PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION

QUEZON CITY

FINANCIAL MANAGEMENT
MIDTERM EXAM

Test 1. Multiple Choice. (Current Assets Management) 20%

1. Ken Lumber Company obtained a short-term bank loan for P1,000,000 at annual interest
rate of 12%. As a condition of the loan, Ken is required to maintain a compensating
balance of P300,000 in its checking account. The checking account t earns interest at
annual rate of 6%. Ken would otherwise maintain only P100,000 in the checking account
t for transactional purposes. Ken’s effective interest cost of the loan is.
a. 12% b. 14% c. 13.5% d. 12.67%

Interest expense 1Mx 0.12 120,000.00

Interest income on additional CA balance (300,000 x 0.06) 18,000.00

Net interest cost 102,000.00

Effective interest rate 102,000/(1000,000-100,000) 14.5%

2. A firm has daily cash receipts of P100,000. A bank has offered to reduce the collection
time on the firm’s deposits by two days for a monthly fee of P500. If money market
rates are expected to average 6 percent during the year, the net annual benefit (loss)
from having this service is:
a. P3,000 b. P12,000 c. P-0- d. P6,000

The annual benefit (loss) from using the bank's proposed service is the excess (deficit)
of interest earned on the early deposits over(under) the cost of the service. If the plan
is adopted, the firm's average cash balance will increase by 200,000 (100,000 x 2 days)

Benefits (loss) = Interest earned - Cost

= (200,000 x 6%) - (500 x 12 month)

= 12,000 - 6000

= 6000
 3. Ram Electronics sells on terms of net 30 days, but its accounts receivable average 30
days overdue. Assuming a 360-day year and annual credit sales of P1,800,000, the book
value of Ram’s receivables is:
a. P150,000 b. P100,000 c. P50,000 d. P250,000

4. The following information regarding a change in credit policy was assembled by the
Wilson Company. The company has a required rate of return of 10% and a variable cost
ratio of 60%.
Old Credit Policy New Credit Policy
Sales P1,600,000 P3,960,000
Average collection period 30 days 36 days

The pretax cost of carrying the additional investment in receivables, using 1 160-day
year, would be
a. P5,760 b. P9,600 c. P8,160 d. P960

Average Collection Period = Ave. AR / Credit sale per day, so Ave. AR = Ave. Collection Period
* Credit sale per day.

Old Credit Policy: Ave. AR = 30 (Ave. collection) * 10,000 (Credit sale per day 3,600,000 / 360)
= 300,000 * 60% (variable cost ratio) = $180,000

New Credit Policy: Ave. AR = 36 (Ave. collection) * 11,000 (Credit sale per day 3,960,000 /
360) = 396,000 * 60% (variable cost ratio) = 237,600

The difference between new AR and old AR 267,600 – 180,000 = 57,600 * 10% (required rate
of return) = 5,76
Test !! (Case Analysis) 80%
Following are comparative condensed financial statements of JD Corporation.
JD Corporation
Statement of Income and Retained Earnings
For the year ending December 31, 2020
2020 2019
Sales P 100,000 P 97,500
Less: cost of goods sold 61,250 55,000
---------- ----------
Gross margin P 38,750 P 42,500
Operating expenses ( 26,000) ( 26,250)
Interest expense ( 2,500) ( 2,250)
----------- ------------
Income before taxes P 10,250 P 14,000
Income taxes 3,590 4,900
----------- -----------
Net income after tax P 6,660 P 9,100
Add beginning retained earnings 10,000 4,750
----------- -----------
P 16.660 P 13,850
Less dividends ( 4,750) ( 3,850)
------------ -----------
Retained earnings ending balance P 11,910 P 10,000
======= =======

JD Corporation
Balance Sheet
December 31, 2020
2020 2019
Cash P 7,500 P 5,250
Accounts receivable (net) 11,000 8,250
Inventories 20,500 19,000
Fixed assets (net) 34,410 37,500
---------- ----------
Total assets P 73,410 P 70,000
====== =======
Current liabilities P 11,500 P 12,500
Bonds payable, 10 percent 25,000 22,500
Common stock P2.50 par 25,000 25,000
2020 2019

Retained earnings 11,910 10,000

------------ ------------
Total equities P 73,410 P 70,000
 ====== =======

Year-end market price of stocks P 6.25 P 8.75

Required:
1. Perform a horizontal analysis of JD financial statements. Show the increases and
decreases in each account in absolute peso values and percentages.

2. Perform a vertical analysis on the financial statements of JD Corporation. Convert all the
income statement and balance sheet accounts to common units, using sales and total
assets as the base.

3. Using the data on the financial statements of JD Corporation, perform a ratio analysis by
calculating the following ratios:
a. Current ratio
h. Equity ratio
b. Quick ratio (acid test ratio) i. Return on sales
c. Receivables turnover j. Return on total assets
d. Inventory turnover k. Return on owners’ equity
e. Times interest earned l. Earnings per share (EPS)
f. Debt-equity ratio m. Price-earnings ratio (P/E)
g. Debt ratio n. Dividend payout

######################################