UNIVERSITY OF PANGASINAN – PEN

Financial Management I
Periodic Test III

Pasol Company has just prepared its master budget for the year 200B. Some of the information used in
the preparation of such budget is as follows:
a. Budgeted sales: January P480,000
February 520,000
March 560,000
April 500,000
May 576,000
June 640,000
b. 20% of total sales is cash sales. The collection pattern for the sales on credit is as follows:
30% in the month of sale
40% in the month after the month of sale
25% in the 2nd month after the month of sale
c. Pasol’s gross margin rate is 60% of sales
d. Accounts payable arising from merchandise purchases is paid for in the month following the
purchase.
e. The company desires an inventory at the end of each month equal to 30% of the next month’s sale in
units.
f. The variable operating expenses (other than cost of goods sold) are 10% of sales and are paid for in
the month following the sale.
g. The annual fixed operating expenses are as follows:
Depreciation P336,000
Advertising 576,000
Insurance 144,000
Salaries 864,000
Property taxes 192,000
h. All of the fixed operating expenses are incurred uniformly throughout the year. Cash fixed operating
expenses are paid in the month of incurrence, except for:
o Insurance – paid quarterly in January, April and July
o Property taxes – paid twice a year in April and October

1. The budgeted cash collection in March for sales made in March is?
2. The budgeted cash receipts for the month of April is?
3. The budgeted purchases of merchandise for February is?
4. The budgeted cash disbursements for expense (other than cost of goods sold) during the month of
April is?
5. The budgeted cash disbursements to be made in April for merchandise purchases is?
6. Assume that the expected cash balance at the beginning of April is P51,600. How much is the
budgeted cash balance as of April 30?

Kenney Corporation recently reported the income statement for 2012 (numbers are in millions)
Sales P7,000
Operating costs 3,000
EBIT P4,000
Interest 200
Earnings before taxes P3,800
Taxes (40%) 1,520
Net income available to common shareholders P2,280
The company forecasts that its sales will increase by 10% in 2013 and its operating costs will increase in
proportion to sales. The company’s interest expense is expected to remain at P200M and the tax rate
will remain at 40%. The company plans to pay out 50% of its net income as dividends, the other 50% will
be addition to retained earnings.

7. What is the forecasted addition to retained earnings?

Lear Inc. has P800,000 in current assets, P350,000 of which are considered permanent current assets. In
addition, the firm has P600,000 invested in fixed assets.

8. Lear wishes to finance all fixed assets and half of its permanent current assets with long – term
financing costing 10 percent. Short – term financing currently costs 5 percent. Lear’s earnings before
interest and taxes are P200,000. Determine Lear’s earnings after taxes under this financing plan. The
tax rate is 30 percent.

9. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of
its temporary current assets with long – term financing. The same interest rates shall apply as in #6.
Earnings before interest and taxes will be P200,000. What will be Lear’s earnings after taxes?

The Tapley Company is trying to determine an acceptable growth rate in sales. While the firm wants to
expand, it does not want to use any external funds to support such expansion. Other information are:
 Capital intensity ratio = 1.2
 Profit margin = 10%
 Dividend pay-out ratio = 50%
 Current sales = 100,000
 Spontaneous liabilities = 10,000

10. What is the maximum growth rate it can sustain without requiring additional funds?

Harmon Company has given the following information: Sales this year = P9,000; Sales increase projected
for next year = 20%; net income this year = P250; Dividend payout ratio = 40%; Projected excess funds
available next year = P100; Accounts payable = P600; Notes payable = P100; Accrued wages = P200.

11. Using AFN formula approach, calculate the total assets of Harmon Company.

The Rein Corporation is attempting to determine the optimal level of current assets for the coming year.
Management expects sales to increase to approximately P2 million as a result of an asset expansion
presently being undertaken. Fixed assets total P1 million, and the firm wishes to maintain a 60% debt
ratio. Rein’s interest cost is currently at 8% on both short – term and long – term debt (which the firm
uses in its permanent structure). Three alternative regarding the projected current asset level are
available to the firm: (1) a tight policy requiring current assets of only 45% of projected sales; (2) a
moderate policy of 50% of sales in the current assets, and (3) a relaxed policy requiring current assets of
60% of sales. The firm expects to generate EBIT at a rate of 12% on total sales.

12. What is the expected return on equity under alternative #1?

13. What is the expected return on equity under alternative #2?
14. What is the expected return on equity under alternative #3?

Ernie Trading Co. budgeted merchandise purchases of 40,000 units next month. The expected beginning
inventory is 12,000 units and the desired ending inventory at the end of next month is 15,000 units.

15. Budgeted sales in units for the next month is?

Studio San has forecasted its seasonal financing needs for the next six months as follows: (Short–term
funds will cost 11% and long–term will cost 13% annually. Permanent requirement = P500K)
Month Seasonal requirement
Jan P1,450,000
Feb 1,895,000
Mar 2,000,000
Apr 1,575,000
May 1,342,000
June 1,562,000

16. Find the average monthly seasonal requirement.

17. What is the financing cost for the six months using aggressive policy?
18. What is the financing cost for the six months using the conservative policy?

Jills’ Wigs Inc. had the following balance sheet last year:
Cash 800 Accounts payable 350
Accounts receivable 450 Accrued wages 150
Inventories 950 Notes payable 2,000
Net fixed assets 34,000 Mortgage 26,500
CS 3,200
RE 4,000
Total assets 36,200 Total liabilities and equity P36,200
Jill has just invented a non – slip wig for men that she expects will cause sales to double from P10,000 to
P20,000, increasing net income to P1,000. She feels that she can handle the increase without adding any
fixed assets.

19. How much is the AFN if Jill pays no dividend?

The following information was gathered by the Budget Committee Chairman of Gigette Corporation:

Gigette Corporation produces and sells only one product. The selling price during the budget period is
expected to be P7.50 per unit. The company expects to sell 112,500 units. The desired finished goods
inventory at the end of the period is 75,000 units, while the expected beginning inventory is 62,500
units. Direct labor is P4.50 per hour. Each product requires 30 minutes to complete. Factory overhead is
applied to production on the basis of direct labor hours. Variable overhead cost at the planned level of
operation is budgeted at P49,800; fixed overhead is budgeted at P149,400.

Each unit requires 1.5 kgs. of raw materials. Only one kind of raw materials is used and it is expected to
cost P0.30 per kilo. The desired ending inventory of raw materials is 12,000 kgs.; the expected beginning
inventory is 9,500 kgs. Variable selling and administrative cost will amount to P1.50 per unit of product
sold.

20. The budgeted production is?

21. The budgeted materials purchases for the period is?
22. The budgeted direct labor cost is?
23. The budgeted cost of goods sold is?
24. The budgeted income before tax is?

Flum Packages, Inc.

Balance Sheet

Asssets Liabilities and equity

Current assets 10,000 Current liabilities 5,000
Fixed assets 20,000 Long – term debt 12,000
Equity 13,000
Total assets 30,000 30,000
The company earns 5 percent on current assets and 15 percent on fixed assets. The firm’s current
liabilities cost 7 percent to maintain and the average annual cost of long – term funds is 20 percent.

25. The firm’s net profit on total assets is?

*****END OF TEST*****
”For whatever the human mind can conceive, it can achieve”.