MANAGEMENT ADVISORY SERVICES MAS. Simulated Exam 1 Excel Professional Services, Inc. Management Firm of Professional Review and Training Center (PRTC) (Luzon) Manila 7339344/7347903 * Calamba, Laguna (049) 5453807 * Angeles, Pampanga (0917) 5103332 (Visayas) Bacolod City (034) 4346214 * Cebu City (032) 2557777 loc. 122 (Mindanao) Cagayan De Oro City (0995) 057-0499 * Davao City (082) 2250049 CPA REVIEW since 197 ADB/URO/BDT MAY 2017 The market for outstanding, listed common stock is called the a. Primary market. b. New Issue market. ¢, Over-the-counter market. d. Secondary market. 2. All of the following are advantages of debt financing, Except a. Interest Is tax deductible. b. The use of debt will assist in lowering the firm's cost of capital. . In periods of inflation, debt is paid back with pesos that are worth less than the ones borrowed. d. The acquisition of debt decreases stockholders’ risk. 3, Assume that Company A and Company B are alike in all respects except that Company A utilizes more debt financing and less equity financing than does Company B. Which of the following statements is true? a. Company A has more net earnings variability than Company B. b. Company A has more operating earnings variability ‘than Company B. c. Company A has less operating earnings variability than Company B. d. Company A has Company B. less financial leverage than 4. When a company increases its degree’ of financial leverage The equity beta of the company falls. The systematic risk of the company falls. c. The unsystematic risk of the company falls. d. The standard deviation of returns on the equity of the company rises. 5. Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs P2 and sells for P3 through regular stores. Any boxes ot sold through regular stores are sold through Dough's thrift store for Pi. Dough assigns the following probabilities to selling additional boxes: ‘Additional sales Probability 60 0.6 100 x2 =2n o4 What is the expected value of Dough’s decision to buy 100 additional boxes of muffins? an P28 OF! unsyze ahs 2s b. baa Oe (ina) -an I ©. P52 pep. tatit d. P68 ie Coa ete) tix) se 6. A construction company has just completed @ bridge over the Visayan area. This the first bridge the company ever built and it required 100 weeks to ‘complete. Now having hired a bridge construction crew with ‘some experience, the company would like to continue building bridges. Because of the investment in heavy machinery needed continuously by this crew, the company believes it would have to bring the average construction time to less than one year (52, weeks) per bridge to earn a sufficient return on Investment. The average construction time will follow ‘an 80% learning curve. To bring the average construction time (over all bridges constructed) below fone year per bridge, the crew would have to build ‘appronimately b. 3additional bridges. d. 8 additional bridges. 7. Benchmarking allows managers to a. determine who in the industry performs similar C4, Processes most effectively. b. determine the processes that have high value-to- cost relationships. ¢. compare certain internal processes, services and activities to those of other companies in order to Identify strengths and weaknesses. d. reproduce another company’s product design and manufacturing processes to eliminate competitive advantage. 8. Hanes Corp. is considering establishing a lockbox system. The bank will charge P30,000 annually for the service, which will save the firm approximately P15,000 Din processing costs. The lock box system will reduce the float for cash receipts by 2 days. Assuming that the average daily cash receipts are equal to P400,000, and short-term interest costs are 4%, calculate the benefit or loss from adopting the lockbox system. 2. P30,000 loss dinky ty #7), = th avid We b. P15,000 loss se €. P12,000 benefit ca d. P17,000 benefit 000 ber y 9. The early liquidation of a long-term hide with cash affects the 2. Current ratio to a greater degree than the quick ratio. b. Quick ratio to 2 greeter degree than the current ratio. ‘e. Current and quick ratio to the same degree. d. Current ratio but not the quick ratio. Items 10 thru 12 are based on the following information: Capital Invest Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year. Initial Cash Outlay Project 1 Project2 Project 3. Project 4 200,000 298,000 248,000 272,000 Annual net cash inflows ri P65,000 100,000 P80,000 P-95,000 Yr2 70,000 135,000 95,000 125,000 Yr3 80,000 90,000 90,000 90,000 Yra4 40,000 65,000 80,000 60,000 NPV (3,798) 4.276 14.064 14.652, PL «98% «101% += «106% += 105% IRR 11% 13% 14% 15% 10. Which project(s) should Capital Invest Inc. undertake CC. during the upcoming year assuming it has no budget restrictions? 2. Allof the projects. SV b. Projects 1, 2, and 3. c. Projects 2, 3, and 4. d. Projects 1, 3, and 4. 411, Which project(s) should Capital Invest Inc. undertake during the upcoming year if It has only 600,000 of funds ailable? Projects 1 and 3. Projects 2, 3, and 4. Projects 2 and 3. 4. Projects 3 and 4. Poae EXCEL PROFESSIONAL SERVICES, INC. 12, Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only P300,000 of capital }) tunds available? ° a. Project 1. b. Projects 2, 3, and 4. c. Projects 3 and 4. d. Project 3. 13. A corporation is considering purchasing a machine that costs P100,000 and has 2 P20,000 salvage value. The C machine will provide net annual cash inflows of P25,000 per year and has a six-year life. The corporation uses a discount rate of 10%. The discount factor for the present value of a single sum six years in the future is 0.564. The discount factor for the present value of an annuity for six years is 4.355. What Is the net present Value of the machine? ! a. P (2,405) (asr42sy.) b. P8875 + [omy.sit) c. P20,155 = ae 4. P28,875 zat 14, Assume that one of Watco's bonds with P4.000 face is 4 SUEently seling for P950. What is the current yield on the bond? aryl a. 8.00% = b. 9.00% " c. 7.56% sale d. 8.42% c 45, The following is selected data for the Consumer Products division of Aaron Corporations for 2016: C. Sales 50,000,000 Average invested capital (assets) 20,000,000 Net income 2,000,000 Cost of capital 8%. What is the amount of interest rate spread for the division. a. 8% b. 10% 2% d. 20% 327, 16. The benefits of a just-in-time system for raw materials usually include 2. Elimination of non-value-added operations. b. Increase in the number of suppliers, ensuring competitive bidding. . Maximization of the standard delivery quantity ‘thereby lessening the paperwork for each delivery. 4. Decrease in the number of deliveries required to maintain production. thereby 6 17. Paulson Company has only 25,000 hours of machine time each month to manufacture its two products, sl Product x has a contribution margin of P50, and Product Y has @ contribution margin of P64. Product X requires § hours of machine time, and Product ¥ requires & hours of machine time. If Paulson Company wants to dedicate 80 percent of its machine time to the product that will provide the most income, the company will have a total contribution margin of 2. P250,000 c. P210,000 ¥ lamx-3 #4 B. P240,000 4, 200,000 ¥ /.) 18. Knox Company uses 10,000 units of a part in its Production process. The costs to make @ part are: direct material, P12; direct labor, P25; variable overhead, P13; and applied fixed overhead, P30. Knox has received @ quote of P55 from a potential supplier for this part. If Knox buys the part, 70 percent of the applied fixed overhead would continue. Knox Company would be better off by c. P40,000 to buy the part d, 160,000 to manufacture the part 19. Dahl Co. uses a standard costing system in connection with the manufacture of a "one size fits all" article of clothing. Each unit of finished product contains two yards of direct material. However a 20% direct material spoilage calculated on input quantities occurs during the manufacturing process. The cost of the direct material is P3 per yard. The standard direct material cost per unit of finished product is. 2.p%7=35 a. 74.80 b. P6.00 7.20 6. 7.50 20. Kumintang, Inc. an appliance manufacturer, Is developing’ a new line of ovens that uses controlled- laser technology. The research and testing costs associated with the new ovens is said to arise from a: 2. unit-level activity. b. batch-level activity. © product-sustaining activity. 4d. facilty-level activity. 21, Companies that engage in mass customization; 2, tend to have a relatively low production volume. © Bi tend to have a high production volume thet involves highly stendardized end-products. tend to have 2 high production volume, many standardized components, and customer-specified combinations of components. 4. tend to have a high production volume, many Unique components, "and —customer-specified combinations of components. 22. An appropriate technique for planning and controlling manufacturing inventories, such as. raw materials, A components, and subassemblies, whose demand depends on the level of production is 2. Materials requirements planning. b. Regression analysis. c. Capital budgeting, d. Linear programming. Question No. 23 through 25 are based on the following: The Tagum Knitting Company produces sweaters under the NNAHRON label. The company buys raw wool on the market and processes it into wool yarn from which the sweaters are woven. One spindle of wool yarn is required to produce one sweater. The costs and revenues associated with the sweaters are given below: Per Sweater Selling price 300 Manufacturing cost Raw Materials Buttons, thread, etc. Wool yarn ‘Sub-total, Direct labor Manufacturing OH Manufacturing profit (loss) Originally, all of the wool yarn was used to produce Sweaters, but in recent years a market has developed for the wool yarn itself. The yarn is purchased by other companies for use in production of wool biankets and other wool products. Since the development of the market for the wool yarn, @ continuing dispute has existed in the Tagum Sweater Company as to whether the yarn should be sold simply as yarn or processed into sweaters. Current cost and revenue data on the yarn are given below: Per Spindle Selita tisten P200EXCEL PROFESSIONAL SERVICES, INC. Direct labor 36 Manufacturing OH 34 _160 Manufacturing profit Bao ‘The market for sweaters is temporarily depressed due to unusually El Nino heat effect in region where the sweaters are sold, This has made it necessary for the company to discount the selling price of the sweaters to P300 from the normal P400 price. Since the market for wool yarn has remained strong, the dispute has again surfaced over whether the yarn should be sold outright rather than processed into sweaters. The sales manager thinks that the production of sweaters should be discontinued. She is upset about having to sell sweaters at a P25 loss when the yarn could be sold for a P40 profit. However, the Production superintendent is equally upset at’ the Suggestion that he close down a large portion of the factory. He argues that the company is in the sweater business, not the yarn business, and that the company should focus on its core strength. Due to the nature of the production process, virtually all of the manufacturing overhead costs are fixed and would not be effected even if sweaters were discontinued. Manufacturing overhead is assigned to products on the basis of 150% of direct labor cost. 23. Would you recommend that the wool yarn be sold outright or processed into sweaters? 7er 2m = (rr No, profit to decrease by P25. % b. Yes, profit to increase by P22 oa c. Yes, profit to increase by P23. . No, profit to decrease by P15 24, What is the lowest price that company can accept for 2 unit of sweater? a. P325 c. P274 b. 278 d. P315 25. What is the amount of incremental cost per unit if the company produces sweaters? 2. 238 . P148, b. P1B4 d. P78 Reto 26. Hotdog Distribution Company operates four hundred hotdog stands in the Greater Manila area. Depreciation expense for the four hundred carts amounts to 160,000 a year, or P400 per cart. Depreciation with regard to number of hotdog stands should be considered a a. fixed cost b. variable cost cc. mixed cost d. discretionary cost 27. A plot of data that results in bunched points with little slope generally indicates: a. a strong relationship b. a weak relationship ©. 2 positive relationship d. a negative relationship 28. Pentagon Corporation has been manufacturing 5,000 units of Part 10541, which is used in the manufacture © of one of its products. At this level of production, the ‘cost per unit of manufacturing Part 10541 Is as follows: Direct material P2. Direct labor a) Variable overhead 4“ Fixed overhead applied 65 Total P20 ‘Octagon Company has offered to sell Pentagon 5,000 units of Part 10541 for P19 a unit. Pentagon has determined that It could use the facilities currently used to manufacture Part 10541 to manufacture Part 10451 ‘Qndt Cansrats On fendtattin Goi ot Waa dase ‘overhead applied will continue even if Part 10541 is Purchased from Octagon. To determine whether to ‘accept Octagon's offer, the net relevant costs to make are a. 70,000. b. 84,000. . P90,000. d. 95,000. Three new companies (R, S, and T) began operations on January i of the current year. Consider the following operating costs that were incurred by these companies during the complete calendar year: CompanyR Company S Production in units 10,000 10,000 10,000 Sales price per unit P10 P10 P10 Fixed production 19,000 F20,000 30,000 Wargble oreduction: p30,000 20,000 —_P10,000 Variable SG8A P10,000 20,000 30,000 Fixed SCBA 30,000 ——F20,000-——P10,000 29, Refer to Companies R, S, and T. Based on sales of 7,000 units, which company will report the greater 1) Income before Income taxes If absorption costing Is used? a. Company R b. Company 5. Company T 4d. All of the companies will report the same income. 30. Refer to Companies R, S, and T. Based on sales of jk 7000 units, which compeny will report the greater income before income taxes if variable costing is used? a. Company R [ak**)-50 b, Company S (4x3) We & Company T (34 %4)~e 4. Allof the comparids will report the same income. 31, Refer to Companies R, S, and T. Based on sales of 410,000 units, which company will report the greater 1) income before income taxes If variable costing Is used? Company BF. Company § |(|( ¥*- on > fee Company T! © ka = ay All'of the companies will report the same income before income taxes. aoge 32. Vera Cruz Company has projected cost of goods sold of, 2 million including fixed costs of P400,000, and A. Yariable costs are expected to be 75 percent of net, sales. What will be the projected net sales? @. 72,133,333 hum ia], =2105,335, b. p2iao0.000 MM*3S7 =20, ©. P2,666,667 d. 2,000,000 33. The budgeting technique that focuses on different phases of @ product such as planning and concept * design, ‘esting, "manufacturing, and distribution and customer service is known as: a. life-cycle budgeting. b. integrative budgeting. base budgeting. d. comprehensive budgeting. 34, The following events took place when Managers A, 8, Cand C were preparing budgets for the upcoming period: 1, Manager A increased property tax expenditures by 2% when she was Informed of a recent rate hike by local authorities. II, Manager B reduced sales revenues by 4% when informed of recent aggressive actions by @ new aos