CVP ANALYSIS CHAPTER QUIZ

2. The following data relate to Homer Company which sells a single product: Unit
selling price P 20.00 Purchase cost per unit 11.00 Sales commission, 10% of
selling price 2.00 Monthly fixed costs P 80,000 The firm’s salespersons would like
to change their compensation from a 10 percent commission plus P20,000 per
month in salary to a 5 percent commission only. The change in compensation
plan should make the monthly breakeven point in units to?

Correct answers: 7500

3. Lemery Corporation had sales of P120,000 for the month of May. It has a
margin of safety ratio of 25 percent, and before-tax return on sales of 6 percent.
The company assumes its sales constant every month. If the tax rate is 40 percent,
how much is the monthly fixed costs?

Correct answers: 21600
4.Claremont Company is a manufacturer of its only one product line. It had sales
of P400,000 for 2020 with a margin of safety ratio of 20 percent. Its contribution
margin ratio was 10 percent. What are the company’s fixed costs?

Correct answers: 32000
5.Total production costs for Carera, Inc. are budgeted at P230,000 for 50,000
units of budgeted output and P280,000 for 60,000 units of budgeted output.
Because of the need for additional facilities, budgeted fixed costs for 60,000 units
are P30,000 more than budgeted fixed costs for 50,000 units. How much is
Carera’s budgeted variable cost per unit of output?

Correct answers: 2
6.Signal Co. manufactures a single product. For 2020, the company had sales of
P90,000, variable costs of P50,000, and fixed costs of P30,000. Signal expects its
cost structure and sales price per unit to remain the same in 2021, however total
sales are expected to jump by 25%. If the 2021 projections are realized, net
income in 2021 should exceed net income in 2020 by?

Correct answers: 10,000
7.CVP Company is planning to produce two products, VC and FC. CVP is planning
to sell 100,000 units of VC at P4 per unit and 200,000 units of FC at P3 per unit.
Variable costs are 70% of sales for FC and 80% of sales for VC. In order to realize
a total profit of P160,000, what must the total fixed costs be?

Correct answers: 100000
8.Brunei Corp. is developing a new product, surge protectors for high-voltage
electrical flows. The cost information for the product are: Direct materials, P3.25
per unit; Direct labor, P4.00 per unit; Distribution, P0.75 per unit. The company
will also be absorbing P120,000 of additional fixed costs associated with this new
product. A corporate fixed charge of P20,000 currently absorbed by other
products will be allocated to this new product. How many surge protectors
(rounded to the nearest hundred) must Brunei sell at a selling price of P14 per
unit to increase before-tax income by P30,000? (effective income tax rate is 40%)

Correct answers: 25000
10.The following cost functions were developed for manufacturing overhead
costs: Manufacturing Overhead Costs Cost Function Electricity P100 + P20 per
direct labor hour Maintenance P200 + P30 per direct labor hour Supervisors’
salaries P10,000 per month Indirect materials P16 per direct labor hour If July
production is expected to be 1,000 units requiring 1,500 direct labor hours,
estimated manufacturing overhead costs would be how much?

Correct answers: 109300
11.The Didang Company has an operating leverage of 2. Sales for 2021 are
P2,000,000 with a contribution margin of P1,000,000. Sales are expected to
increase by P3,000,000 in 2020. Net income for 2020 can be expected to increase
by what amount over 2021?

Correct answers: 1500000
12.The following information is for Barnett Corporation: Product Chu:
Selling Price P10.00 Variable Cost P 2.50 Product Chay: Selling Price
P15.00 Variable Cost P 5.00 Total fixed costs P 50,000 What is the breakeven
point in pesos of product Chay assuming the sales mix consists of three units of
Product Chu and two units of Product Chay?
Correct answers: 35294.12
 CVP ANALYSIS PRE TEST

S1. A strength of the high-low method of cost estimation is that the high point
and the low point are representative of all data points. S2. An example of a
physical cause-and-effect relationship is when additional units of production
increase total direct material costs. S3. If the selling price per unit is P20 and the
contribution margin percentage is 30%, then the variable cost per unit must be
P6.
FALSE, TRUE, FALSE

3.S1. If planned net income is P21,000 and the tax rate is 30%, then planned
operating income would be P27,300. S2. If contribution margin decreases by P1
per unit, then operating profits will increase by P1 per unit. S3. The selling price
per unit is P30, variable cost per unit P20, and fixed cost per unit is P3. When this
company operates above the breakeven point, the sale of one more unit will
increase net income by P7.
FALSE, FALSE, FALSE

4.S1. When estimating a cost function, cost behavior can be approximated by a

linear cost function within the relevant range. S2. All cost functions are linear. S3.
The longer the time horizon, the more likely that a cost will have a fixed cost
behavior.
TRUE, FALSE, FALSE

5.S1. In CVP analysis, the number of output units is the only revenue driver. S2. If
the selling price per unit of a product is P30, variable costs per unit are P20, and
total fixed costs are P10,000 and a company sells 5,000 units, operating income
would be P40,000. S3. A planned decrease in selling price would be expected to
cause an increase in the quantity sold.
TRUE, TRUE, TRUE
 6.Which of the following is true about the assumptions underlying basic CVP
analysis?
(1/1 Point)
Selling price, variable cost per unit, fixed cost per unit, and total fixed costs are known and
constant.
Only selling price is known and constant.
Only selling price, variable cost per unit, and total fixed costs are known and constant.
Only selling price and variable cost per unit are known and constant.

7.Cost-volume-profit analysis assumes all of the following, except,

(1/1 Point)
Total revenues and total costs are linear in relation to output units.
Proportion of different products will remain constant when multiple products are sold.
Costs may be separated into separate fixed and variable components.
Unit selling price, unit variable costs, and unit fixed costs are known and remain constant.

8.S1. If the selling price per unit of a product is P50, variable costs per unit are
P40, and total fixed costs are P50,000, a company must sell 6,000 units to make a
target operating income of P10,000. S2. If a company has a degree of operating
leverage of 2.0, that means a 20% increase in sales will result in a 40% increase in
variable costs. S3. Sensitivity analysis is a “what-if” technique that managers use
to examine how a result will change if the originally predicted data are not
achieved or if an underlying assumption changes.
(0/1.5 Points)
TRUE, FALSE, TRUE

9.Contribution margin equals:

(1/1 Point)
revenues minus fixed costs
revenues minus period costs
revenues minus variable costs
revenues minus product costs
10.Cost-volume-profit analysis is used primarily by management as,
(1/1 Point)
for control purposes
to prepare external financial statements
as a planning tool
to attain accurate financial results

11.The following statements about net income (NI) are not true, except?
(0/1 Point)
NI = operating income plus nonoperating revenue.
NI = operating income less cost of goods sold.
NI = operating income plus operating costs.
NI = operating income less income taxes.

12.S1. Regression analysis relies on only two observations to estimate a linear

cost function. S2. It is assumed in CVP analysis that the unit selling price, unit
variable costs, and unit fixed costs are known and constant. S3. Individual cost
items included in the dependent variable should have the same cost driver or
more than one cost function should be estimated.
FALSE, FALSE, TRUE
 CVP ANALYSIS POST TEST

CVP Co. has fixed costs of P95,000. At a sales volume of P300,000, return on sales
is 10%; at a P500,000 volume, return on sales is 22%. What is the break-even
sales?

Correct answers: 237500

3.CVP Co. produces a single product that sells for P200. Variable costs per unit
equal P50. The company expects total fixed costs to be P120,000 for the next
month at the projected sales level of 2,000 units. What is the current breakeven
point in terms of number of units?
800

4.The following information is for CVP Co. Product Juts: Selling Price P20 Variable
Cost P14 Product Daks: Selling Price P30 Variable Cost P18 Total fixed costs P
48,000 What is the breakeven point in units of product Daks assuming a constant
mix of 3 units of Juts for every 1 unit of Daks?
1600

5.CVP Co. prepared the following preliminary forecast concerning product G for
next year assuming no expenditure for advertising: Selling price per unit P 10
Units sales 100,000 units Variable costs P 600,000 Fixed costs 300,000 Based on a
market study in December of this year, CVP Co. estimated that it could increase
the unit selling price by 15% and increase the unit sales volume by 10% if
P100,000 were spent on advertising. Assuming that CVP Co. incorporates these
changes in its forecast, what should be the operating income from product G?

Correct answers: 205000

6.CVP Co. sells a single product. 7,000 units were sold resulting in P70,000 of
sales revenue, P28,000 of variable costs, and P12,000 of fixed costs. What is the
number of units that must be sold to achieve an operating income equal to 50%
of sales?
 Correct answers: 12000
7.The following information is for CVP Co. Product Juts: Selling Price P20 Variable
Cost P14 Product Daks: Selling Price P30 Variable Cost P18 Total fixed costs P
48,000 What is the breakeven point in units of product Juts assuming a constant
mix of 3 units of Juts for every 1 unit of Daks?
4800

8.CVP Co. performs a certain outpatient procedure for P1,000. Its fixed costs are
P20,000, while its variable costs are P500 per procedure. CVP Co. currently plans
to perform 200 procedures this month. What is the margin of safety ratio?
0.8

9.The following relates to CVP Co., which produced and sold 50,000 units during
a recent accounting period: Sales P 850,000 Fixed manufacturing costs 210,000
Variable manufacturing costs 140,000 Fixed selling and administrative expense
300,000 Variable selling and administrative expense 45,000 Income tax rate 40%
For the next accounting period, if production and sales are expected to be 40,000
units, the company should anticipate a contribution margin per unit of?
13.3

10.CVP Co. produces a single product that sells for P80. Variable costs per unit
equal P32. The company expects total fixed costs to be P72,000 for the next
month at the projected sales level of 2,000 units. What is the current breakeven
point in terms of total peso sales?
120,000

11.CVP Co. had the following economic information for the year 2020: Sales
(50,000 units @ P20) P 1,000,000 Variable manufacturing costs 400,000 Fixed
costs 250,000 Income tax rate 40% CVP Co. budgets its 2021 sales at 60,000 units
or P1,200,000. The company anticipates increased competition; hence, an
additional P75,000 advertising costs is budgeted in order to maintain its sales
target for 2021. What is the amount of peso sales needed for 2021 in order to
equal the after-tax income in 2020?
Correct answers: 1125000
COST OF CAPITAL AND LEVERAGE CHAPTER TEST

2.The earnings, dividends, and stock price of CCL Company are expected to grow at 7
percent per year after this year. CCL’s common stock sells for P23 per share, its last dividend
was P2.00 and the company expects to pay P2.14 at the end of the current year. CCL should
pay P2.50 flotation cost. Using the dividend growth model, what is the expected cost of
retained earnings for CCL Company?

Correct answers: 0.163

3.The following data are related to CCL stock: Required return 15 percent Beta coefficient
1.5 Risk-free rate 9.0 percent What is the required market return?

Correct answers: 0.13

4.CCL Company’s bonds have 5 years remaining to maturity. Interest is paid annually; the
bonds have a P1,000 face value; and the coupon interest rate is 9 percent. What is the
estimated yield to maturity of the bonds at their current market price of P1,030?
0.0828

5.CCL Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now
sells for P36. New stock can be sold to net the firm P32.40 per share. What is the CCL
Company’s cost of retained earnings?

Correct answers: 0.1581

6.The earnings, dividends, and stock price of CCL Company are expected to grow at 7
percent per year after this year. CCL’s common stock sells for P23 per share, its last dividend
was P2.00 and the company expects to pay P2.14 at the end of the current year. CCL should
pay P2.50 flotation cost. If the firm’s beta is 1.75, the risk-free rate is 8 percent, and the
average return on the market is 12 percent, what will be the firm’s cost of equity using the
CAPM approach?
0.15
7.The CCL Corporation is preparing to evaluate the capital expenditure proposals for the
coming year. Because the firm employs discounted cash flow methods of analyses, the cost
of capital for the firm must be estimated. The following information for CCL Corporation is
provided.  Market price of common stock is P60 per share.  The dividend next year is
expected to be P3.50 per share.  Expected growth in dividends is a constant 10%.  New
bonds can be issued at face value with a 13% coupon rate.  The capital structure of 60%
long-term debt and 40% equity is considered to be optimal.  Anticipated earnings to be
retained in the coming year are P3 million.  The firm has a 27.5% corporate tax rate. If the
firm must assume a 10% flotation cost on new stock issuances, what is the cost of long-term
debt?
0.0943

8.CCL Company stock’s beta is .50. If the market return is 16%, and the risk-free rate is 6%,
what is the required rate of return on CCL stock?

Correct answers: 0.11
9.For the current year, CCL Company increased earnings before interest and taxes by 15%.
During the same period, net income after tax increased by 42%. What is the degree of
financial leverage?
2.8

10.CCL Company plans to issue some P100 preferred stock with an 10 percent dividend. The
stock is selling on the market for P97, and CCL must pay flotation costs of 5 percent of the
market price. The company is under the 40 percent corporate tax rate. What is the cost of
preferred stock for CCL Company?
0.1085

11.CCL Company’s stock is currently selling for P60 a share. The firm is expected to pay a
year-end dividend of P5.40 per share and to earn P3.60 per share. If investors require a 9
percent return, what rate of growth must be expected for CCL?
0
 COST OF CAPITAL AND LEVERAGE PRE-TEST

2.According to the capital asset pricing model (CAPM), the relevant risk of a
security is its
Company-specific risk.
Diversifiable risk.
Systematic risk.
Total risk.

3.The pre-tax cost of capital is higher than the after-tax cost of capital because
principal payments on debt are deductible for tax purposes.
interest expense is deductible for tax purposes.
the cost of capital is a deductible expense for tax purposes.
dividend payments to stockholders are deductible for tax purposes.

4.The overall cost of capital is the

Rate of return on assets that covers the costs associated with the funds employed.
Minimum rate a firm must earn on high-risk projects.
Cost of the firm's equity capital at which the market value of the firm will remain unchanged.
Average rate of return a firm earns on its assets.

5.The theory underlying the cost of capital is primarily concerned with the cost of
Long-term funds and old funds.
Long-term funds and new funds.
Short-term funds and new funds.
Any combination of old or new, short-term or long-term funds.

6.The three elements needed to estimate the cost of equity capital for use in
determining a firm's weighted-average cost of capital are
Current dividends per share, expected growth rate in dividends per share, and current market
price per share of common stock.
Current dividends per share, expected growth rate in dividends per share, and current book value
per share of common stock.
Current earnings pers share, expected growth rate in earnings per share, and current book value
per share of common stock.
Current earnings per share, expected growth rate in dividends per share, and current market
price per share of common stock.
7.An investor uses the capital asset pricing model (CAPM) to evaluate the risk-
return relationship on a portfolio of stocks held as an investment. Which of the
following would not be used to estimate the portfolio's expected rate of return?
Expected rate of return on the market portfolio.
Interest rate for the safest possible investment.
Standard deviation of the market returns.
Expected risk premium on the portfolio of stocks.

8.Which of the changes in leverage (financial, operating) would apply to a

company that substantially increases its investment in fixed assets as a proportion
of total assets and replaces some of its long-term debt with equity?

Decrease, Increase

9.The basis for measuring the cost of capital derived from bonds and
preferred stock, respectively, is the
after-tax rate of interest for bonds and stated annual dividend rate for preferred stock
after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings
per share for preferred stock
pretax rate of interest for bonds and stated annual dividend rate less the expected earnings per
share for preferred stock
pretax rate of interest for bonds and stated annual dividend rate for preferred stock

10.The weighted average cost of capital represents the

overall cost of capital from all organization financing sources.
equivalent units of capital used by the organization.
overall cost of dividends plus interest paid by the organization.
cost of bonds, preferred stock, and common stock divided by the three sources.

11.Cost of capital is
The dividends a company must pay on its equity securities.
The amount the company must pay for its plant assets.
The cost the company must incur to obtain its capital resources.
The cost the company is charged by investment bankers who handle the issuance of equity or
long-term debt securities.
 COST OF CAPITAL AND LEVERAGE POST-TEST

2.Blair Brothers’ stock currently has a price of P50 per share and paid dividend of
P2.50 per share. The dividend is expected to grow at a constant rate of 4% per
year. The company has insufficient retained earnings to fund capital projects and
must, therefore, issue new common stock. The new stock has an estimated
flotation cost of P3 per share. What is the company’s cost of equity capital?

Correct answers: 0.0953
3.Grateway Inc. has a weighted average cost of capital of 11.5 percent. Its target
capital structure is 55 percent debt and 45 percent equity. The company has
sufficient retained earnings to fund the equity portion of its capital budget. The
after-tax cost of debt is 9 percent, and the company’s tax rate is 30 percent. If the
expected dividend next period is P5 and the current stock price is P45, what is the
company’s growth rate?

Correct answers: 0.0344
4.What is the yield to maturity on Fox Inc.'s bonds if its before-tax cost of debt is
9% and its tax rate is 34%?
Correct answers: 0.09
5.Newmass, Inc. expects to pay a cash dividend to its common shareholders for
the next 12 months of P2.20 per share. The current market value of the common
stock is P40 per share, and investors are anticipating the common dividend to
grow at a rate of 6% annually. The cost to issue new common stock will be 5% of
the market value. What is the cost of a new common stock issue?
Correct answers: 0.1179
6.Wiley's new financing will be in proportion to the market value of its present
financing, shown below. Book Value: Long-term debt 7,000,000 Preferred stock
(100k shares) 1,000,000 Common stock (200k shares) 7,000,000 The firms’ bonds
are currently selling at 80% of par, generating a current market yield of 9%, and
the corporation has a 40% tax rate. The preferred stock is selling at P12 per share
and pays a 6% dividend. The common stock has a current market value of P40
and is expected to pay a P1.20 per share dividend this fiscal year. Dividend
growth is expected to be 10% per year. Compute for Wiley’s weighted-average
cost of capital.
Correct answers: 0.0948
7.Allison Engines Corporation has established a target capital structure of 40
percent debt and 60 percent common equity. The current market price of the
firm’s stock is P28; its last dividend was P2.20, and its expected dividend growth
rate is 6%. What will Allison’s marginal cost of common stock be?

Correct answers: 0.1433

8.The common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5%
and the market rate is 6%. Assume the firm will be able to use retained earnings
to fund the equity portion of its capital budget. What is the company’s cost of
retained earnings?
0.062

9.A company has unit sales of 300,000, the unit variable cost is P1.50, the unit
sales price is P2.00, and the annual fixed costs are P50,000. Furthermore, the
annual interest expense is P20,000, and the company has no preferred stock.
Compute for the degree of financial leverage.

Correct answers: 1.25

10.Frostfell Airlines previously paid dividend of P3.29. The company's dividend is

expected to grow at a steady, constant rate of 5% well into the future. Frostfell
currently has 1,600,000 shares of common stock outstanding. If the required rate
of return for Frostfell is 12%, what is the best estimate for the current price of
Frostfell's common stock?

Correct answers: 49.35

11.Maylar Corporation has sold 50,000 of 15-year, P1,000 par value, 12% bonds.
The bonds were sold at a discount and the corporation received P46,012,629 per
bond. If the corporate tax rate is 40%, what is the after-tax cost of these bonds
for the first year?

Correct answers: 0.0795,0.0731,0.0782,0.0783
 CURRENT LIABILITIES MANAGEMENT

2.S1. The risk to a firm that borrows with short-term credit is usually greater than
if it borrowed using long-term debt. This added risk stems from the greater
variability of interest costs on short-term debt and possible difficulties with
rolling over short-term debt. S2. If a profitable firm finds that it simply must
"stretch" its accounts payable, then this suggests that it is undercapitalized, i.e.,
that it needs more working capital to support its operations. S3. "Stretching"
accounts payable is a widely accepted, entirely ethical, and costless financing
technique.
TRUE, TRUE, FALSE

3.S1. The calculated cost of trade credit for a firm that buys on terms of 2/10,
net 30, is lower (other things held constant) if the firm plans to pay in 40 days
than in 30 days. S2. Accruals are "free" capital in the sense that no explicit interest
must normally be paid on accrued liabilities. S3. If one of your firm's customers is
"stretching" its accounts payable, this may be a nuisance but it does not
represent a real financial cost to your firm as long as the customer periodically
pays off its entire balance.
TRUE, TRUE, FALSE

4.Which of the following actions would be likely to shorten the cash conversion
cycle?
Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
Adopt a new manufacturing process that speeds up the conversion of raw materials to
finished goods from 20 days to 10 days.
Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
Adopt a new manufacturing process that saves some labor costs but slows down the
conversion of raw materials to finished goods from 10 days to 20 days.

5.S1. The prime rate charged by big money center banks at any one time is likely
to vary greatly (for example, as much as 2 to 4 percentage points) across banks
due to banks' ability to differentiate themselves and because different banks
operate in different parts of the country. S2. Not taking cash discounts is costly,
and as a result, firms that do not take them are usually those that are performing
poorly and have inadequate cash balances. S3. An informal line of credit and a
revolving credit agreement are similar except that the line of credit creates a legal
obligation for the bank and thus is a more reliable source of funds for the
borrower.
FALSE, TRUE, FALSE

6.S1. If a firm switched from taking trade credit discounts to paying on the net
due date, this might cost the firm some money, but such a policy would probably
have only a negligible effect on the income statement and no effect whatever on
the balance sheet. S2. Commercial paper is typically offered at a long-term
maturity of at least five years. S3. The maturity of most bank loans is short term.
Bank loans to businesses are frequently made as 90-day notes which are often
rolled over, or renewed, rather than repaid when they mature. However, if the
borrower's financial situation deteriorates, then the bank may refuse to roll over
the loan.
FALSE, FALSE, TRUE

7.S1. The longer its customers normally hold inventory, the longer the credit
period supplier firms normally offer. Still, suppliers have some flexibility in the
credit terms they offer. If a supplier lengthens the credit period offered, this will
shorten the customer's cash conversion cycle but lengthen the supplier firm's
own CCC. S2. Accruals are "free" in the sense that no explicit interest is paid on
these funds. S3. As a rule, managers should try to always use the free component
of trade credit but should use the costly component only if the cost of this credit
is lower than the cost of credit from other sources.
TRUE, TRUE, TRUE
 CURRENT LIABILITES MANAGEMENT PRE-TEST

2.S1. Loans can have either fixed or floating interest rates. On a fixed-rate loan,
the rate of interest is determined at a set increment above the prime rate on the
date of the loan and remains unvarying at that fixed rate until maturity. On a
floating-rate loan, the increment above the prime rate is initially established, and
the rate of interest is allowed to “float,” or vary, above prime as the prime rate
varies until maturity. Generally, the increment above the prime rate will be lower
on a floating-rate loan than on a fixed-rate loan of equivalent risk because the
lender bears less risk with a floating-rate loan. S2. Commercial finance companies
are lending institutions that make only secured loans—both short-term and long-
term—to businesses. Unlike banks, finance companies are not permitted to hold
deposits. S3. The most important characteristic of inventory being evaluated as
loan collateral is perishability. When evaluating inventory as possible loan
collateral, the lender looks for items that lack undesirable physical properties.
TRUE, TRUE, FALSE

3.S1. The stated cost of a pledge of accounts receivable is normally 2%-5% above
the prime rate while factoring costs include; commissions, typically stated as a
1%-3% discount from the book value of factored accounts receivable, interest
levied on advances, which is generally 2%-4% percent above the prime rate, and
interest earned on surpluses, which is generally between 0.2%-0.5% percent per
month. S2. A trust receipt inventory loan often can be made against relatively
expensive goods. Under this agreement, the borrower keeps the inventory. The
lender may advance 80%-100% of its cost and normally charges a 2% interest or
more above the prime rate. S3. The major type of loan made by banks to
businesses is the short-term, self-liquidating loan. These loans are intended
merely to carry the firm through seasonal peaks in financing needs that are due
primarily to buildups of inventory and accounts receivable.
TRUE, TRUE, TRUE

4.S1. Current assets are the most desirable short-term loan collateral because
they can normally be converted into cash much sooner than fixed assets. The
interest rate that is charged on secured short-term loans is typically higher than
the rate on unsecured short-term loans because lenders do not normally consider
secured loans less risky than unsecured loans. S2. Although its costs may seem
high, pledging has certain advantages that make it attractive to many firms. One
is the ability it gives the firm to turn accounts receivable immediately into cash
without having to worry about repayment. Another advantage is that it ensures a
known pattern of cash flows. S3. A warehouse receipt loan is an arrangement
whereby the lender receives control of the pledged inventory collateral. The
lender generally advances 75%-90% of the collateral’s value and charges an
interest generally ranging from 3%-5% above the prime rate.
TRUE, FALSE, TRUE

5.S1. Inventory normally has a book value that is greater than its market value,
which is used to establish its value as collateral. A lender whose loan is secured
with inventory will probably be able to sell that inventory for at least book value if
the borrower defaults on its obligations. S2. Two commonly used means of
obtaining short-term financing with accounts receivable are pledging accounts
receivable and factoring accounts receivable. However, only a pledge of accounts
receivable creates a secured short-term loan. S3. Commercial paper is a form of
financing that consists of short-term, unsecured promissory notes issued by firms
with a high credit standing. Generally, only large firms of unquestionable financial
soundness can issue commercial paper.
FALSE, TRUE, TRUE

6.S1. A floating inventory lien is a claim on inventory in general that consists of a

diversified group of relatively inexpensive merchandise. Because it is difficult for a
lender to verify the presence of the inventory, the lender generally advances less
than 50% of the book value of the average inventory and charges ab interest of
3%-5% above the prime rate. S2. Secured short-term loans are secured short-
term financing has specific assets pledged as collateral whereas holding such
collateral as security reduces the risk that a loan will default. The collateral
commonly takes the form of an asset, such as accounts receivable or inventory.
S3. An interesting characteristic of commercial paper is that its interest cost is
normally 2%-4% above the prime rate. The reason is that many suppliers of
short-term funds do not have the option, as banks do, of making low-risk
business loans at the prime rate.
TRUE, FALSE, FALSE
 MAS3 FINAL EXAM

3.Easy Co. currently has a beta of 1.2. The company’s capital structure consists of
P7 million of equity and P3 million of debt. The company is considering changing
its capital structure. Under the proposed plan the company would increase its
debt by P2 million and use the proceeds to repurchase common stock. The
company estimates that if it goes ahead with the plan, its bonds will have a
nominal yield to maturity of 8.5%. The company’s tax rate is 40 percent. The risk-
free rate is 6% and the market risk premium is 7%. What is the company’s
estimated WACC if it goes ahead with the plan?

Correct answers: 0.109,0.1090

4.Easy Co. had sales of P120,000 for the month of May. It has a margin of safety
ratio of 25 percent, and after-tax return on sales of 6 percent. The company
assumes its sales constant every month. If the tax rate is 40 percent, how much is
the total variable costs for the month of May?

Correct answers: 72000

5.Easy Co., an all-equity firm, is considering a new capital investment. Analysis has
indicated that the proposed investment has a beta of 0.5 and will generate an
expected return of 7 percent. The firm currently has a required return of 10.75
percent and a beta of 1.25. The investment, if undertaken, will double the firm’s
total assets. If kRF is 7 percent and the market return is 10 percent, should the
firm undertake the investment?
Yes; the expected return of the asset (7%) exceeds the required
return (6.5%).
No; the expected return of the asset is less than the firm’s required return, which is 10.75%.
No; the risk of the asset (beta) will increase the firm’s beta.
Yes; the beta of the asset will reduce the risk of the firm.
No; the expected return of the asset (7%) is less than the required return (8.5%).
6.Easy Co. buys on credit terms of 2/10, net 45, and it always pays on Day 45. If
you calculate that this policy effectively costs your firm P181,671 each year using
a 360-day year, what is Easy Co.’s average accounts payable balance?

Correct answers: 786570

7.Easy Co. has P1,500,000 in debt outstanding. The company's before-tax cost of
debt is 10%. Sales for the year totaled P3,500,000 and variable costs were 60% of
sales. Net income was equal to P600,000 and the company's tax rate was 40%. If
Easy Co.'s degree of total leverage is equal to 1.40, what is its degree of financial
leverage?

Correct answers: 1.15

8.Easy Co. can issue 90-day commercial paper with a face value of P1,000,000 for
P980,000. Transaction costs will be P1,200. What will be the effective annualized
percentage cost of the financing, based on a 360-day year?

Correct answers: 0.0895

9.S1. Commercial finance companies are lending institutions that make only
secured loans—both short-term and long-term—to businesses. Like banks,
finance companies are also permitted to hold deposits. S2. The risk to a firm that
borrows with long-term credit is usually greater than if it borrowed using short-
term debt. This added risk stems from the greater variability of interest costs on
long-term debt and possible difficulties with rolling over long-term debt. S3.
Loans can have either fixed or floating interest rates. On a fixed-rate loan, the rate
of interest is determined at a set increment above the prime rate on the date of
the loan and remains unvarying at that fixed rate until maturity. On a floating-
rate loan, the increment above the prime rate is initially established, and the rate
of interest is allowed to “float,” or vary, above prime as the prime rate varies until
maturity. Generally, the increment above the prime rate will be higher on a
floating-rate loan than on a fixed-rate loan of equivalent risk because the
borrower bears less risk with a floating-rate loan.
FALSE, FALSE, FALSE
10.Easy Co. produces two products for which the following data have been
tabulated. Fixed manufacturing cost is applied at a rate of Php1.00 per machine
hour. Per Unit XY-7 BD-4 Selling price P4.00 P3.00 Variable mfg. cost 2.00 1.50
Fixed cost 0.75 0.20 Variable selling cost 1.00 1.00 The sales manager has had a
P160,000 increase in the budget allotment for advertising and wants to apply the
money to the most profitable product. The products are not substitutes for one
another in the eyes of the company's customers. Suppose the sales manager
chooses to devote the entire P160,000 to increased advertising for XY-7. What is
the minimum increase in sales units of XY-7 required to offset the increased
advertising?
160,000

11.S1. The degree of operating leverage (DOL) depends on a company's fixed

costs, variable costs, and sales. The DOL formula assumes (1) that fixed costs are
constant and (2) that variable costs are a constant proportion of sales. S2. If the
company has no debt outstanding, then its degree of total leverage equals its
degree of operating leverage. S3. The closer the firm is operating to the
breakeven quantity, the smaller the DOL.
TRUE, TRUE, FALSE

12.Easy Co. obtained a short-term bank loan of P500,000 at an annual interest

rate of 8%. As a condition of the loan, the company is required to maintain a
compensating balance of P100,000 in its checking account. The checking account
earns interest at an annual rate of 3%. Ordinarily, Easy Co. maintains a balance of
P50,000 in its account for transaction purposes. What is the effective interest rate
of the loan?
0.0856

13.Assume there is a reduction in the selling price and all other CVP parameters
remain constant. This change will most likely,
(1/1 Point)
reduce fixed costs.
reduce operating income.
increase variable costs.
increase operating income.
 increase fixed cost.
decrease variable cost.
increase contribution margin.

14.Easy Co. has a 25% margin of safety. It’s before-tax return on sales is 6%, and
its tax rate is 40%. Assuming that current sales are P120,000, what is Easy Co.’s
total fixed costs?

Correct answers: 21600

15.Easy Co. currently sells 150,000 units a year at a price of P4.00 a unit. Its
variable costs are approximately 30% of sales, and its fixed costs amount to 50%
of revenues at its current output level. Although fixed costs are based on
revenues at the current output level, the cost level is fixed. What is Easy Co.'s
degree of operating leverage?
3.5

16.Which of the following statements is correct?

(1/1 Point)
Arithmetically, financial leverage and operating leverage offset one another so as to keep the
degree of total leverage constant. Therefore, the formula shows that the greater the degree of
financial leverage, the smaller the degree of operating leverage.
None of the given statements.
The degree of operating leverage (DOL) depends on a company's fixed costs, variable costs, and
sales. The DOL formula assumes (1) that fixed costs are constant and (2) that variable costs are a
constant proportion of sales.
The degree of total leverage (DTL) is equal to the DOL plus the degree of financial leverage (DFL).

17.If the return on total assets is 10% and if the return on common stockholders’
equity is 12% then, S1. The after-tax cost of long-term debt is 12%. S2. The after-
tax cost of long-term debt is probably less than 10%. S3. Leverage is negative.
FALSE, TRUE, FALSE

18.Which one of the following statements concerning cash discounts is correct?

(1/1 Point)
The cost of not taking the discount is lower for terms of 2/10, net 60 than for 2/10, net 30.
The cost of not taking a 2/10, net 30 cash discount is usually less than the prime rate.
 None of the choices given.
With trade terms of 2/15, net 60, if the discount is not taken, the buyer receives 45 days of free
credit.

19.Easy Co. estimates that if its sales increase 10% then its net income will
increase 18%. The company's net income equals P2.4 million, and its interest
expense is P400,000. The company's operating costs include fixed and variable
costs. What is the level of the company's fixed operating costs?

Correct answers: 285714.29

20.Easy Co. is considering issuing long-term debt. The debt would have a 30-year
maturity and a 12% coupon rate and make semiannual coupon payments. In
order to sell the issue, the bonds must be underpriced at a discount of 2.5% of
face value. In addition, the firm would have to pay flotation costs of 2.5% of face
value. The firm’s tax rate is 33%. Given this information, what is the after-tax cost
of debt?

Correct answers: 0.0855

21.Easy Co., a satellite launching firm, expects its sales to increase by 50 percent
in the coming year as a result of NASA's recent problems with the space shuttle.
The firm's current EPS is P3.25. Its degree of operating leverage is 1.6, while its
degree of financial leverage is 2.1. What is the firm's projected EPS for the
coming year using the DTL approach?

Correct answers: 8.71

22.Easy Co. manufactures and sells T-shirts imprinted with college names and
slogans. Last year, the shirts sold for P7.50 each, and the variable cost to
manufacture them was P2.25 per unit. The Easy Co. needed to sell 20,000 shirts to
break even. The net income last year was P5,040. Easy Co.'s expectations for the
coming year include the following: a) The sales price of the T-shirts will be P9 b)
Variable cost to manufacture will increase by one-third c) Fixed costs will increase
by 10% d) The income tax rate of 40% will be unchanged What selling price
would maintain the same contribution margin rate as last year?
10
23.Easy Co., a retail store, is considering foregoing sales discounts in order to
delay using its cash. Supplier credit terms are 2/10, net 30. Assuming a 360-day
year, what is the annual cost of credit if the cash discount is not taken and Easy
Co. pays net 30?
0.3673

24.Easy Co. manufactures and sells T-shirts imprinted with college names and
slogans. Last year, the shirts sold for P7.50 each, and the variable cost to
manufacture them was P2.25 per unit. The company needed to sell 20,000 shirts
to break even. The net income last year was P5,040. Easy Co's expectations for
the coming year include the following: a) The sales price of the T-shirts will be P9
b) Variable cost to manufacture will increase by one-third c) Fixed costs will
increase by 10% d) The income tax rate of 40% will be unchanged If Easy Co.
wishes to earn P22,500 in net income for the coming year, the company's sales
volume in peso must be?
229500

25.S1. A company with sales of P100,000, variable costs of P70,000, and fixed
costs of P50,000 will reach its breakeven point if sales are increased by P20,000.
S2. To calculate the breakeven point in a multi-product situation, one must
assume that the sales mix of the various products remains constant. S3. An
increase in the tax rate will increase the breakeven point.
FALSE, TRUE, FALSE

26.S1. The contribution margin ratio always increases when the variable costs as a
percentage of net sales decrease. S2. The most important use of the cost-
volume-profit graph is to show the relationships among volume, cost, revenues,
over wide ranges of activity. S3. Easy Co. breaks even at P300,000 sales and earns
P30,000 at P350,000 sales. Profit at sales of P400,000 would be P80,000.
TRUE, TRUE, FALSE
27.Easy Co. employs 45 sales personnel to market its sedan cars. The average car
sells for P690,000 and a 6% commission is paid to the sales person. It is
considering changing the scheme to a commission arrangement that would pay
each person a package of P30,000 plus a commission of 2% of the sales made by
the person. What amount of total monthly car sales at which Easy Co. would be
indifferent as to which plan to select is?
33,750,000

28.S1. The effective annual interest rate to the borrower of a P100,000 one-year
loan with a stated rate of 7% and a 20% compensating balance is 8.75%. S2.
Using a 360-day year, the opportunity cost to a buyer of not accepting terms of
3/10, net 45 is 55.67%. S3. Easy Co. has a P100 invoice with payment terms of
2/10, net 60. Easy Co. can either take the discount or place the funds in a money
market account paying 6% interest. Using a 360-day year, Easy Co.'s cost of not
taking the cash discount is 6.4%.
TRUE, FALSE, FALSE

29.The explicit cost of debt financing is the interest expense. The implicit cost(s)
of debt financing is (are) the, S1. Increase in the cost of equity as the debt-to-
equity ratio increases. S2. Increase in the cost of debt as the debt-to-equity ratio
increases. S3. Decrease in the weighted-average cost of capital as the debt-to-
equity ratio increases.
TRUE, TRUE, FALSE

30.S1. In multiproduct situations when sales mix shifts toward the product with
the lowest contribution margin, the breakeven quantity will decrease. S2. Outside
of the relevant range, variable and fixed cost-behavior patterns may change. S3.
Passenger-miles are a potential measure of output for the airline industry.
FALSE, TRUE, TRUE

31.Easy Co. is considering discontinuing a certain product line if it does not have
a margin of safety higher than 15%. The breakeven sales are P76,800 and the
margin of safety is P13,200. Based on this information, the controller has
recommended to stop this product line. Did the controller make the appropriate
decision?
No, because the margin of safety ratio of 17.2% is not better than 15%.
 Yes, because the margin of safety ratio of 14.7% is not better than 15%.
None of the choices given made a valid analysis.
No, because the margin of safety ratio of 14.7% is not better than 15%.
Yes, because the margin of safety ratio of 17.2% is better than 15%.

32.Easy Co. has just acquired a large account and needs to increase its working
capital by P100,000. The controller of the company has identified a number of
sources. One of them is to borrow P125,000 from a bank on a discount basis for
one year at 20%. No compensating balance would be required. Assume a 360-
day year in all of your calculations. The cost of this alternative is what
percentage?

Correct answers: 0.25

33.S1. Current assets are the most desirable short-term loan collateral because
they can normally be converted into cash much sooner than fixed assets. The
interest rate that is charged on secured short-term loans is typically higher than
the rate on unsecured short-term loans because lenders do not normally consider
secured loans less risky than unsecured loans. S2. The longer its customers
normally hold inventory, the shorter the credit period supplier firms normally
offer. Still, suppliers have some flexibility in the credit terms they offer. If a
supplier shortens the credit period offered, this will shorten the customer's cash
conversion cycle but lengthen the supplier firm's own cash conversion cycle. S3.
Secured short-term loans are secured short-term financing has specific assets
pledged as collateral whereas holding such collateral as security reduces the risk
that a loan will default. The collateral commonly takes the form of an asset, such
as accounts receivable or inventory.
TRUE, FALSE, FALSE

34.Suppose the credit terms offered to Easy Co. by its suppliers are 2/10, net 30
days. Out of convenience, Easy Co. is not taking discounts, but is paying after 20
days, instead of waiting until Day 30. You point out that the nominal cost of Easy
Co.'s current practice is around 73 percent. But since Easy Co. is not taking
discounts and is paying on Day 20, what is the effective annual cost of not taking
the discount and paying on Day 30, using a 360-day year?

Correct answers: 0.4386
35.When calculating a firm's cost of capital, S1. All costs should be expressed as
after-tax costs. S2. The cost of capital of a firm is the weighted average cost of its
various financing components. S3. The calculation of the cost of capital should
focus on the historical costs of alternative forms of financing rather than market
or current costs.
FALSE, FALSE, TRUE

36.Easy Co. is expecting an increase of fixed costs by P78,750 upon moving their
place of business to the downtown area. Likewise, it is anticipating that the selling
price per unit and the variable expenses will not change. At present, the sales
volume necessary to breakeven is P750,000 but with the expected increase in
fixed costs, the sales volume necessary to breakeven would go up to P975,000.
Based on these projections, what is the total fixed costs after the increase of
P78,750?

Correct answers: 341250

37.Easy Co. has a temporary need for funds. Management is trying to decide
between not taking discounts from one of their three biggest suppliers, or a
14.75% per annum renewable discount loan from its bank for 3 months. The
suppliers' terms are as follows: Riley Mftg. Co. 2/10, net 30 Shad, Inc. 2/15, net 60
Fort Co. 2/10, net 60 Using a 360-day year, evaluate the following statements, S1.
The cost of taking a cash discount is higher than the cost of the bank loan. S2.
The cost of not taking the discount is higher for terms of 2/10, net 60 than for
2/10, net 30. S3. With trade terms of 2/15, net 60, if the discount is taken, Easy
Co. receive 45 days of credit.
FALSE, FALSE, TRUE

38.The use of financial leverage by the firm has a potential impact on which of
the following? (1) The risk associated with the firm. (2) The return experienced by
the shareholder. (3) The variability of net income. (4) The degree of operating
leverage. (5) The degree of financial leverage.
1, 2, 3, 5
39.Which one of the following statements is most correct if a seller extends credit
to a purchaser for a period of time longer than the purchaser's operating cycle?
The seller,
is, in effect, financing more than just the purchaser's inventory needs.
will have a lower level of accounts receivable than those companies whose credit period is
shorter than the purchaser's operating cycle.
has no need for a stated cash discount rate or credit period.
can be certain that the purchaser will be able to convert the inventory into cash before payment
is due.
will earn plus 5 points to heaven.

40.Which of these statements are pertinent to cost of capital?

1. It is the expected return that investors demand for a given level of risk.
2. It may be employed as a benchmark for the evaluation of performance.
3. For investment decisions, it must be based on the current or prospective cost
of the various capital components rather than on their historical costs.
4. It may also be used in acquisition analysis, liquidation studies and source of
financing decisions.
Answer not given.

41.Easy Co. wants to determine the effect of an expansion of its sales on its EBIT.
The firm's current degree of operating leverage is 2.50. It projects new unit sales
to be 170,000, an increase of 45,000 over last year's level. Last year's EBIT was
P60,000. What is this year's expected EBIT with the increase in sales?

Correct answers: 114000

42.Which of the following statements is correct?

(1/1 Point)
All of the given statements.
When calculating the cost of debt, a company needs to adjust for taxes, because interest
payments are tax deductible.
When calculating the cost of preferred stock, a company needs to adjust for taxes, because
preferred stock dividends are tax deductible.
Since the money is readily available, the cost of retained earnings is usually a lot cheaper than
the cost of debt financing.
43.Easy Co. has a revolving credit arrangement with its bank which specifies that
Easy Co. can borrow up to P5 million at an annual interest rate of 9% payable
monthly. In addition, Easy Co. must pay a commitment fee of 0.25% per month
on the unused portion of the line, payable monthly. Easy Co. expects to have a P2
million cash balance and no borrowings against this line of credit on April 1, net
cash inflows of P2 million in April, net outflows of P7 million in May, and net
inflows of P4 million in June. If all cash flows occur at the end of the month,
approximately how much will Easy Co. pay to the bank during the second quarter
related to this revolving credit arrangement?

Correct answers: 52600

44.S1. Easy Co. sells three chemicals: petrol, septine, and tridol. Petrol is the
company's most profitable product; tridol is the least profitable. An increase in
anticipated sales of petrol relative to sales of septine and tridol will definitely
decrease the firm's overall breakeven point for the upcoming accounting period.
S2. Easy Co. sells two products. Product A provides a contribution margin of P3
per unit, and Product B provides a contribution margin of P4 per unit. If Easy Co.'s
sales mix shifts toward Product A, the total number of units necessary to break
even will decrease. S3. A calculation used in a CVP analysis is the breakeven point.
Once the breakeven point has been reached, operating income will increase by
the contribution margin per unit for each additional unit sold.
TRUE, FALSE, TRUE

45.The following strategies most likely will increase the breakeven point, except,
decrease both the fixed costs and the contribution margin.
increase contribution margin.
increase both the fixed costs and the contribution margin.
increase fixed cost.
decrease contribution margin.
decrease fixed cost .
increase the fixed costs and decrease the contribution margin.
decrease the fixed costs and increase the contribution margin.
46.Two companies produce and sell the same product in a competitive industry.
Thus, the selling price of the product for each company is the same. Easy Co. 1
has a contribution margin ratio of 40% and fixed costs of P25 million. Easy Co. 2
is more automated, making its fixed costs 40% higher than those of Easy Co. 2.
Easy Co. 2 also has a contribution margin ratio that is 30% greater than that of
Easy Co. 1. By comparison, Easy Co. 1 will have the __________ breakeven point in
terms of peso sales volume and will have the __________ peso profit potential once
the indifference point in dollar sales volume is exceeded.
Undeterminable, Lesser
Lower, Lesser
Undeterminable, Greater
Higher, Lesser
Lower, Greater
Lower, Undeterminable
Both undeterminable based on the information given.
Higher, Undeterminable
Higher, Greater

47.Last month, Easy Co. had an income of P0.75 per unit with sales of 60,000
units. During the current month when the unit sales are expected to be only
45,000, there is a loss of P1.25 per unit. Both the variable cost per unit and total
fixed costs remain constant. Compute for the breakeven sales in units.

Correct answers: 53334

48.Ignoring cost and other effects on the firm, the following measures would
tend to extend the cash conversion cycle, except,
(1/1 Point)
Maintain the level of receivables as sales decrease.
Buy more raw materials to take advantage of price breaks.
Take discounts when offered.
None of these choices.
Forgo discounts that are currently being taken.
49.Easy Co. currently sells 150,000 units a year at a price of P4.00 a unit. Its
variable costs are approximately 30% of sales, and its fixed costs amount to 50%
of revenues at its current output level. Although fixed costs are based on
revenues at the current output level, the cost level is fixed. What is Easy Co.'s
degree of operating leverage?
3.5

50.If a P1,000 bond sells for P1,125, S1. The market rate of interest is greater than
the coupon rate on the bond. S2. The coupon rate on the bond is greater than
the market rate of interest. S3. The bond sells at a discount.
FALSE, TRUE, FALSE

51.Easy Co. is expected to pay a P2.50 dividend at year end, the dividend is
expected to grow at a constant rate of 5.50% a year, and the common stock
currently sells for P52.50 a share. The after-tax cost of debt is 7.50%, and the tax
rate is 40%. The target capital structure consists of 45% debt and 55% common
equity. What is the company’s WACC if all the equity used is from retained
earnings?
0.0902

52.Easy Co. provides two products, M and W. M accounts for 60 percent of total
sales, variable cost as a percentage of selling price are 60% for M and 85% for W.
Total fixed costs are P225,000. If fixed costs will increase by 30 percent, what
amount of peso sales would be necessary to generate an operating profit of
P48,000?
1,135,000