventory.

a.

b. maximize sales.

C. minimize production costs.

d. maintain inventory at a level that best balances the estimates

of actual savings, the cost of carrying additional inventory,

and the efficiency of inventory control.

41. Inventory costs, in addition to the costs of the purchased items,

have been traditionally classified as follows, except

order costs.

b. carrying costs.

a.

C. stockout costs.

d. order-filling costs.

42. Inventory management requires the firm to balance the quantity of

inventory on hand for operations with the investment in inventory.

Two cost categories in inventory management are order costs and

carrying costs.

a. The carrying costs include handling costs, interest on capital

invested, and obsolescence.

b. The order costs include quantity discounts lost, handling

costs, and setup costs for a production run.

C. The carrying costs include purchasing costs, shipping costs,

quantity discounts lost, and setup costs.

d. The order costs include insurance costs, shipping costs, and

obsolescence.

43. The following data are taken from the records of Chikoy

Corporation for year 200A:

Sales

Cost of sales

Inventory turnover

P25,200,000

P14,400,000

9 times per year

For 200B, budgeted sales and cost of sales are the same as in

200A actual data, although the company will try to increase its

inventory turnover to 12 times per year. If short-term interest

rates are expected to average at 8%, what is the company's

expected savings due to the increase in inventory turnover?

a. P400,000

b. P700,000

C. P32,000

d. P56,000

44. Which inventory costing system will result in a high inventory

turnover ratio in a period of rising prices?

a. FIFO

b. LIFO

C. Perpetual

d. Periodic

3. In inventory management, a decrease in the frequency of ordering

will normally

a. increase total carrying costs.

b. increase the total ordering costs.

C. have no effect on total carrying costs.

d. have no effect on total ordering costs.

46. A company would be wiling to have a low inventory turnover ratio

if the

a. inventory order costs is low.

b. carrying cost of inventory is high.

c. cost of stock out is high.

d. lead time is short.

47. The EOQ model is a deterministic model that calculates the ideal

order quantity (or production lot) given specified periodic demand,

the cost per order or production run, and the periodic carrying cost

per unit. The EOQ model

a. minimizes the sum of inventory carrying costs and either

ordering or production setup costs.

b. minimizes the sum of ordering costs and production setup

costs.

C. minimizes the sum of carrying costs and handling costs.

d. minimizes the level of average inventory in units.

48. The Economic Order Quantity (EOQ) model can be used to establish

inventory policy. In the case of a manufacturer, the EOQ is called the

Economic Lot Size (ELS) or Economic Production Quantity (EPQ).

Which of the following statements about the ELS is incorrect?

a. The objective of the ELS model is to minimize the sum of

inventory carrying costs and the costs of production runs or

setup costs.

b. In the ELS model, the production rate is deemed to be

instantaneous.

C. In the ELS model, the demand is assumed to occur at a

constant rate over some period of time.

d. The ELS model is used to maximize contribution margin or

minimize costs given resource constraints.

LINEAK FRGAMNG

49. Which of the following is not an element in the EOQ formula?

a. yearly demand

b. variable cost per order d. periodic carrying cost per unit

C. safety stock

FO Which of the following statements is false?

a The cost of inventory itself, as weli as any quantity discounts lost

on inventory purchases, is directly reflected in the EOQ model.

b. A decrease in inventory order costs will decrease the EOQ.

C. An increase in inventory carrying costs will decrease the EOQ.

d. An increase in the variable cost of placing and receiving an

order will increase the ECQ.

51. The Economic Order Quantity (EOQ) formula does not assume that

a. demand is known.

b. usage is uniform.
the cost of placing an order is constant.

d. the cost of inventory itself is constant.

C.

52. In the EOQ model, the return on capital that is foregone when it is

invested in inventory is a(an)

a, order cost.

b. carrying cost.

exclusion in the EOQ computation.

d. irrelevant cot.

C.

ITEMS 53 to 55 ARE BASED ON THE FOLLOWING INFORMATION:

Emil Traders, Inc. sells cellphone cases which it buys from a local

manufacturer. Emil Traders selis 24,000 cases evenly throughout

the year. The cost of carrying one unit in inventory for one year is

P11.52 and the order cost per order is P38.40.

53. What is the economic order quantity?

La, 400

b. 283

C. 200

d. 625

54. If Emil Traders would buy in economic order quantities, the total

order costs is

P921,600.

6. P 2,304.

C. P 76,800.
d. P460,800.

a.

55. If Emil Traders would buy in economic order quantities, the total

inventory carrying costs per year is

a. P276,480.

C. P 23,040.

d. P138,240.

b. P 2,304.

56. The basic EOQ model equals the square root of the (1) product of

twice the demand times the cost per order, (2) divided by the

periodic carrying cost per unit. If the annual demand increases by

44%, the EOQ will increase (decrease) by

a. 6.63%.

b. 20%.

C. 9.38%.

d. 12%.

ON THE FOLLOWING INFORMATION:

ITEMS 57 and 58 ARE BASED

The following information is available for Edgar Corporation's

Material X

12,600 units

360 days

20 days

Annual usage
Working days per year

Normal lead time

The units of Material X are required evenly throughout the year.

57. What is the reorder point?

a. 35 units

b. 20th day

c. 700 units

d. 630 units

58. Assuming that occasionally, the company experiences delay in the

delivery of Material X, such that the lead-time reaches a maximum

of 30 days, how many units of safety stock should the company

maintain and what is the reorder point?

Safety Stock

Reorder Point

350

350

1,050

700

a.

b.

C.

d.

1,050

700

1,050
59. The following information pertains to Annie Corporation's Material X:

Annual usage

Working days per year

Normal lead time in working days

Safety stock

25,200 units

360 days

30 days

1,050 units

The maximum lead time in working days and the reorder point for

Material X are

Maximum Lead Time

Reorder Point

30 days

15 days

45 days

45 days

a.

2,100

1,050

3,150

2,100

b.

C.

d.
60. Using the EOQ model, Ram Corporation determined the economic

order quantity for a merchandise item to be 800 units. To avoid

stockout costs, it maintains 200 units in safety stock. What is Ram

Corporation's average inventory of such merchandise item?

400 units

a.

C.

500 units

d. 1,000 units

b. 600 units

ITEMS 61 and 62 ARE BASED ON THE FOLLOWWING INFORMATION:

Using the EOQ model, Apple Baby Corporation computed the

economic order quantity for one of the products it sells to be 4,000

units. Apple Baby Corporation maintains safety stock of 300 units.

The quarterly demand for the product is 10,000 units. The order

cost is P200 per order. The purchase price of the product is P2.40.

The company sells at a 100% markup. The annual inventory

carrying cost is equal to 25% of the average inventory level.

61. The annual inventory carrying costs is

a. P2,300.

b. P2,000.

C. P4,300.

d. P4,000.

62. The total inventory order cost per year is

a. P 2,300.
b. P800,000.

C. P2,000.

d. P5,520.

The following information pertains to Emy Manufacturing Corporation's

33,750 units

P15

P500

TTEMS 63 to 66 ARE BASED ON THE FOLLOWING INFORMATION:

Product X:

Annual demand

Annual cost to hold one unit of inventory

Setup cost (or the cost to initiate a production run)

Beginning inventory of product X

At present, the company produces 2,250 units of Product X per

production run, for a total of 15 production runs per year. The

company is considering to use the EOQ model to determine the

economic lot size and the number of production runs that will minimize

the total inventory carrying cost and setup cost for Product X.

63. At present, the company's total annual inventory costs is

a. P 7,500.

b. P16,875.

c. P24,375.

d. P22,500.

64. If the EOQ model is used, the economic lot size is

a. 2,250 units.

b. 1,500 units.

c. 2,250,000 units.

d. P1,500.

65. If the EOQ model is used, the number of production runs should be

C. 67.5 runs.

d. 22.5 runs.

15 runs.

a.

b. 1,500 units.

66. If the EOQ model is used, the total annual inventory costs, compared

with that under the present system, will increase (decrease) by

a. (P1,875).

b. P3,750.

C. (P 5,625)

d. P11,250

67. Which of the following is not a source of short-term credit?

C. deferred income

d. common stock

a. purchases on account

b. accruals

58. Which of the following is incorrect?

a. When a firm purchases goods or services on credit from a

supplier, it automatically obtains short-term financing.

b. Trade credit usually bears no interest, so it is costless.

C. Accruals or accrued expenses is a form of spontaneous

financing which represents liabilities for services that have

been provided to the company but have not been paid for.

d. Pledging of receivables is an example of secured short-term

credit.

69. Which of the foillowing forms of short-term borrowing is a secured

credit?

a. commercial paper

b. line of credit

c. chattel mortgage

d. banker's acceptances

70. A company obtained a short-term loan from a bank. Information

about such loan is as follows:

Principal of loan

Stated interest rate

P5,000,000

10%

Terms

1 year

If the

pan is discounted, the effective interest rate is

10%.

a.

C. 9.09%.
d. 8.89%.

b. 11.11%.

71. A company received a P500,000 line of credit from its bank. Some

information about the credit line is as follows:

Stated interest rate

10%

Compensating balance requirement

20%

Assuming that the company drew down the entire amount at the

beginning of the year, and that the loan is discounted, what is the

effective interest rate on the loan?

C. 30%

d. 14.29%

10%

a.

b. 20%

72. A company received a line of credit from its bank. The stated

interest rate is 12%, deducted in advance. The line of credit

agreement requires that an amount equal to 20% of the loan be

deposited into a compensating balance account. On March 1, the

company drew down the entire usable amount of the loan and

received the proceeds of P340,000. How much is the principal

amount of the loan?

a. P340,000

b. P500,000
C. P231,200

d. P448,800

73. A company purchases merchandise form its supplier on credit

terms of 3/10, net 30. What is the equivalent annual interest rate

(use a 360-day year) if the company foregoes the discount and

pays on the 30th day?

a. 55.67%

b. 3%

60%

d. 3.09%

C.

74. What is the current price of a P100,000 treasury bill due in 180

days on an 8% discount basis?

a.. P100,000

b. P 96,000

C. P104,000

d. P 92,000

75. Jun Traders, a merchandising firm, purchases merchandise from

its suppliers on credit terms of 2/10, net 30. Jun Traders needs

cash, so it is considering two alternatives:

Alternative 1- Obtain a short-term loan from a bank at an

effective interest rate of 12%.

Alternative 2- Forego the discount on its credit purchases

and pay on the 30th day of the term.

Jun Traders should choose (Use a 360-day year.)

Alternative 2 because this is a costless credit financing.

b.

a.

Alternative 2 because its cost is cheaper by 10%.

C. Alternative 1 because its cost is cheaper by 24.73%.

d. Alternative 1 because its cost is cheaper by 1%.

76. A company's policy is to maintain a current ratio of at least 2:1. At

present, its current ratio is 2.5 is to 1. If current liabilities at present

amounts to P250,000, what is the maximum amount of short-term

commercial loan that can be obtained by the firm to finance

inventory expansion without violating its current ratio policy?

a. P125,000

b. PO

C. P62,500

d. P50,000

company obtained a short-term bank loan of P500,000 at an

annual interest rate of 10%.

compensating balance of 20% be maintained in the borrower's

account. The compensating balance will earn interest of 2% per

annum, payable on the maturity of the loan.

77.

The bank requires that a

Even before the approval of the loan, the company has been
maintaining a balance of P50,000 in the account.

compliance with the bank's condition, the company will just

deposit from the loan principal an amount of P50,000. What is the

effective interest rate of the loan?

Thus, in

10%

b. 10.89%

a.

C. 11.11%

d. 12.5%

ITEMS 78 to 80 ARE BASED ON THE FOLLOWING INFORMATION:

The expected boom in business in the coming period led the Baby

Apple Company to decide to expand its operations. The expansion

requires an increase of P500,000 in working capital, which the

company is considering to finance through any of the following

alternatives:

1. Pledge the accounts receivable

The company's average accounts receivable is P625,000

per month. A financier will lend 80% of the face value of

the receivables at 10% interest per annum, payable on the

maturity of the loan.

2. Issue P515,000 of 3-month commercial paper to net

P500,000. New paper will be issued every 3 months.

3. Borrow from a commercial bank an amount that will net

P500,000 after deducting a compensating balance of 15%

and interest of 5%.

Use a 360-day year in all your calculations.

78. The cost of Alternative 1 is

a 10%.

Б. 12.5%.

8%.

C.

d. 120%.

79. The annual cost of Alternative 2 is

a. 11.65%.

b. 1%.

C. 12%.

0.97%.

d.

80. The annual cost of Alternative 3 is

5%.

b. 20%.

C. 25%.

6.25%.

d.

a.

ITEMS 81 to 84 ARE BASED ON THE FOLLOWING INFORMATION:

Lei Company enters into an agreement with a firm that will buy Lei

Company's accounts receivable and assume the risk of collection.

Details about the agreement are as follows:

Average amount of receivable to

be factored each month

Average collection period

Amount to be advanced by the

factor

P500,000

60 days

80% of the face amount

of the

eivables

Interest rate, deductible in

advance

Factor's fee, deductible in advance

Annual savings of Lei Company in

collection expenses

10% p.a.

2%

P60,000

How much is the monthly net proceeds from factoring the receivables?

81.

a. P500,000

b. P400,000

C. P383,333

d. P350,000
82. What is the annual net cost of factoring?

a. P120,000

b. P100,000

P160,000

d. (P 10,000)

C.

83. What is the effective annual cost rate of financing?

a 26.09%

b. 25%

C. 20%

d. 29.41%

84. If the interest charge and factor's fee is not deducted in advance,

the effective annual cost rate is

a. 26.09%.

b. 25%.

C. 20%.

d. 29.41%.

85. Loi often factors its accounts receivable. The factor requires a 10%

reserve and charges 2% commission on the amount of receivables

factored. The remaining amount (after deducting the reserve and

commission) is further reduced by an annual interest charge of 12%

.At the beginning of the month, the company factored P500,000 of

accounts receivable due in 60 days and received net proceeds of

(Use a 360-day year)

a. P440,000.

b. P387,200.

c. P431,200.

d. P380,000.

ITEMS 86 to 89 ARE BASEI)

ON THE FOLLOWING INFORMATION:

Jem Traders, Inc. needs P100,000 to pay a supplier's invoice for

merchandise purchased with terms of 2/10, net 30. Jem Traders

wants to pay on the 10th day of the credit term so it can avail of

the 2% discount.

The funds needed can be raised by obtaining a short-term loan from a

bank which agrees to grant a 30-day loan at 12% discounted interest

per annum. The bank requires that a compensating balance of 10%

be maintained in the borrower's non-interest earning deposit account.

86. The amount needed by Jem Traders to pay the invoice within the

discount period is

a. P 98,000.

b. P100,000.

87. The principal amount of the loan that must be obtained from the

bank to raise the needed fund is

a: P110,112.

b. P108,780.

C. P 9,000.

d. P102,000.

C. P112,360.
d. P125,640.

What is the effective interest rate of the loan?

C. 10%

d. 13.48%

88.

12%

a.

b. 22%

89. If Jem Traders fails to pay the discount and pays the account on

the 30th day of the term, what is the annual cost of this non-free

trade credit?

a. 2%

b 36.73%

C. 24%

d. 0

30, Which of the following is not a source of long-term financing?

a. Common stucks

b. Bonds

C. Preferred stocks

d. Floating lien

91. One of the sources of long-term financing is the issuance of

common stocks. The advantages (to the issuer) of issuing

common stocks are as follows, except

a. the sale of common stocks increases credit worthiness of the

firm by providing more equity.

b. common stock cash dividends are not tax deductible as expense.

common stock is frequently more attractive to investors than

C.

debt because it grows in value with the success of the firm,

d. common stock dividends are not fixed - thèy are paid from

profits when available.

It is a hybrid of debt and equity. It has a fixed charge and increases

leverage, but payment of dividends is not a legal obligation.

ca. Preferred stock

b. Common stock

92.

C. Bonds

d. Commercial paper

93. Bonds, a source of long-term financing, are long-term debt

instruments. They are similar to term loans, except that they are

usually offered to the public and sold to many investors. Among the

advantages (to the issuer) of issuing bonds are as follows, except

cost of debt is limited- bondholders usually do not participate

in the superior earnings of the firm.

b. interest paid on debt (bonds) is tax deductible.

CC. debt adds risk to a firm.

d. basic control of the firm is not shared with the debt holders.

a.

94. Leasing has become a major means of financing because it offers

a variety of tax and other benefits. The three principal forms of

lease are sale-leaseback, operating lease, and capital lease. The

operating lease

a. involves the sale of property by the owner and a lease of the

property back to the seller.

b. is non-cancelable and fully amortizes the cost of the leased

asset over the term of the basic lease contract.

C. transfers substantially all of the benefits and risks of

ownership of property to the lessee.

d is a form of off-balance-sheet financing.

95. Jammy Corporation presently has 200,000 shares, P10 par value

common stocks issued and outstanding.

stockholders of Jammy Corporation have preemptive rights.

The

common

If Jammy Corporation issues 100,000 additional shares of cornmon

stock at P15 per share, a current holder of 30,000 shares of Jammy

Corporation's common stocks must be given the option to buy

a. 15,000 additional shares.

b. 30,000 additional shares.

C. 45,000 additional shares.

d. 60,000 additional shares.

96. Which of the following brings in additional capital to the firm?

a. Issuance of stock dividend

b. Two-for-one stock split

C. Exercise of warrants

d. Conversion of convertible bonds to common stocks

97. Warrants are long-term options that give holders the right to buy

common stocks in the future at a specified price. Issuers of debt

sometimes attach stock purchase warrants to debt instrument as an

inducement to investors. A major use of warrants in financing is to

increase the return on debt.

b. lower the cost of debt.

C. avoid dilution in earnings per share.

d. maintain managerial control.

a.

98. To acquire additional capital while attempting to maximize

earnings per share, a company should normally

select debt over equity initially.

b. select equity over debt initially.

C. issue both bonds and stocks in equal proportion.

d. discontinue paying dividends and use current cash flows to

raise capital funds.

a.

99. If a firm's degree of operating leverage is higher than the industry

average, such firm

is more profitable.

C. has profits that are more sensitive to changes in sales volume.

d. has higher sales.

a.

is less risky.

b.

ITEMS 100 to 102 ARE BASED ON THE FOLLOWING INFORMATION:

Following is the income statement of Annabelle Corporation for the

year ended December 31, 200A:

ANNABELLE CORPORATION

Income Statement

For the year ended December 31, 200A

P50,000,000

40,000,000

P10,000,000

6,000,000

P 4,000,000

1,000,000

P 3,000,000

900,000

P 2,100,000

Sales (500,000 units at P100 each)

Less variable cost (500,000 at P80 each)

Contribution margin

Less fixed costs

Operating income (or EBIT)

Less interest expense

Income before tax

Less income tax (30%)

Income after tax

100. What is Annabelle Corporation's degree of operating leverage (DOL)?

C. 4.90

d. 7.35

a. 2.50

b. 3.33

101. What is Annabelle Corporation's degree of financial leverage (DFL)?

a. 1.72

b. 2.50

C. 2.00

d. 1.33

102. What is Annabelle Corporation's degree of total leverage (DTL)?

C. 1.25

d. 0.80

a. 4.00

b. 3.325

103. The weighted average cost of capital approach to decision making

is not directly affected by the

a. cost of debt outstanding

value of the common stocks

b.

C. current budget for capital expansion

d. proposed mix of debt, equity, and existing funds used to

implement the project.

104. Which of the following statements about cost of capital is false?

a. Cost of capital is based on what the company pays for its

capital, not the return earned on the capital employed.

b. The overall cost of capitai is the minimum rate a firm must

earn on all investments to cover capital costs.

C. The overall cost of capital is the cost of the firm's equity

capital at which the market value of the firm will remain

unchanged.

d. The overall cost of capital is the weighted average cost of

the various debt and equity components in a firm's capital

structure.

105. Ideally, a firm's optimal capital structure is the one that balances

the cost of debt and equity capital and their associated risk levels.

The optimal capital structure minimizes the firm's

a. weighted average cost of capital.

b. cost of debt.

cost of equity capital.

d. earnings per share.

C.

106. Which of the following statements is incorrect?

a. Capital structure is the mix of the long term sources of funds

used by the firm.

b. Capital structure consists of the firms long-term financing,

i.e., long-term debt and stockholders' equity.

C. The optimum capital structure is a combination of long-term

debt and equity that minimizes the cost of capital and value

of the firm.

d. Debt is cheaper than equity, but excessive use of debt

increases the firm's risk and drives up the weighted average

cost of capital.

An increase in the corporate income tax rate might

encourage a firm to increase the amount of debt in its

capital structure.

b. An increase in economic uncertainty encourages equity

financing.

C. In general, debt financing is more expensive than equity

financing.

d. When calculating the cost of capital, the cost assigned to

retained earnings should be lower than the cost of external

common equity.

107. Which of the following statements is incorrect?

a.

108. At present, Jerry Corporation's capital structure is composed of

200,000 shares of common stocks outstanding with a market price

of P20 per share. It also has P4 million in 8% bonds and P2 million

in 10%, P10 par value preferred stocks, both currently selling at par,

The company is considering a P3-million expansion program which

can be financed with:

1. all common stocks at P20 per share.

2. all bonds at 10% interest rate.

3. all preferred stocks.

If the expansion program is undertaken, the company estimates

that it can earn EBIT (earnings before interests and taxes) of

P2,000,000. The income tax rate is 30%.

If the expansion program is implemented, the expected earnings

per share under each alternative source of financing are:

All Common Stocks All Bonds All Preferred Stocks

P4.71

3.26

P3.69

P3.21

a.

b.

5.71

5.71

4.69

2.69

4.78

C.

d.

2.78

3.83
3.38

109. Jervi Corporation is planning to issue P20M bonds at an effective

interest rate of 10%. The company pays income tax at a rate of

30%. What is the cost of debt capital?

10%

C.

3%

d. 13%

a.

b.

7%

110. Sam Corporation is planning to issue 100,000 shares of 10%, P50 par

value preferred stocks for P80 per share. The company pays income

tax at a rate of 30%. What is the cost of capital (preferred stocks)?

C. 6.25%

d. 4.25%

10%

a.

b. P5

111. Tanya Corporation issued preferred stocks for P120 per share.

The issue price is P20 more than the stock's par value.

company incurred underwriting fees of P10 per share. The stocks

will earn annual dividends of P12 per share. If the tax rate i5

30%, the cost of capital (preferred stocks) is

The
10%

a.

b.

7.42%

d. 10.91%

C.

12%

112. Vicky Corporation has preferred stocks that pay dividends of P6.72

per share. If the cost of funds (capital) coming from preferred

stocks is 12% and the income tax rate is 30%, what is the price of

the preferred stocks?

a. P56.00

b. P 0.81

C. P 1.79

d. P38.08

ITEMS 113 to 116 ARE BASED ON THE FOLLOWING INFORMATION:

Hector Corporation's capital structure is as follows:

Bonds payable, 10 years, 10%

10% preferred stocks, P200 par value,

10,000 shares issued and outstanding

Common stocks, P50 per share,

30,000 shares issued and outstanding

Retained earnings

Total
P1,000,000

2,000,000

1,500,000

500,000

P5.000,000

The company's earnings per common share (EPS) is P12. The

common shares' current market price is P60, while that of preferred

shares is P250. The income tax rate is 30%.

113. For purposes of computing the company's overall cost of capital,

the cost of common stocks and retained earnings is

a. 24%.

b. 16.32%.

C. 20%.

d. 13.6%.

114. The cost of debt is

7%.

14.71%.

7.58%.

C.

a.

d.

b. 10%.

115. The cost of preferred stocks is

C. 8%.

d. 5.44%.
a. 10%.

6.8%.

b.

116. What is the weighted average cost of capital?

8.54%

a. 34.80%

b. 23.66%

C.

d. 12.60%

117. Harry Corporation's common stocks currently sell for P40 per

share. The estimated dividend payment at the end of this year is

P4 per share. The expected growth rate is 12%.

dividend growth model, the cost of capital is

a. 22%.

b. 10%.

Using the

C. 12%.

d. 23%.

ITEMS 118 and 119 ARE BASED ON THE FOLLOWING INFORMATION:

Harold Corporation's common stocks currently sell for P50 per share.

Flotation cost is 5%. In the past, the company paid dividends of

P4.50 per share. The expected dividend growth rate is 10%.

118. Using the dividend growth model, the cost of capital is

c. 20.42%.
d. 10.42%.

19.47%.

a.

b. 19.90%.

119. What is the cost of retained earnings?

a. 19.47%

b.

19.90%

C. 20.42%

d. 10.42%

120. Pinky Corporation expects to pay dividends of P5 per share at the

end of this year. The expected growth rate is 10%.

Using the dividend growth model, what is the stock's market price

if the cost of capital (common stocks) is 25%?

a. P14.29

b. P50

C. P20

d. P33.33

ITEMS 121 and 122 ARE BASED ON THE FOLLOWING INFORMATION:

The return on market portfolio is 12% and the risk-free rate is 5%.

The beta coefficient is 1.4.

121. Using the capital asset pricing model, what is the cost of capital

(or required rate of return)?

a. 14.8%

b. 12%
C. 9.8%

d. 14.0%

122. If the beta coefficient increases to 1.6, the required rate of return

will increase (decrease) by

0.2%.

b. (0.2%).

a.

C.

1.4%.

d. (1.4%).

123. Chelsea Corporation is planning to invest in a project.

investment opportunities are being considered:

Two

Alternative

Cost of Investment

Expected Return on Investment

P100 M

P100 M

11%

15%

Chelsea Corporation can invest in only one of the alternatives. The

investment project will be financed by issuing common stocks. The

company uses the capital asset pricing model (CAPM) in computing

the cost of capital (common stocks). At present, the market rate is

12% and the risk-free rate is 8%. The beta coefficient is 1.3.
Which investment alternative should the company choose?

a. Alternative 1 only

b. Alternative 2 only

C. Alternatives 1 and 2

d. None

ITEMS 124 to 126 ARE BASED ON THE FOLLOWING INFORMATION:

Following are some financial data pertaining to Kyle Corporation:

Capital structure (in millions):

Long-term debt (12% interest rate)

Stockholders' equity:

Common stocks, P10 par value

Additional paid-in capital

Retained earnings

Total

P 140

P 40

400

860

P1,000

420

Kyle Corporation's common stock is currently selling at par. The

current market return is 14% and the risk-free rate is 10%. The

beta value for Kyle Corporation is 1.20. It pays income tax at the

rate of 30% of taxable income.

124. The after-tax cost of debt is

8.40%.

d. 17.64%.

12%.

3.84%.

b.

C.

a.

125. Using the capital asset pricing model, the cost of common equity is

14.8%.

b. 12.0%.

C. 18.8%.

a.

d.

4.8%.

126. The weighted average cost of capital is

a. 22.96%.

b. 11.48%.

14.80%.

C.

d.

13.91%.

127. Charmaine Corporation has P50M bonds in its capital structure.

The corporation issued the bonds at par, P1,000 per bond, with

10% interest rate. The bonds will mature in 10 years. At present,

such bonds can be sold at P1,300 per bond and can be issued at

140 basis points over Philippine treasury bonds.

Corporation's income tax rate is 30%. The interest rate for

Philippine treasury bonds is 8%.

Charmaine

What is Charmaine Corporation's current cost of debt?

a. 7.84%

b.

C. 11.20%

d. 9.52%

8%

ITEMS 128 to 131 ARE BASED ON THE FOLLOWING INFORMATION:

Apple Corporation is engaged in the call center business. A boom

in this type of business has caused Apple Corporation's

management to consider expanding its operations by opening

more call centers in key cities all over the countr

expansion project requires an investment of P240M, a 100%

increase

Management is considering three financing alternatives:

The plahned

the corporation's present capital structure.

in

Alternative 1- Debt and Equity Financing

Float bonds with 10% interest rate, expected proceeds of

P72M, net of flotation costs.

Issue 8% preferred stocks, expected proceeds of P48M,

net of P2M flotation costs.

Issue common stocks, expected proceeds of P120M, net of

6% flotation costs.

Alternative 2- Debt Financing

> Float bonds with 12% interest rate. Expected proceeds,

P240M, net of flotation costs.

Alternative 3-Equity Financing

Issue common stocks, expected proceeds, P240M, net of

5% flotation costs.

The company's capital structure is composed of 30% bonds, 20%

preferred stocks, and 50% common stocks.

The common stocks currently sell for P50 per share. For the past

2 years, common stock dividends amounted to P5 per share. The

expected dividend growth rate is 4%. Apple Corporation pays

income tax at the rate of 30%

128. What is the weighted average cost of capital for Apple

Corporation's first financing alternative?

C. 15.06%

d.

6.80%

a. 11.30%

30.19%

b.

129. What is the weighted average cost of capital for Apple

Corporation's second financing alternative, assuming that the costs

of preferred stocks and common stocks are 8.5% and 15%,

respectively?

a. 31.66%

b.

C. 10.06%

d. 11.65%

8.16%

Corporation's alternative 3, assuming that costs of bonds and

preferred stocks are 6.8% and 8.33%, respectively?

a. 30.08%

13.06%

130. What is the weighted average cost of capital for Apple

11.21%

C.

d. 11.19%

b.

131. What is the after-tax weighted marginal cost of capital for Apple

Corporation's financing alternative 2, consisting solely of bonds?

3.84%

C.

8.40%

b. 12.00%

a.

d. 17.65%
ITEMS 132 to 135 ARE BASED ON THE FOLLOWING INFORMATION:

Ayie Corporation is considering a project for the coming year that

will require an investment cost of P100M. the company plans to

finance the project by a combination of debt and equity, as follows:

- Issue P20M of 10-year bonds at a price of 102, with an

interest rate of 10%, and flotation cost of 3% of par.

Use P80M of funds generated from earnings retained in the

business.

The expected market rate of return is 14%. The current rate of

Treasury Bills is 8%. The beta coefficient for Ayie Corporation is

1.2. The corporate income tax rate is 30%.

132. What is the effective rate of interest of the bonds?

10.20%

10%

a.

C.

b.

9.89%

d. 10.10%

133. What is the after-tax effective cost of bonds?

a. 6.80%

b. 7.07%

C. 6.73%

d. 6.94%

134. Using the capital asset pricing model (CAPM), what is the cost of
equity capital for Ayie Corporation?

a. 9.6%

b. 10.34%

C. 15.20%

d. 7.2%

135. Assume that the after-tax cost of debt is 7% and the cost of equity

capital is 15%, what is the weighted average cost of capital for

Ayie Corporation's project?

13.40%

a.

13.53%

d. 14.96%

C.

b. 22%

ITEMS 136 to 138 ARE BASED ON THE FOLLOWING INFORMATION:

Oneng Corporation's present capital structure consists of 30% debt,

10% preferred equity, and 60% common equity.

structure is considered optimal and Oneng Corporation wishes to

This capital

maintain it. For the coming year, Oneng Corporation is planning to

invest in an P80M project that will be financed according to the

desired capital structure. Currently, Oneng Corporation has P20M

cash available for the project.

136. The percentage of P80M that will come from long-term debt is
30%

a.

C. P24M.

d. P18M.

b.

22.5%

137. The percentage of P80M that will oome from a new issuance of

common stock is

60%

a.

C. 30.6%.

d. 45%.

b.

40.8%

138. If the company will maintain the optimal capital structure to finance

the project, and preferred stocks are issued, the proceeds should be

P6M.

10%.

d. 7.5%.

a.

C.

b. P8M.

139. Butchoy Corporation's present capital structure, at book value, is

shown below:

P 9,800,000
1,400,000

9,800,000

P21.000.000

Bonds

Preferred stocks (140,000 shares)

Common stocks (280,000 shares)

Total

Additional data pertaining to the capital structure were gathered

and they are as foilows:

Preferred

Stocks

Common

Stocks

P40 per share

Bonds

80% of par P10 per share

9%

Current selling price

Interest rate

Expected dividend payments

Dividend growth rate

Income tax rate

1.20/share

6%

8%lyear
30%

What is Butchoy Corporation's weighted average cost of capital if

its new financing will be in proportion to the market value of its

present financing?

11.00%

C.

8.86%

d.

8.39%

a.

b. 23.12%

140. Unye Corporation expects to pay dividends of P4.80 per share at

the end of the current year. The dividend growth rate is 10% and

the cost of common equity capital is 14%.

If the dividend growth model is used to appraise Unye Corporation's

shares of stocks, the price of the stocks to the public is

a. P120.00 per share.

b. P 5.28 per share.

14.00%.

C.

d. 15.40%.

141. Danise Corporation believes that it can sell long-term bonds with

an 8% coupon rate, although the effective rate is 10%. If such

bonds are part of Danise Corporation's financing plans for next

year, what is the after-tax (30% tax rate) cost of bonds for

purposes of calculating the corporation's cost of capital?

a. 5.44%

b. 7%

C. 8%

d. 10%

ITEMS 142 to 148 ARE BASED ON THE FOLLOWING INFORMATION:

At the end of 200A, Tanya Corporation had the following capital

structure considered to be optimal (in millions of pesos):

Amount

P 42.00

25.20

100.80

Debt (10% coupon bonds)

16% Preferred stocks, P100 par value

Common stocks and retained earnings

25%

15%

60%

The management of Tanya Corporation is planning to increase its

productive capacity. This plan will require acquisition of additional

facilities that calls for a substantial amount of capital expenditures.

Tanya is considering four investment alternatives:

Amount of

Investment Required
P300M

300M

300M

300M

Rate of Returm

Alternative A

Alternative B

Alternative C

Alternative D

14.80%

15.20%

15.50%

16.00%

Preferred stocks may be issued at par.

Common stock has a par value of P10 and is selling for P42 per

share, net of P3 per share flotation cost. The company has had

8% dividend yield and a growth rate of 9% per year.

Retained earnings as of the end of 200A amount to P58.8M.

The 10% yield on bonds is applicable to a maximum of P70M

bonds. Additional debt will require a 4% premium and be sold to

yield 14%.

The corporate tax rate is 40%

142. The cost of retained earnings and common stocks are

Retained Earnings

Common Stocks
8%

a.

9%

b.

5.44%

17.72%

25%

C.

d.

18.34%

17.72%

18.34%

143. What is the cost of preferred stocks?

10.88%

16%

C.

a.

d. P16

5.12%

b.

144. The weighted-average cost of capital as of the end of 200OA is

C. 17.72%

d. 15.15%

14.78%

a.
b. 18.34%

145. What is the retained earnings breakpoint?

C. P100.8M

a. P58.8M

b. P98.0M

d. P35.28M

146. What is the weighted-average cost of capital beyond the retained

earnings breakpoint?

C. 17.72%

d. 15.15%

14.78%

a.

b. 18.34%

147. What is the debt breakpoint?

a, P7OM

b. P42M

C. P280M

d. P 28M

148. If the additional facilities require an investment of P30OM, which

investment alternative should be chosen?

a. Alternative A

b. Alternative B

Alternative C

d. Alternative D
C.

ITEMS 149 and 150 ARE BASED

ON THE FOLLOWING INFORMATION:

Neo Corporation is a closely held corporation owned by Rivera

Family. It currently earns P6M profit after tax and has 300,000

shares outstanding. Next year, Neo Corporation will go public for

the first time. Its initial public offering of 100,000 shares will be

priced at P60 per share, with a 5% spread on the offering price. In

addition, Neo Corporation will incur P200,000 in out-of-pocket costs.

149. If all the shares will be issued, the net proceeds will be

a. P6.0M.

b. P5.5M.

C. P5.7M.

d. P5.8M.

150. What rate of return must be earned on the net proceeds from the

IPO so that there will be no dilution in earnings per share during

the year of going public?

a. 35.09%

b. 33.33%

34.48%

d. 36.36%

C.

151. Bea Recreation Corporation is a publicly listed corporation. In

200C, it decided to go private by buying all its 5M outstanding

shares at P5.80 per share.

In 200D, it restructured the company by selling its low margin

facilities (bowling and billiard centers) for P20M and concentrated

in operating its golf course, tennis, and badminton centers. Within

one year, the restructuring improved the company's earnings per

share to P1.50. This made the company's management consider

expanding its golf and tennis operations. Funds for the planned

expansion can be raised by going public again and issue the 5M

shares that it previously reacquired. The company's investment

bankers said that the shares can be offered to the public at a P/E

ratio of 4 times the present earnings per share of P1.50.

At what price will the 5M shares be offered to the public?

845

a. P6.00

b. P4.00

C. P1.50

d. P2.67

ITEMS 152 to 155 ARE BASED ON THE FOLLOWING INFORMATION:

Ka Jess Corporation is planning to go public for the first time. To

determine some relevant information pertaining to the planned

IPO, Ka Jess Corporation submitted the following operating and

financial data for the most recent year to its investment bankers:

KA JESS CORPORATION

Baiance Sheet

December 31, 200D

Assets:

Cash

P 240,000

3,360,000

6,080,000

10,800,000

P20,480.000

Accounts receivable

Inventory

Plant and equipment, net

Total assets

Liabilities:

Accounts and notes payable

Long-term liabilities

Total Liabilities

Stockholders' Equity:

Common stocks (480,000 shares

@ P4 par value)

Additional paid-in capital

Retained earnings

Total stockholders' equity

P3,520,000

3,808,000

P7,328,000

P1, 920,000
4,480,000

6,752,000

P13,152,000

P20.480.000

Total liabilities and stockholders' equity

KA JESS CORPORATION

Income Statement

For the Year Ended December 31, 200D

Sales

Cost of goods sold

Gross income

P35,884,800

25,964,800

P 9,920,000

4,255,040

P 5,664,960

Less operating expenses

Income from operations

Income from operations

Less interest expense

Income before tax

Less provision for income tax

Net income

P 5,664,960

592,960
P 5,072,000

2,028,800

P 3.043.200

The investment bankers estimate that the new public offering will

be at 5 times the earnings per share. The company will issue

120,000 new common shares to the public.

152. What will be the initial price of the new shares?

C. P 0.99

d. P25.35

a. P31.50

b. P 1.01

153. If an underwriter spread of 6% and out-of-pocket costs of

P159,480 will be incurred, how much will the net proceeds from

the new issuance be?

a. P3,042,000

b. P2,700,000

C. P2,859,480

d. P2,882,520

154. What return must the corporation earn on the net proceeds from

the issuance of new shares to equal the earnings per share before

the offering?

a. 25%

b. 31.10%

C. 25.35%

d. 28.18%
155. Assume that the price-earnings ratio after the distribution of new

shares is 5, and that of the 120,000-share distribution, 30,000

shares belong to the current stockholders and 90,000 are new

corporate shares and these will be added to the 480,000 shares

currently outstanding. At how much should the stocks be priced to

the public?

a. P25.35

b. P31.70

C. P 26.70

d. P126.80