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Important Reminder: A TRUE LASALLIAN CHOOSES TO BE HONEST EVEN IF OTHERS ARE NOT, EVEN IF OTHERS CANNOT, & EVEN IF

OTHERS WILL NOT. From the Student Handbook 2008-2009, Sec. 9.5, p. 75-76
The University strongly prohibits any form of intellectual dishonesty, most common of which are CHEATING & plagiarism.
Specifically prohibited are the following acts of dishonesty: Cheating during examinations which may be in the form of copying from another persons
answers, lifting from unauthorized materials, giving information to another student, or colluding or attempting to collude with other students during an
examination, having somebody else take ones examination or taking it for another person, and using unauthorized notes or texts during an exam. The
penalty for the offenses under the Academic & Intellectual Dishonesty will range from a minimum of total loss of credit for the assignment or examination
in question, suspension of not less than five school days disciplinary probation for the rest of the students stay in the University & a maximum penalty of
dismissal from the University.

University of St. La Salle-Bacolod City

COLLEGE OF BUSINESS AND ACCOUNTANCY


Midterm Examination AY 2016-2017
Finance 1 (FIN1)
Students Name: ______________________________________ Instructors Name:_________________
Course & Year: ______________________________________ Score: _________________
General Instructions: Write all answers on the answer sheet provided. Write the CAPITAL LETTER of the
best answer for multiple choice questions. Use only blue or black ink. Attach the answer sheet with the
questionnaire upon submission. You may write on the questionnaire but erasure or any form or alteration of
final answer is not allowed.

Part 1.Concepts. Multiple Choice. (1 Point each).

1. Last year, Blanda Brothers had positive net cash flow, yet cash on the balance sheet decreased. Which of
the following could explain the companys financial performance? D
a. The company issued new common stock.
b. The company issued new long-term debt.
c. The company sold off some of its assets.
d. The company purchased a lot of new fixed assets.
e. The company eliminated its dividend.

2. Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to
last year. Which of the following could explain this performance? B
a. The companys interest expense increased.
b. The companys depreciation and amortization expenses declined.
c. The companys operating income declined.
d. All of the statements above are correct.
e. None of the statements above is correct.

3. On its 2001 balance sheet, Sherman Books had retained earnings equal to P510 million. On its 2002
balance sheet, retained earnings were also equal to P510 million. Which of the following statements is most
correct? C
a. The company must have had net income equal to zero in 2002.
b. The company did not pay dividends in 2002.
c. If the companys net income in 2002 was P200 million, dividends paid must have also equaled P200 million.
d. If the company lost money in 2002, they must have paid dividends.
e. None of the statements above is correct.

4. Assume that a company currently depreciates its fixed assets over


7 years. Which of the following would occur if a tax law change forced the company to depreciate its fixed
assets over 10 years instead? D
a. The companys tax payment would increase.
b. The companys cash position would increase.
c. The companys net income would increase.
d. Statements a and c are correct.
e. Statements b and c are correct.

5. Which of the following statements is most correct? C


a. Accounts receivable show up as current liabilities on the balance sheet.
b. Dividends paid reduce the net income that is reported on a companys income statement.
c. If a company pays more in dividends than it generates in net income, its balance of retained earnings
reported on the balance sheet will fall.
d. Statements a and b are correct.
e. All of the statements above are correct.

6. Haskell Motors common equity on the balance sheet totals P700 million, and the company has 35 million
shares of common stock outstanding. Haskell has significant growth opportunities. Its headquarters has a
book value of P5 million, but its market value is estimated to be P10 million. Over time, Haskell has issued
outstanding debt that has a book value of P10 million and a market value of P5 million. Which of the following
statements is most correct? E
a. Haskells book value per share is P20.
b. Haskells market value per share is probably less than P20.
c. Haskells market value per share is probably greater than P20.
d. Statements a and b are correct.
e. Statements a and c are correct.

7. The CFO of Mulroney Brothers has suggested that the company should issue P300 million worth of common
stock and use the proceeds to reduce some of the companys outstanding debt. Assume that the company
adopts this policy, and that total assets and operating income (EBIT) remain the same. The companys tax rate
will also remain the same. Which of the following will occur? A
a. The companys net income will increase.
b. The companys taxable income will fall.
c. The company will pay less in taxes.
d. Statements b and c are correct.
e. All of the statements above are correct.

8. When a balance sheet amount is related to an income statement amount in computing a ratio, C
a. The income statement amount should be converted to an average for the year.
b. Comparisons with industry ratios are not meaningful.
c. The balance sheet amount should be converted to an average for the year.

d. The ratio loses its historical perspective because a beginning-of-the-year amount is combined with an end-ofthe-year amount.

9. A useful tool in financial statement analysis is the common-size financial statement. What does this tool
enable the financial analyst to do? C
a. Evaluate financial statements of companies within a given industry of approximately the same value.
b. Determine which companies in the same industry are at approximately the same stage of development.
c. Compare the mix of assets, liabilities, capital, revenue, and expenses within a company over time or
between companies within a given industry without respect to relative size.
d. Ascertain the relative potential of companies of similar size in different industries.

10. Last year, a business had no long-term investments; this year long term investments amount to P100,000.
In a horizontal analysis the change in long-term investments should be expressed as C
a. An absolute value of P100,000, and an increase of 100%
b. An absolute value of P100,000 and an increase of 1,000%
c. An absolute value of P100,000 and no value for a percentage change
d. No change in any terms because there was no investment in the previous year.

11. Which of these ratios are measures of a companys profitability? B


1. Earnings per share

5. Return on assets

2. Current ratio

6. Inventory turnover

3. Return on sales

7. Receivables turnover

4. Debt-equity ratio

8. Price-earnings ratio

a.

All eight ratios.

c.

1, 3, 5, 6, 7, and 8 only.

b.

1, 3, 5, and 8 only.

d.

1, 3, and 5 only

12. How are the following used in the calculation of the dividend-pay-out ratio for a company with only common
stock outstanding? C
a.

b.

c.

d.

Dividends per share

Denominator Denominator Numerator

Numerator

Earnings per share

Numerator

Not used

Denominator Not used

Book value per share

Not used

Numerator

Not used

Denominator

13. Mabuhay Corp. has current assets of P180,000 and current liabilities of P360,000. Which of the following
transactions would improve Mabuhays current ratio? C
a. Refinancing a P60,000 long-term mortgage with a short-term note.
b. Collecting P20,000 of short-term accounts receivable.
c. Purchasing P100,000 of merchandise inventory with a short-term accounts payable.
d. Paying P40,000 of short-term accounts payable.

14. All of the following statements are valid except D


a. The short term creditor is more interested in cash flows and in working capital management that he is in how
much accounting net income is reported.
b. If the return on total assets is higher than the after-tax cost of long-term debt, then leverage is positive, and
the common stockholders will benefit.
c. The results of financial statements analysis are of value only when viewed in comparison with the results of
other periods or other firms.
d. The inventory turnover is computed by dividing sales by average inventory.

15. The following situations are descriptive of SBD Corporation. Which would be considered as the most
favorable for the common stockholders. B
a. Book value per share of common stock is substantially higher than market value per share; return on
common stockholders equity is less than the rate of interest paid to creditors.
b. Equity ratio is high; return on assets exceeds the cost of borrowing.
c. SBD stops paying dividends on its cumulative preferred stock; the price-earnings ratio of common stock is
low.
d. Equity ratio is low; return on assets exceeds the cost of borrowing.

16. In a comparison of 1992 to 1991, Neir Co.s inventory turnover ratio increased substantially although sales
and inventory amounts were essentially unchanged. Which of the following statements explains the increased
inventory turnover ratio? D
a. Cost of goods sold decreased.
b. Accounts receivable turnover increased.
c. Total asset turnover increased.
d. Gross profit percentage decreased.

17. A companys current ratio is 2.2 to 1 and the quick ratio is 1.0 to 1 at the beginning of the year. At the end
of the year, the company has a current ratio of 2.5 to 1 and a quick ratio of 0.8 to 0.1 Which of the following
could help explain the divergence in the ratios from the beginning to the end of the year? A
a. An increase in inventory levels during the year.
b. An increase in credit sales in relationship to sales
c. An increase in the use of payables during the current year.
d. An increase in the use of payables during the current year.

18. When compared to a debt-to-assets ratio, a debt-to-equity ratio would B


A. Be about the same as the debt-to-assets ratio.
B. Be higher than the debt-to-assets ratio.
C. Be lower than the debt-to-assets ratio.
D. Have no relationship at all to the debt-to-assets ratio.

19. You have determined the profitability of a planned project by finding the present value of all the cash flows
from that project. Which of the following would cause the project to look more appealing in terms of the
present value of those cash flows? A

a. The discount rate decreases.


b. The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the
same.
c. The discount rate increases.
d. Statements b and c are correct.
e. Statements a and b are correct.

20. Which of the following statements is most correct? E


a. A 5-year P100 annuity due will have a higher present value than a
5-year P100 ordinary annuity.
b. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and
same interest rate.
c. If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent.
d. Statements a and c are correct.
e. All of the statements above are correct.

21. The future value of a lump sum at the end of five years is P1,000. The nominal interest rate is 10 percent
and interest is compounded semiannually. Which of the following statements is most correct? D
a. The present value of the P1,000 is greater if interest is compounded monthly rather than semiannually.
b. The effective annual rate is greater than 10 percent.
c. The periodic interest rate is 5 percent.
d. Statements b and c are correct.
e. All of the statements above are correct.

22. You are interested in investing your money in a bank account. Which of the following banks provides you
with the highest effective rate of interest? D
a. Bank 1; 8 percent with monthly compounding.
b. Bank 2; 8 percent with annual compounding.
c. Bank 3; 8 percent with quarterly compounding.
d. Bank 4; 8 percent with daily (365-day) compounding.
e. Bank 5; 7.8 percent with annual compounding.

23. Your family recently obtained a 30-year (360-month) P100,000 fixed-rate mortgage. Which of the following
statements is most correct? (Ignore all taxes and transactions costs.) B
a. The remaining balance after three years will be P100,000 less the total amount of interest paid during the
first 36 months.
b. The proportion of the monthly payment that goes towards repayment of principal will be higher 10 years from
now than it will be this year.
c. The monthly payment on the mortgage will steadily decline over time.
d. All of the statements above are correct.
e. None of the statements above is correct.

24. Suppose someone offered you the choice of two equally risky annuities, each paying P10,000 per year for
five years. One is an ordinary (or deferred) annuity, the other is an annuity due. Which of the following
statements is most correct? C
a. The present value of the ordinary annuity must exceed the present value of the annuity due, but the future
value of an ordinary annuity may be less than the future value of the annuity due.
b. The present value of the annuity due exceeds the present value of the ordinary annuity, while the future
value of the annuity due is less than the future value of the ordinary annuity.
c. The present value of the annuity due exceeds the present value of the ordinary annuity, and the future value
of the annuity due also exceeds the future value of the ordinary annuity.
d. If interest rates increase, the difference between the present value of the ordinary annuity and the present
value of the annuity due remains the same.
e. Statements a and d are correct.

25. Which of the following statements is most correct? E


a. The first payment under a 3-year, annual payment, amortized loan for P1,000 will include a smaller
percentage (or fraction) of interest if the interest rate is 5 percent than if it is 10 percent.
b. If you are lending money, then, based on effective interest rates, you should prefer to lend at a 10 percent
nominal, or quoted, rate but with semiannual payments, rather than at a 10.1 percent nominal rate with annual
payments. However, as a borrower you should prefer the annual payment loan.
c. The value of a perpetuity (say for P100 per year) will approach infinity as the interest rate used to evaluate
the perpetuity approaches zero.
d. Statements b and c are correct.
e. All of the statements above are correct.

Part 2. Problems. (3 points each) All supporting computations must be presented. Answers with no
supporting computation will not be given credit.

1. At the beginning of the year, Gonzales Corporation had P100,000 in cash. The company undertook a major
expansion during this same year. Looking at its statement of cash flows, you see that the net cash provided by
its operations was P300,000 and the companys investing activities required cash expenditures of P800,000.
The companys cash position at the end of the year was P50,000. What was the net cash provided by the
companys financing activities? 450,00

2. Cox Corporation recently reported an EBITDA of P22.5 million and P5.4 million of net income. The company
has P6 million interest expense and the corporate tax rate is 35 percent. What was the companys
depreciation and amortization expense? 8,192,308

3. Scranton Shipyards has P20 million in total investor-supplied operating capital. The companys WACC is 10
percent. The company has the following income statement:

Sales
Operating costs
Operating income (EBIT)
Interest expense
Earnings before taxes (EBT)

P10.0 million
6.0 million
P 4.0 million
2.0 million
P 2.0 million

Taxes (40%)

0.8 million

Net income

P 1.2 million

What is Scrantons EVA? 400,000


4. Coolidge Cola is forecasting the following income statement:
Sales
Operating costs excluding depreciation and amortization
EBITDA
Depreciation and amortization
Operating income (EBIT)
Interest expense
Taxable income (EBT)
Taxes (40%)
Net income

P30,000,000
20,000,000
P10,000,000
5,000,000
P 5,000,000
2,000,000
P 3,000,000
1,200,000
P 1,800,000

Assume that, with the exception of depreciation, all other non-cash revenues and expenses sum to zero.
Congress is considering a proposal that will allow companies to depreciate their equipment at a faster
rate. If this provision were put in place, Coolidges depreciation expense would be P8,000,000 (instead of
P5,000,000). This proposal would have no effect on the economic value of the companys equipment, nor would
it affect the companys tax rate, which would remain at 40 percent. If this proposal were to be implemented, what
would be the companys net cash flow? 8,000,000

5. Barr Co. has total debt of P420,000 and shareholders equity of P700,000. Barr is seeking capital to fund an
expansion. Barr is planning to issue an additional P300,000 in common stock, and is negotiating with a bank to
borrow additional funds. The bank is requiring a debt-to-equity rate of 0.75. What is the maximum additional
amount Barr will be able to borrow? 330,000

6. Perry Technologies Inc. had the following financial information for the past year:
Sales

P860,000

Inventory turnover

8x

Quick ratio

1.5

Current ratio

1.75

What were Perrys current liabilities? 430,000

7. Alumbat Corporation has P800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on
its bank loan. Alumbats annual sales are P3,200,000, its average tax rate is 40 percent, and its net profit margin
on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to
renew its loan, and bankruptcy will result. What is Alumbats current TIE ratio? 5.0x

8. Victoria Enterprises has P1.6 million of accounts receivable on its balance sheet. The companys DSO is 40
(based on a 360-day year), its current assets are P2.5 million, and its current ratio is 1.5. The company plans to
reduce its DSO from 40 to the industry average of 30 without causing a decline in sales. The resulting decrease
in accounts receivable will free up cash that will be used to reduce current liabilities. If the company succeeds in
its plan, what will Victorias new current ratio be? 1.66

9. Taft Technologies has the following relationships:


Annual sales

P1,200,000

Inventory turnover ratio

4.8

Current liabilities

P 375,000

Current ratio

1.2

Days sales outstanding


(DSO)

40

(360-day year)

The companys current assets consist of cash, inventories, and accounts receivable. How much cash does Taft
have on its balance sheet? 66,667

10. Last year, Thomas Lumber Co. had a profit margin of 10 percent, total assets turnover of 0.5, and a debt ratio
of 20 percent. (The company finances its assets with debt and common equity; it does not use preferred stock.)
This year, the companys CFO wants to double ROE. She expects the total assets turnover will remain at 0.5,
while the profit margin and debt ratio will increase enough to double ROE. Assume that the profit margin is
increased to 15 percent, what debt ratio will the company need in order to double its ROE? 0.40

11. Southeast Packagings ROE last year was only 5 percent, but its management has developed a new
operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will
result in interest charges of P8,000 per year. Management projects an EBIT of P26,000 on sales of P240,000,
and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be
40 percent. If the changes are made, what return on equity will Southeast earn? 22.50%

Questions 12 thru 15 are based on the following information.


You are requested to reconstruct the accounts of Angela Trading for analysis. The following data were made
available to you:

Gross margin for 19x8

P472,500

Ending balance of merchandise inventory

P300,000

Total stockholders equity as of December 31, 19x8

P750,000

Gross margin ratio

35%

Debt to equity ratio

0.8:1

Times interest earned

10

Quick ratio

1.3:1

Ratio of operating expenses to sales

18%

Long-term liabilities consisted of bonds payable with interest rate of

20%

Based on the above information,

12. What was the operating income for 19x8? 229,500

13. How much was the bonds payable? 114,750

14. Total current liabilities would amount to 485,250

15. Total current assets would amount to 930,825

16. Today is your 23rd birthday. Your aunt just gave you P1,000. You have used the money to open up a
brokerage account. Your plan is to contribute an additional P2,000 to the account each year on your birthday,
up through and including your 65th birthday, starting next year. The account has an annual expected return of
12 percent. How much do you expect to have in the account right after you make the final P2,000 contribution
on your 65th birthday? 2,045,442

17. A real estate investment has the following expected cash flows:

Year

Cash Flows

P10,000

25,000

50,000

35,000

The discount rate is 8 percent. What is the investments present value? 96,110

18. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the
required funds on a loan in which interest must be paid monthly, and the quoted rate is 8 percent. Bank B will
charge 9 percent, with interest due at the end of the year. What is the difference in the effective annual rates
charged by the two banks? 0.70%

19. An investment pays you 9 percent interest compounded semiannually. A second investment of equal risk,
pays interest compounded quarterly. What nominal rate of interest would you have to receive on the second
investment in order to make you indifferent between the two investments? 8.90%

20. Today, Bruce and Brenda each have P150,000 in an investment account. No other contributions will be
made to their investment accounts. Both have the same goal: They each want their account to reach P1
million, at which time each will retire. Bruce has his money invested in risk-free securities with an expected
annual return of 5 percent. Brenda has her money invested in a stock fund with an expected annual return of
10 percent. How many years after Brenda retires will Bruce retire? 19 years

21. Robert recently borrowed P20,000 to purchase a new car. The car loan is fully amortized over 4 years. In
other words, the loan has a fixed monthly payment, and the loan balance will be zero after the final monthly
payment is made. The loan has a nominal interest rate of 12 percent with monthly compounding. Looking
ahead, Robert thinks there is a chance that he will want to pay off the loan early, after 3 years (36 months).
What will be the remaining balance on the loan after he makes the 36th payment? 5,927.59

22. Your subscription to Joggers World Monthly is about to run out and you have the choice of renewing it by
sending in the P10 a year regular rate or of getting a lifetime subscription to the magazine by paying P100.
Your cost of capital is 7 percent. How many years would you have to live to make the lifetime subscription the
better buy? Payments for the regular subscription are made at the beginning of each year. 15 years

23. Today is your 20th birthday. Your parents just gave you P5,000 that you plan to use to open a stock
brokerage account. Your plan is to add P500 to the account each year on your birthday. Your first P500
contribution will come one year from now on your 21st birthday. Your 45th and final P500 contribution will occur
on your 65th birthday. You plan to withdraw P5,000 from the account five years from now on your 25th birthday
to take a trip to Europe. You also anticipate that you will need to withdraw P10,000 from the account 10 years

from now on your 30th birthday to take a trip to Asia. You expect that the account will have an average annual
return of 12 percent. How much money do you anticipate that you will have in the account on your 65th
birthday, following your final contribution? 505,803

24. You are saving for the college education of your two children. One child will enter college in 5 years, while
the other child will enter college in 7 years. College costs are currently P10,000 per year and are expected to
grow at a rate of 5 percent per year. All college costs are paid at the beginning of the year. You assume that
each child will be in college for four years. You currently have P50,000 in your educational fund. Your plan is to
contribute a fixed amount to the fund over each of the next 5 years. Your first contribution will come at the end
of this year, and your final contribution will come at the date when you make the first tuition payment for your
oldest child. You expect to invest your contributions into various investments, which are expected to earn 8
percent per year. How much should you contribute each year in order to meet the expected cost of your
childrens education? 3,712

25. John is saving for his retirement. Today is his 40th birthday. John first started saving when he was 25 years
old. On his 25th birthday, John made the first contribution to his retirement account; he deposited P2,000 into
an account that paid 9 percent interest, compounded monthly. Each year on his birthday, John contributes
another P2,000 to the account. The 15th (and last) contribution was made last year on his 39th birthday.

John wants to close the account today and move the money to a stock fund that is expected to earn an
effective return of 12 percent a year. Johns plan is to continue making contributions to this new account each
year on his birthday. His next contribution will come today (age 40) and his final planned contribution will be on
his 65th birthday. If John wants to accumulate P3,000,000 in his account by age 65, how much must he
contribute each year until age 65 (26 contributions in all) to achieve his goal? 12,471

26. Your family recently bought a house. You have a $100,000, 30-year mortgage with a 7.2 percent nominal
annual interest rate. Interest is compounded monthly and all payments are made at the end of the month.
What is the monthly payment on the mortgage? 678.79

27. Using the same information on No. 26, what percentage of the total payments during the first three years is
going towards the principal? 12.91

28. The Huck Printing Co. had sales of $10 million, Operating Income of $3 million; Aftertax income of $1
million; assets of $8 million; Stockholders' equity of $5 million; and a total debt of $3 million. What is Huck's
return on equity? 20%

29. Based on the following data, what is the amount of quick assets?

Accounts payable

$ 30,000

Accounts receivable

65,000

Accrued liabilities

7,000

Cash

20,000

Intangible assets

40,000

Inventory

72,000

Long-term investments

100,000

Long-term liabilities

75,000

Marketable securities

36,000

Notes payable (short-term)

20,000

Property, plant, and equipment

625,000

Prepaid expenses

2,000

121,000
30. A company with working capital of $400,000 and a current ratio of 2.5 pays a $75,000 short-term liability.
The amount of working capital immediately after payment is ______. 400,000

<<<END>>>

Your struggles are real. Ive been there. Whatever happens, know that your worth is not
defined by the worlds standards. You are PRECIOUS.

Important Reminder: A TRUE LASALLIAN CHOOSES TO BE HONEST EVEN IF OTHERS ARE NOT, EVEN IF OTHERS CANNOT, & EVEN IF
OTHERS WILL NOT. From the Student Handbook 2008-2009, Sec. 9.5, p. 75-76
The University strongly prohibits any form of intellectual dishonesty, most common of which are CHEATING & plagiarism.
Specifically prohibited are the following acts of dishonesty: Cheating during examinations which may be in the form of copying from another persons
answers, lifting from unauthorized materials, giving information to another student, or colluding or attempting to collude with other students during an
examination, having somebody else take ones examination or taking it for another person, and using unauthorized notes or texts during an exam. The
penalty for the offenses under the Academic & Intellectual Dishonesty will range from a minimum of total loss of credit for the assignment or examination
in question, suspension of not less than five school days disciplinary probation for the rest of the students stay in the University & a maximum penalty of
dismissal from the University.

University of St. La Salle-Bacolod City

COLLEGE OF BUSINESS AND ACCOUNTANCY


Midterm Examination AY 2015-2016
Finance 1 (FIN1)
ANSWER SHEET
Students Name: ______________________________________ Instructors Name:_________________
Course & Year: ______________________________________ Score: _________________

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