COMPRE 1

Question 1

A major difference between economic profit and accounting profit is that economic profit

a.
Minimizes the impact of accounting estimates.
b.
Allows for more accurate expense accruals.
c.
Reduces profits by associated cost of capital.
d.
Adjusts accounting profit by depreciation.

Answer 1

c.
Reduces profits by associated cost of capital.

Question 2

Foley Mfg. performed the following horizontal analysis on sales. What was the rate of inflation
in 20X2?
20X2 20X1
Sales P 586,860 P489,050
Inflation Adjusted Sales P 523,982 P489,050

a.
13%
b.
9%
c.
12%
d.
8%
e.
10%
f.
11%

Answer 2

c.
12%

Question 3

Term structure of interest rates illustrates:

a.
the relationship between bond maturity and yield for such securities.
b.
security yields ranked by default risk structure (interest rate risk is assumed
zero)
c.
how interest rates vary over the years
d.
the pattern of interest rates over the long-term business cycle

Answer 3

a.
the relationship between bond maturity and yield for such securities.

Question 4

A futures contract is an agreement to trade an asset

a.
in the future at a price prevailing in the future
b.
today at a price prevailing at some future date
c.
in the future at a price determined today
d.
today at a price determined today

Answer 4

c.
in the future at a price determined today

Question 5

Which one of the following is the most relevant evidence suggesting that the quality of a
company’s earnings is weak?

a.
Inventory levels are rising during a period of falling prices.
b.
The company intentionally overestimates the useful life of its PPE by two-fold.
c.
The company’s accounts receivable turnover ratio rises during an economic
downturn.
d.
A significant portion of the company’s business is located in a country where it
is difficult for multinational corporations to repatriate profits.

Answer 5

b.
The company intentionally overestimates the useful life of its PPE by two-fold.

Question 6

The ICA Company has the following characteristics:
Sales: P1,000
Total Assets: P1,000
Total Debt/Total Assets: 35%
EBIT: P 150
Tax rate: 40%
Interest rate on total debt: 4.57%
What is ICA’s ROE?

a.
12.37%
b.
30.77%
c.
11.04%
d.
28.31%
e.
16.99%

Answer 6

a.
12.37%

Question 7

A company’s net profit as presented on its income statement is generally

a.
less than its economic profits because accountants include labor costs, while
economists exclude labor costs.
b.
greater than its economic profits because opportunity costs are not
considered in calculating net income.
c.
The same as economic profit.
d.
greater than its economic profit because economists do not consider interest
payments to be costs.

Answer 7

b.
greater than its economic profits because opportunity costs are not
considered in calculating net income.

Question 8

Bubbles Soap Corporation has a quick ratio of 1.0 and a current ratio of 2.0 implying that

a.
None of the statements are true.
b.
the amount of current liabilities is equal to the amount of inventory and
prepayments.
c.
the amount of current assets is equal to the amount of current liabilities.
d.
the amount of current assets is equal to the amount of inventory and
prepayments
e.
All of the statements are true

Answer 8

b.
the amount of current liabilities is equal to the amount of inventory and
prepayments.

Question 9

Tucker Corporation’s manager believes that the economic environment during the next year
can be good, normal, or bad, and he thinks that a stock’s returns will have the following
probability distribution shown below.
Good .50 15%
Normal .20 0%
Bad .30 -5%
Calculate the expected rate of return

a.
6.00%
b.
3.33%
c.
9.00%
d.
10.00%

Answer 9

a.
6.00%

Question 10

In 20x7, Moreno Cheeses had a net income of P42,390, paid common share dividends of P6,000,
and had 18,000 shares of common stock outstanding. What was Moreno’s earnings per share
(EPS) for 20x7?

a.
P1.69
b.
P2.69
c.
P2.36
d.
P2.02

Answer 10

c.
P2.36

Question 11

Which is an implicit cost for a company?

a.
The cost of salaries foregone by the employer.
b.
The cost paid for production supplies for the firm.
c.
The cost paid for renting a building for the firm.
d.
The cost of salaries of an employee of the firm.
e.
The cost paid for purchasing merchandize for resale

Answer 11

a.
The cost of salaries foregone by the employer.

Question 12

Statement 1. The income statement presents a summary of the firm’s revenues and expenses
over an accounting period.
Statement 2. On the balance sheet, total assets must equal total liabilities plus stockholders
equity.

a.
Statement 1 is true
b.
Statement 2 is true
c.
Both statements are false
d.
Both statements are true

Answer 12

d.
Both statements are true

Question 13

Star Corporation, an auto fuel cell maker, is planning a new plant and needs to raise $50 million
to finance it. The company plans to raise the money through a general cash offering priced at
$25.00 a share. Star’s underwriters charge a 4% spread. How many shares does the company
have to sell toachieve its goal? (Round your final answer to the nearest unit of share.)

a.
1,198,083 shares
b.
1,153,846 shares
c.
1,200,000 shares
d.
1,250,000 shares
e.
2,083,333 shares
f.
2,000,000 shares

Answer 13

e.
2,083,333 shares

Question 14

The assets of Moreland Corporation are presented below.
January 1 December 31
Cash $ 48,000 $ 62,000
Marketable securities 42,000 35,000
Accounts receivable 68,000 47,000
Inventory 125,000 138,000
Plant & equipment
(net of accum. Depr.) 325,000 424,000
For the year just ended, Moreland had net income of $84,000 on $800,000 of sales. Moreland’s
total asset turnover ratio is

a.
1.48.
b.
1.37.
c.
1.22
d.
1.50.
e.
1.27.

Answer 14

c.
1.22

Question 15

Which of the following statements is true?

a.
Ceteris paribus, long-term bonds have less price risk than short-term bonds.
b.
Ceteris paribus, short-term bonds have less reinvestment risk than long-term
bonds.
c.
Ceteris paribus, long-term bonds have less reinvestment risk than short-term
bonds.
d.
Ceteris paribus, high-coupon bonds have less reinvestment risk than lowcoupon bonds.
e.
Ceteris paribus, low-coupon bonds have less price risk than high-coupon
bonds.

Answer 15

c.
Ceteris paribus, long-term bonds have less reinvestment risk than short-term
bonds.

Question 16

A share of perpetual preferred stock pays an annual dividend of P6 per share. If investors
require a 12 percent rate of return, what should be the price of this preferred stock?

a.
P62.38
b.
P57.25
c.
P50.00
d.
P46.75
e.
P41.64

Answer 16

c.
P50.00

Question 17

Bonds that can be exchanged for shares of equity at the owner’s discretion are called what?

a.
Convertible bond.
b.
Putable bond.
c.
Debenture.
d.
Indenture.
e.
Callable bond

Answer 17

a.
Convertible bond.

Question 18

All of the following statements about accounting profit and economic profit are true except

a.
Accounting profit is the difference between accounting revenues and
accounting expenses.
b.
Accounting profit is the difference between accounting revenues and implicit
costs.
c.
Economic profit is the difference between accounting profit and opportunity
costs.
d.
Economic profit is the difference between accounting revenues and both
types of costs.

Answer 18

b.
Accounting profit is the difference between accounting revenues and implicit
costs.

Question 19

In the capital asset pricing model (CAPM), a security market line (SML):

a.
indicates the degree to which two stock returns move together in a portfolio.
b.
shows the effect of portfolio diversification on market risk.
c.
represents the weighted average of the expected returns of all the
investments composing that portfolio.
d.
provides a benchmark for evaluating the relative merits of different stocks or
portfolios.

Answer 19

d.
provides a benchmark for evaluating the relative merits of different stocks or
portfolios.

Question 20

The equity section of Allen Inc.’s statement of financial position is presented as follows.
Preferred stock ($100 par value) $ 8,000,000
Common stock ($10 par value) 5,000,000
Paid-in capital in excess of par 12,000,000
Retained earnings 6,000,000
Net worth $31,000,000
The book value of Allen Inc.’s common stock is

a.
$10.00
b.
$62.00
c.
$31.00.
d.
$17.00.
e.
$23.00.
f.
$46.00.
g.
$5.00.

Answer 20

f.
$46.00.

Question 21

Which of the following statements is NOT CORRECT?

a.
When a corporation’s shares are owned by a few individuals, we say that the firm
is “closely, or privately, held.”
b.
“Going public” establishes a firm’s true intrinsic value and guarantees that a
liquid market will always exist for the firm’s shares.
c.
It is possible for a firm to go public and yet not raise any additional new capital
for the firm itself.
d.
When stock in a closely held corporation is offered to the public for the first time,
the transaction is called “going public, or an IPO,” and the market for such stock
is called the new issue or IPO market.
e.
The stock of publicly owned companies must generally be registered with and
reported to a regulatory agency such as the SEC.

Answer 21

b.
“Going public” establishes a firm’s true intrinsic value and guarantees that a
liquid market will always exist for the firm’s shares.

Question 22

Which of the following is likely to discourage a firm to increase the amount of debt in its capital
structure?

a.
The corporate tax rate increases.
b.
The firm’s earnings become less volatile.
c.
The firm’s assets become less liquid.
d.
The standard deduction for estate tax decreases
e.
The capital gains tax increases
f.
The personal tax rate decreases.

Answer 22

c.
The firm’s assets become less liquid.

Question 23

Which of the following is true about the impact of price inflation on financial ration analysis?

a.
Inflation impacts financial ratio analysis for one firm over time, as well as
comparative analysis of firms of different ages.
b.
Inflation impacts financial ratio analysis for one firm over time, but not
comparative analysis of firms of different ages.
c.
Inflation impacts comparative analysis of firms of different ages, but not
financial ratio analysis for one firm over time
d.
Inflation has no impact on financial ratio analysis

Answer 23

a.
Inflation impacts financial ratio analysis for one firm over time, as well as
comparative analysis of firms of different ages.

Question 24

Which of the following ratios measures the extent to which operating profit covers its annual
interest costs?

a.
Op. profit margin
b.
ROE ratio
c.
Debt-to-Equity Ratio
d.
Debt-to-Assets ratio
e.
fixed charge coverage ratio
f.
TIE ratio

Answer 24

f.
TIE ratio

Question 25

Weaver Chocolate Co. expects to EARN P3.50 per share during the current year, its expected
dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its
common stock currently sells for P32.50 per share. New stock can be sold to the public at the
current price, but a flotation cost of 5% would be incurred. What would be the cost of equity
from new common stock?

a.
14.74%
b.
15.48%
c.
14.04%
d.
12.70%
e.
13.37%

Answer 25

e.
13.37%

Question 26

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual
coupon rate of 9.5%. The bond has a face value of P1,000, and it makes semiannual interest
payments. If you require an 8.4% nominal yield to maturity on this investment, what is the
maximum price you should be willing to pay for the bond?

a.
P1,220.48
b.
P1,105.69
c.
P1,190.71
d.
P1,161.67
e.
P1,133.34

Answer 26

b.
P1,105.69

Question 27

Statement 1. An important step in applying the corporate valuation model is forecasting the
firm’s free cash flows.
Statement 2. Free cash flows are assumed to grow at a constant rate beyond a specified date in
order to find the horizon, or continuing, value.

a.
Statement 1 is true
b.
Both statements are false
c.
Statement 2 is true
d.
Both statements are true

Answer 27

d.
Both statements are true

Question 28

Brad Corporation has 6,000 shares of 5% cumulative, P100 par value preferred stock
outstanding and 200,000 shares of common stock outstanding. Brad’s board of directors last
declared dividends for the year ended May 31, 20X0, and there were no dividends in arrears at
that time. For the year ended May 31, 20X2, Brad had net income of P1,750,000. The board of
directors is declaring a dividend for common shareholders equivalent to 20% of net income.
The total amount of dividends to be paid by Brad at May 31, 20X2 is:

a.
P350,000
b.
P206,000
c.
P410,000
d.
P380,000

Answer 28

c.
P410,000

Question 29

In the translation process, we begin with a determination of whether a foreign affiliate’s
functional currency is also its local reporting currency. Which one of the following factors
indicates that a foreign affiliate’s functional currency is the U.S. dollar itself?

a.
Sales prices are responsive to short-term changes in exchange rates and
worldwide competition.
b.
Cash flows are primarily in foreign currency and do not affect the parent’s
cash flows.
c.
Labor, materials, and other costs consist primarily of local costs to the foreign
affiliate.
d.
Financing is primarily obtained from local foreign sources and from the
affiliate’s operations.

Answer 29

a.
Sales prices are responsive to short-term changes in exchange rates and
worldwide competition.

Question 30

Which one of the following would decrease the working capital of a company?

a.
Payment of a 20-year mortgage payable with cash.
b.
Cash collection of accounts receivable.
c.
Refinancing a short-term note payable with a two year note payable.
d.
Cash payment of payroll taxes payable.

Answer 30

a.
Payment of a 20-year mortgage payable with cash.

Question 31

If an investment banker has agreed to sell a new issue of securities on a best-efforts basis, the
issue

a.
most likely involves an unusually large stock offering.
b.
most likely involves a well-established, large company.
c.
results in no assumption of underwriting risk by the investment banker.
d.
most likely involves bonds instead of common stocks.
e.
most likely involves common stocks instead of bonds.

Answer 31

c.
results in no assumption of underwriting risk by the investment banker.

Question 32

Flavorsweet Inc. expects EBIT of P2,000,000 for the coming year. The firm’s capital structure
consists of 40 percent debt and 60 percent equity, and its marginal tax rate is 40 percent. The
cost of equity is 14 percent, and the company pays a 10 percent rate on its P5,000,000 of longterm debt. One million shares of common stock are outstanding.
In its next capital budgeting cycle, the firm expects to fund one large positive NPV project
costing P1,200,000, and it will fund this project in accordance with its target capital structure. If
the firm follows a residual dividend policy and has no other projects, what is its expected
dividend payout ratio?

a.
0
b.
70%
c.
20%
d.
100%
e.
30%
f.
40%
g.
60%
h.
80%

Answer 32

c.
20%

Question 33

Economic cost is defined us

a.
the opportunity cost of all inputs less the dollar cost of those inputs.
b.
the total of all explicit and implicit costs of the business firm.
c.
the difference between all implicit and explicit costs of the business firm.
d.
all the dollar costs employers pay for all inputs purchased.

Answer 33

b.
the total of all explicit and implicit costs of the business firm.

Question 34

In the classical interest rate theory, rising interest rates will

a.
increase the demand for money
b.
decrease the demand for money
c.
decrease investment expenditures
d.
increase the quantity of saving

Answer 34

d.
increase the quantity of saving

Question 35

Financial institutions whose specialty is helping companies sell new debt and equity in the
primary markets are called:

a.
Finance Companies
b.
Stock exchange
c.
Securities brokerage
d.
Investment banks.
e.
Venture capitalist
f.
Commercial banks

Answer 35

d.
Investment banks.

Question 36

Colner Corporation expects to report profit of at least $90 million annually for the foreseeable
future. Colner could increase its return on equity by taking which of the following actions with
respect to its inventory turnover and the use of equity financing?

a.
Increase inventory turnover; increase use of equity financing.
b.
Decrease inventory turnover; decrease use of equity financing.
c.
Increase inventory turnover; decrease use of equity financing.
d.
Decrease inventory turnover; increase use of equity financing.

Answer 36

c.
Increase inventory turnover; decrease use of equity financing.

Question 37

The Carlos Compania is a relatively small, privately owned firm. Last year the company had
after-tax income of P15,000, and 10,000 shares were outstanding. Dividends of P5,000 were
declared for the preferred stockholders. The owners were trying to determine the market value
for the stock, prior to taking the company public. A similar firm which is publicly traded had a
price/earnings ratio of 5.0. Using only the information given, estimate the market value of one
share of Charleston’s stock.

a.
P2.50
b.
P5.00
c.
P7.50
d.
P1.50
e.
P10.00

Answer 37

b.
P5.00

Question 38

Which of the following is a reason a firm can benefit from going public?

a.
Being able to sell the stock in an IPO at what they believe is the firm’s value
b.
Being unable to sell the stock in an IPO at what they believe is the firm’s value
c.
More disclosure requirements that would benefit the company
d.
Incurring the legal fees, auditing fees, consulting fees, and regulatory fees
associated with the IPO process
e.
When it needs a large sum of capital, it will be easier to obtain.

Answer 38

e.
When it needs a large sum of capital, it will be easier to obtain.

Question 39

A change in realizability of accounts receivable is an example of a(n)

a.
Correction of error
b.
Accounting principles change
c.
Accounting estimate change
d.
Prior period adjustment
e.
Accounting method change

Answer 39

c.
Accounting estimate change

Question 40

The expected rate of return for the share of Corn-pop Co. is 20%, with a standard deviation of
14%. The expected rate of return for the share of Orange Associates is 10%, with a standard
deviation of 9%. The share that would be considered riskier is:

a.
Cornpop because the standard deviation is higher.
b.
Orange because the standard deviation is higher.
c.
Orange because the return is lower.
d.
Cornpop because the coefficient of variation is lower.
e.
Orange because the coefficient of variation is higher.

Answer 40

e.
Orange because the coefficient of variation is higher.

Question 41

Ronin Company’s bonds mature in 8 years, have a par value of P1,000, and make an annual
coupon interest payment of P65. The market requires an interest rate of 8.2% on these
bonds. What is the bond’s price?

a.
P972.48
b.
P948.76
c.
P903.04
d.
P925.62
e.
P996.79

Answer 41

c.
P903.04

Question 42

A firm had the following accounts and financial data for 2008:
Revenue P 3,060 Cost of sales P1,800
Accounts receivable 500 Preferred stock dividends 18
Interest expense 126 Tax rate 40%
Total operating expenses 600 Number of common shares 1,000
Accounts payable 240 outstanding
The firm’s earnings per share, rounded to the nearest cent, for 2008 was ______.

a.
0.28
b.
0.25
c.
0.32
d.
0.30
e.
0.51
f.
0.48
g.
0.26
h.
0.53

Answer 42

d.
0.30

Question 43

To say that there is “asymmetric information” in the issuing of common stock or debt means
that

a.
management has more accurate information than investors have.
b.
investors have nearly perfect information.
c.
investors have more accurate information than management has.
d.
the markets have nearly perfect information

Answer 43

a.
management has more accurate information than investors have.

Question 44

The times interest earned ratio of McHugh Company is 4.5. The interest expense for the year
was P20,000, and the company’s tax rate is 30%. The company’s net income is:

a.
P49,000
b.
P63,000
c.
P54,000
d.
P77,000
e.
P22,000
f.
P66,000
g.
P42,000

Answer 44

a.
P49,000

Question 45

Ron Enterprises forecasts the free cash flows (in millions) shown below. The weighted average
cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year
3. What is the firm’s total corporate value, in millions?
Year 1 2 3
FCF -P15.0 P10.0 P40.0

a.
P314.51
b.
P366.82
c.
P331.06
d.
P348.48
e.
P386.13

Answer 45

e.
P386.13

Question 46

If a company has a high current ratio but a low acid-test ratio, one can conclude that:

a.
the company prepaid its rent for as long as 12 straight months.
b.
the company has little outstanding accounts receivable balance.
c.
the company’s unearned revenue is too large.
d.
the company has little amount of current liabilities.
e.
the company has little investment in inventory.
f.
the company’s financial leverage is very high.

Answer 46

a.
the company prepaid its rent for as long as 12 straight months.

Question 47

Goodheart Corp’s stock has a required rate of return of 11.50% on its equity, and it sells for
P25.00 per share. Goode’s dividend is expected to grow at a constant rate of 7.00%. What was
the last dividend, D 0?

a.
P0.95
b.
P1.13
c.
P1.16
d.
P1.05
e.
P1.27

Answer 47

d.
P1.05

Question 48

You have the following data on three stocks:
Stock Standard Deviation Beta
A 10% 0.67
B 20% 0.51
C 14% 1.29
If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and
Stock ____ if it is to be held as part of a well-diversified portfolio.

a.
C; B.
b.
B; A.
c.
C; A.
d.
A; B.
e.
A; A

Answer 48

d.
A; B.

Question 49

The degree of operating leverage (DOL) is

a.
A measure of the change in earnings available to common stockholders
associated with a given change in operating earnings.
b.
Higher if the degree of total leverage is lower, other things held constant.
c.
Lower if the degree of total leverage is higher, other things held constant.
d.
A measure of the change in operating income resulting from a given change in
sales.

Answer 49

d.
A measure of the change in operating income resulting from a given change in
sales.

Question 50

What is insider trading?

a.
A legal practice where individuals with confidential or nonpublic information
trade on investments for profits.
b.
A legal practice where individuals with public information trade on
investments for profits.
c.
An illegal practice where individuals with confidential or nonpublic information
trade on investments for profits.
d.
An illegal practice where individuals with public information trade on
investments for profits.

Answer 50

c.
An illegal practice where individuals with confidential or nonpublic information
trade on investments for profits.

Question 51

Tucker Corporation’s manager believes that the economic environment during the next year
can be good, normal, or bad, and he thinks that a stock’s returns will have the following
probability distribution shown below.
Good .50 15%
Normal .20 0%
Bad .30 -5%
Calculate the variance

a.
0.79%
b.
0.84%
c.
2.38%
d.
0.25%

Answer 51

b.
0.84%

Question 52

What effect will a year-end increase in the market price of a corporation’s common stock have
on the following ratios?
Return on Assets Return on Shareholders’ Equity

a.
Increase Increase
b.
Decrease Decrease
c.
Increase No effect
d.
Decrease Increase
e.
No effect No effect
f.
No effect Increase
g.
Increase Decrease

Answer 52

e.
No effect No effect

Question 53

A company changes its credit policy from 1/10 net 90 to 2/10 net 30. The most likely effect of
this change is to

a.
Decrease the days’ sales outstanding in accounts receivable and decrease the
cash cycle.
b.
Decrease the days’ sales outstanding in accounts receivable and increase the
cash cycle.
c.
Increase the days’ sales outstanding in accounts receivable and decrease the
cash cycle.
d.
Increase the days’ sales outstanding in accounts receivable and increase the
cash cycle.

Answer 53

a.
Decrease the days’ sales outstanding in accounts receivable and decrease the
cash cycle.

Question 54

A corporation has P180 million in current assets. If the corporation has a current ratio of 1.2
and a quick ratio of 0.9, what is net working capital?

a.
P30 million.
b.
P108 million.
c.
P20 million
d.
P15 million.
e.
P81 million.
f.
P10 million.

Answer 54

a.
P30 million.

Question 55

Although uncommon, if investors expect decreasing price level growth, what would be the
shape of the yield curve?

a.
a downward sloping yield curve.
b.
a humped yield curve.
c.
an upward sloping yield curve.
d.
a flat yield curve.

Answer 55

a.
a downward sloping yield curve.

Question 56

Mike Flannery holds the following portfolio:
Stock Investment Beta
A P150,000 1.40
B 50,000 0.80
C 100,000 1.00
D 75,000 1.20
Total P375,000
What is the portfolio’s beta?

a.
1.17
b.
1.56
c.
1.29
d.
1.42
e.
1.06

Answer 56

a.
1.17

Question 57

The issuance of new shares in a five-for-one split of common stock

a.
Increases the book value per share of common stock.
b.
Decreases the book value per share of common stock.
c.
Decreases total shareholders’ equity
d.
Increases total shareholders’ equity

Answer 57

b.
Decreases the book value per share of common stock.

Question 58

Makay Corporation has decided to include certain financial ratios in its year-end annual report
to shareholders. Selected information relating to its most recent fiscal year is provided below.
Cash $ 10,000
Accounts receivable (end of year) 20,000
Accounts receivable (beginning of year) 24,000
Inventory (end of year) 30,000
Inventory (beginning of year) 26,000
Notes payable (due in 90 days) 25,000
Bonds payable (due in 10 years) 35,000
Net credit sales for year 220,000
Cost of goods sold 132,000
Makay’s average inventory turnover for the year was

a.
5.1 times.
b.
5.0 times.
c.
4.7 times.
d.
7.9 times.
e.
5.4 times.
f.
4.4 times.

Answer 58

c.
4.7 times.

Question 59

If the books of a foreign entity are maintained in a currency other than the functional currency,
foreign currency amounts must be re-measured into thefunctional currency. All of the following
items should be re-measured at the historical rate except:

a.
Inventory carried at cost
b.
Prepaid expenses.
c.
Cost of goods sold.
d.
Cash.
e.
Property, plant, and equipment.

Answer 59

d.
Cash.

Question 60

Trevino Ltd. has a degree of financial leverage of 1.38 and degree of operating leverage of 1.45.
Trevino would like to decrease its degree of total leverage over the next couple of years. All of
the following actions would achieve this goal except

a.
Increase Trevino Ltd.’s reliance on debt financing.
b.
Defer the purchase two machines that would automate a process currently
performed by 12 employees; and add 4 more employees to increase production
capacity.
c.
Replace three older machines with one new machine that, due to technological
improvements, is both more efficient and less expensive.
d.
Increase Trevino Ltd.’s usage of equity financing.

Answer 60

a.
Increase Trevino Ltd.’s reliance on debt financing.

Question 61

If Boyd Corporation has sales of P2 million per year (all credit) and days sales outstanding of 35
days, what is its average amount of accounts receivable outstanding (assume a 360 day year)?

a.
P194,444
b.
P97,222
c.
P285,714
d.
P5,556
e.
P20,571
f.
P57,143

Answer 61

a.
P194,444

Question 62

The times interest earned ratio of McHugh Company is 4.5. The interest expense for the year
was P20,000, and the company’s tax rate is 30%. The company’s net income is:

a.
P49,000
b.
P42,000
c.
P63,000
d.
P54,000
e.
P22,000
f.
P66,000
g.
P77,000

Answer 62

a.
P49,000

Question 63

Which of the following is the best definition of opportunity cost?

a.
the cost incurred in the past before we make a decision about what to do in
the future.
b.
a cost that can be avoided if we stop the activity currently being done.
c.
the additional benefit of buying an additional unit of a product
d.
that which we give up or forgo, when we make a choice or a decision.
e.
the additional cost of buying an additional unit of a product
f.
a cost that cannot be avoided, regardless of what is done in the future

Answer 63

d.
that which we give up or forgo, when we make a choice or a decision.

Question 64

Laptop Co. presently has a current ratio of 1.9 and an acid-test ratio of 1.3. Prepaying next
year’s office rent of P50,000 will:

a.
have no effect on the company’s current ratio but will decrease its quick
ratio.
b.
decrease the company’s current ratio and decrease its quick ratio.
c.
have no effect on the company’s current ratio but will increase its quick
ratio.
d.
have no effect on either the company’s current ratio or its quick ratio.
e.
increase the company’s current ratio and increase its quick ratio.

Answer 64

a.
have no effect on the company’s current ratio but will decrease its quick
ratio.

Question 65

Which one of the following statements best reflects the relationship between the results of
financial ratios calculated in a local currency versus those calculated after the local statements
have been remeasured or translated into the reporting currency?

a.
Financial ratio results are different under translation and remeasurement, but
ratios under translation are often similar to those in the local currency.
b.
Financial ratio results are similar under translation and remeasurement, and
ratios under translation are also often similar to those in the local currency.
c.
Finacial ratio results are similar under translation and remeasurement, but
ratios under translation are often different from those in the local currency.
d.
Financial ratio results are different under translation and remeasurement, and
ratios under translation are also often different from those in the local currency

Answer 65

d.
Financial ratio results are different under translation and remeasurement, and
ratios under translation are also often different from those in the local currency.

Question 66

Financial markets in which equity and debt instruments with maturities greater than one year
are traded are called what?

a.
money markets
b.
Capital markets
c.
Private placements
d.
Eurocurrency markets

Answer 66

b.
Capital markets

Question 67

You were hired as a consultant to Giambono Company, whose target capital structure is 40%
debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of
preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any
new stock. What is its WACC?

a.
9.53%
b.
9.55%
c.
8.98%
d.
8.75%
e.
9.26%

Answer 67

a.
9.53%

Question 68

Which of the following statements is CORRECT?

a.
One disadvantage of dividend reinvestment plans is that they increase
transactions costs for investors who want to increase their investment in the
company.
b.
One advantage of dividend reinvestment plans is that they enable investors to
postpone paying taxes on the dividends credited to their account.
c.
Stock repurchases can be used by a firm that wants to increase its debt ratio.
d.
Stock repurchases make sense if a company expects to have a lot of profitable
new projects to fund over the next few years, provided investors are aware of
these investment opportunities.
e.
One advantage of an open market dividend reinvestment plan is that it provides
new equity capital and increases the shares outstanding

Answer 68

c.
Stock repurchases can be used by a firm that wants to increase its debt ratio.

Question 69

The common stock of a company must provide a higher expected return than the debt of the
same company because

a.
there is greater demand for stock than for bonds.
b.
there is more systematic risk involved for the common stock.
c.
there is a market premium required for bonds.
d.
there is less demand for stock than for bonds.

Answer 69

b.
there is more systematic risk involved for the common stock.

Question 70

If debt financing is used, which of the following is correct?

a.
The percentage change in net operating income is equal to a given percentage
change in net income.
b.
The percentage change in net operating income is greater than a given
percentage change in net income.
c.
The percentage change in net operating income is less than the percentage
change in net income.
d.
The degree of operating leverage is greater than 1.
e.
The percentage change in net operating income depends on the interest rate
charged on debt.

Answer 70

c.
The percentage change in net operating income is less than the percentage
change in net income.

Question 71

The financial statements of Lark Inc. for last year are shown below.
Income Statement ($000)
Revenue $4,000
Cost of sales 2,900
Gross margin 1,100
General & administrative 500
Interest 100
Taxes 150
Net income $ 350
Balance Sheet ($000)
Current assets $ 800 Current liabilities $ 500
Plant & equipment 3,200 Long-term debt 1,000
Common equity 2,500
Totals $ 4,000 Totals $ 4,000
If Lark’s book values approximate market values and if the opportunity costs of debt and equity
are 10% and 14%, respectively, what was the economic profit for Lark last year?

a.
($100,000)
b.
($25,000).
c.
$350,000.
d.
($125,000).
e.
$0.
f.
$120,000

Answer 71

e.
$0.

Question 72

All of the following statements regarding the risk-and-return relationship are correct except:

a.
When holding such an asset pose a greater risk, the investor requires a higher
rate of return to compensate for bearing the greater risk.
b.
The investor is more likely to expect a lower return for a share in an unproven,
start-up company than from a share in a well-established multinational
corporation.
c.
An asset’s rate of return, or the amount earned, depends on the risk associated
with that investment.
d.
Investors often face a trade-off between risk and reward when evaluating asset
investment alternatives.

Answer 72

b.
The investor is more likely to expect a lower return for a share in an unproven,
start-up company than from a share in a well-established multinational
corporation.

Question 73

Using CAPM, if the treasury bond rate is 7%, the beta of the firm’s share is 1.1, and the expected
rate of return for the market is 12%, then the cost of equity capital is:

a.
13.2%
b.
20.2%
c.
12.5%
d.
7%
e.
12%

Answer 73

c.
12.5%

Question 74

Craston Company’s net income last year was P35,000. The company paid common dividends of
P5,000 and its average common stockholders’ equity was P480,000. The company’s return on
common stockholders’ equity for the year was closest to:

a.
12.5%
b.
13.72%
c.
6.25%
d.
7.29%
e.
8.33%
f.
16.00%

Answer 74

d.
7.29%

Question 75

EVERY financial market has the following characteristic:

a.
It channels funds from lenders-savers to borrowers-spenders.
b.
It determines the level of interest rates.
c.
It allows common stock to be traded.
d.
It allows loans to be made.

Answer 75

a.
It channels funds from lenders-savers to borrowers-spenders.

Question 76

Fortune Cookies Inc. issues an IPO on a best-effort basis. The company’s investment bank
demands a commission of 20 percent of the selling price. Five million shares are issued. The
average selling price remains at $32. How much did the investment bank receive?

a.
$32.0 million
b.
$31.0 million
c.
$155.0 million
d.
$186.0 million
e.
$124.0 million

Answer 76

a.
$32.0 million

Question 77

In primary markets, the first time issued shares to be publicly traded, in stock markets is
considered as

a.
Issuance offering
b.
Trade offering
c.
Initial public offering
d.
Public markets
e.
Seasoned public offering

Answer 77

c.
Initial public offering

Question 78

Bonjeeng Inc. wants to maintain a target capital structure with 30% debt and 70% equity. Its
forecasted net income is P550,000, and its board of directors has decreed that no new stock can
be issued during the coming year. If the firm follows the residual dividend model, what is the
maximum capital budget that is consistent with maintaining the target capital structure?

a.
P673,652
b.
P709,107
c.
P785,714
d.
P825,000
e.
P746,429

Answer 78

c.
P785,714

Question 79

Inflation will impact sales, expenses, income, and the cost of inventory. This can cause
distortions when comparing year-to-year financial statements. Allof the following statements
about inflation are true except

a.
By restating results to remove the impact of inflation, horizontal analysis can
be used to measure growth from a base year.
b.
Inflation impacts the income statement as well as the carrying cost of
inventory.
c.
Inflation has negligible impact in countries where inflation has been relatively
high.
d.
Inflation can have a significant impact on key ratios.

Answer 79

c.
Inflation has negligible impact in countries where inflation has been relatively
high.

Question 80

Assume the following cost of sales data for a company:
2012 P3,000,000
2011 2,700,000
2010 2,250,000
2007 1,500,000
If 2007 is the base period, what is the percentage change in cost of sales sales from 2007 to
2010?

a.
50% Increase
b.
150% Increase
c.
180% Increase
d.
100% Increase
e.
55.5% Decrease

Answer 80

a.
50% Increase

Question 81

Given an acid test ratio of 2.0, current assets of P5,000, and inventory of P2,000, prepayments
of P1,000; the value of current liabilities is

a.
P1,000
b.
P 500
c.
P1,500
d.
P6,000
e.
P2,500
f.
P3,500

Answer 81

a.
P1,000

Question 82

What is the Efficient Market Hypothesis all about?

a.
It is a theory about how diversified portfolios are more efficient than nondiversified portfolios.
b.
It is a theory that stocks placed for sale on the market will be sold within 24
hours.
c.
It is a theory about how much a security’s price will affect its demand in the
market.
d.
It is a theory about how well markets are able to reflect information in
security prices.

Answer 82

d.
It is a theory about how well markets are able to reflect information in
security prices.

Question 83

Which of the following is true when a company’s equity beta is 0.35?

a.
Returns on the stock will be less volatile than the overall market.
b.
The stock incurs the same level of unsystematic risk as stocks with similar
credit ratings.
c.
Returns on the stock will be more volatile than the overall market.
d.
The stock incurs the same level of systematic risk as stocks with similar credit
ratings.

Answer 83

a.
Returns on the stock will be less volatile than the overall market.

Question 84

A company is considering the early retirement of its 10%, 10-year bonds payable. Before retiring
the bonds, the company’s capital structure was
Current liabilities $125,000
Long-term liabilities: Notes payable (due in 5 years) 200,000
Bonds payable 300,000
Premium on bonds payable 25,000
Owner’s equity: Common stock ($5 par value) 150,000
Paid-in capital in excess of par 50,000
Retained earnings 450,000
If the bonds can be retired at 103.5%, the

a.
Financial leverage will decrease.
b.
Return on owner’s equity will decrease.
c.
Asset turnover ratio will decrease.
d.
Debt-equity ratio will increase.

Answer 84

a.
Financial leverage will decrease.

Question 85

The capital structure of four corporations is as follows.
C o r p o r a t i o n
Sterling Cooper Warwick Pane
Short-term debt 10% 10% 15% 10%
Long-term debt 25% 35% 30% 40%
Preferred stock 25% 30% 30% 20%
Common equity 40% 25% 25% 30%
Which corporation is the most highly leveraged?

a.
Pane.
b.
Sterling.
c.
Warwick.
d.
Cooper.

Answer 85

a.
Pane.

Question 86

X Inc.’s ROE is 20 percent, while Y Corp.’s ROE is 15 percent. Which of the following statements is
most correct?

a.
All of the statements must be true.
b.
X Inc. must have a higher EPS than Y Corp.
c.
X Inc. must have a higher ROA than Y Corp.
d.
X Inc. must have a higher net income than Y Corp.
e.
None of the statements are necessarily true.
f.
X Inc. must have a higher operating profit margin than Y Corp.

Answer 86

e.
None of the statements are necessarily true.

Question 87

The before-tax cost of debt, rd, is the same as the

a.
average yield to maturity (YTM) associated with the firm’s bonds.
b.
average coupon rate of the firm’s bonds.
c.
the firm’s marginal tax rate.
d.
re if the firm has no preferred stock.
e.
dividend yield associated with the firm’s common stock.

Answer 87

a.
average yield to maturity (YTM) associated with the firm’s bonds.

Question 88

Statement 1. A firm that follows a residual dividend policy must believe that the dividend
irrelevance theory is correct.
Statement 2. If the information content, or signaling, hypothesis is correct, then changes in
dividend policy can be important with respect to firm value and capital costs.

a.
Both statements are false.
b.
Both statements are true.
c.
Statement 2 is true.
d.
Statement 1 is true.

Answer 88

c.
Statement 2 is true.

Question 89

Tigersoft Corporation’s net income last year was P3,800,000. The dividend on common stock
was P2.00 per share and the dividend on preferred stock was P1.80 per share. The market price
of common stock at the end of the year was P53.40 per share. Throughout the year, 500,000
shares of common stock and 100,000 shares of preferred stock were outstanding. The priceearnings ratio is closest to:

a.
7.03
b.
7.38
c.
9.54
d.
26.70
e.
10.19
f.
14.05

Answer 89

b.
7.38

Question 90

Zorro Industries is a manufacturer which has been operating in an environment of significant
inflationary pressures. Which one of the following inventory methods would produce the
highest cost of goods sold on its financial statements?

a.
Last-in, first-out
b.
Average cost
c.
First-in, first-out
d.
Specific identification

Answer 90

a.
Last-in, first-out

Question 91

Which of the following statements about inflation is false

a.
If some prices are falling in an economy, that economy may still be
experiencing inflation.
b.
Inflation leads to a rise in purchasing power.
c.
Inflation is measured using price indexes.
d.
The annual inflation rate is measured as the percent change in the consumer
price index.

Answer 91

b.
Inflation leads to a rise in purchasing power.

Question 92

A company expects the following results for Year 1.
Sales P2,000,000
Cost of goods sold 1,200,000
Indirect costs 400,000
Earnings before interest and taxes P 400,000
The controller is preparing a forecast for Year 2 using the following assumptions.
Unit sales growth: 0% per year
Increase in unit selling price: 3% per year
Increase in direct costs per unit: 2% per year
Increase in indirect costs: 4% per year
The forecast of earnings before interest and taxes for Year 2 using the above assumptions
(rounded to the nearest thousand) would be:

a.
P486,000.
b.
P488,000
c.
P523,000.
d.
P462,000.
e.
P420,000.

Answer 92

e.
P420,000.

Question 93

A steady drop in a firm’s price-earnings ratio could indicate that

a.
The market price of the stock has been steadily rising.
b.
Both earnings per share and the market price of the stock are rising.
c.
Earnings per share has been steadily decreasing.
d.
Earnings per share has been increasing while the market price of the stock
has held steady

Answer 93

d.
Earnings per share has been increasing while the market price of the stock
has held steady

Question 94

Shown here is the degree of financial leverage (DFL) for four different companies.
Lynch Industries 2.1
Peterson Manufacturing 1.8
Rosales Ltd. 2.4
Todd Electronics 1.3
Which of the following statements is correct?

a.
Peterson Manufacturing has less financial risk than Todd Electronics.
b.
Lynch Industries is using less debt in its capital structure than Peterson
Manufacturing.
c.
Rosales Ltd. has more financial risk than Lynch Industries.
d.
Lynch Industries is using more debt in its capital structure than Rosales Ltd.

Answer 94

c.
Rosales Ltd. has more financial risk than Lynch Industries.

Question 95

Richards & Sons operate in a competitive market. The company would like to increase its gross
margin over the next two years. Which action would bethe best solution to meet this goal?

a.
Change its salespeople from salary plus commission to commission only to
cut down on overhead.
b.
Increase its selling price by 2% to 4% on most products.
c.
Negotiate its contracts with its workers with a 3% to 5% increase in labor cost
to prevent strikes.
d.
Use lower skilled laborers for menial tasks that do not require specialized
skills.
e.
Pay off its long-term debt by issuing additional shares of preferred stock.

Answer 95

d.
Use lower skilled laborers for menial tasks that do not require specialized
skills.

Question 96

Ceteris parabus, which of the following will not affect the acid-test ratio? (Assume that current
assets is greater than current liabilities.)

a.
Accounts receivable are collected.
b.
Cash is used to pay off accounts payable.
c.
Fixed assets are sold for cash.
d.
Long-term debt is issued to payoff a short-term bank loan.
e.
Cash is used to purchase inventories

Answer 96

a.
Accounts receivable are collected.

Question 97

A firm has total interest charges of P15,000 per year, sales of P1 million, a tax rate of 40 percent,
and a net profit margin of 6 percent. What is the firm’s times-interest-earned ratio?

a.
8 times
b.
20 times
c.
11 times
d.
10 times
e.
16 times
f.
6 times

Answer 97

a.
8 times

Question 98

Which one of the projects O, M, N, L should be selected? The expected return on the market is
16% and the risk-free rate is 6%

a.
Project M, which has a beta of 2.50 and has an expected return of 29.4%.
b.
Project L, which has a beta of 1.00 and has an expected return of 15.9%.
c.
Project N, which has a beta of 1.25 and has an expected return of 18.3%.
d.
Project O, which has a beta of 0.50 and has an expected return of 11.1%.

Answer 98

d.
Project O, which has a beta of 0.50 and has an expected return of 11.1%.

Question 99

The common stock of a company must provide a higher expected return than the debt of the
same company because

a.
there is greater demand for stock than for bonds.
b.
there is less demand for stock than for bonds.
c.
there is a market premium required for bonds.
d.
there is more systematic risk involved for the common stock.

Answer 99

d.
there is more systematic risk involved for the common stock.

Question 100

The market (as a whole) has a beta coefficient of

a.
1.
b.
zero.
c.
– 1.
d.
depends on the economic conditions

Answer 100

a.
1.