lOMoARcPSD|47945818

lOMoARcPSD|47945818

ACCOUNTING ANSWER KEY

1. Which of the following statements is false?
a. Working capital management concerns decisions about all of a firm’s assets.
b. Net working capital equals working capital less current liabilities.
c. A firm with a current ratio greater than one has positive net working capital.
d. Net working capital is that portion of a firm’s current assets financed with
longterm funds
2. Which of the following statements is false?
a. Working capital management uses only a small portion of the financial
manager’s time.
b. Liquidity is the ability to convert an asset into cash without significant loss.
c. The goal of working capital management is to maintain optimal level of net
working capital.
d. Lengthening the cash cycle increases a firm’s required level of working capital.
3. Which of the following statements is true?
a. The greater the stability of cash flows, the higher the requirement for net working
capital.
b. Short-term interest rates are generally higher than long-term interest rates
c. Expectations theory can be used only to explain upward sloping yield curves.
d. The traditional yield curve is upward sloping.
4. Which of the following is true?
a. The hedging approach is an example of an aggressive working capital
management strategy.
b. Long-term financing used to finance current assets under the hedging approach.
c. A higher level of working capital increases the firm’s profitability.
d. Technical insolvency is the inability of a firm to pay its obligations as they
come due.
5. Which of the following statements is false?
a. Maintaining a high level of current assets in the form of marketable securities
reduces the profitability of technical insolvency.
 lOMoARcPSD|47945818

b. Using short-term debt to finance permanent assets increases the risk of

insolvency.
c. Financing fluctuating current assets with long term financing is a conservative
strategy.
d. The term permanent assets refers only to fixed assets such as machinery,
buildings, and equipment.
6. Working capital is important for all the following reasons except that it:
a. consist of a large portion of a firm’s total assets.
b. affects a firm’s liquidity and profitability.
c. consumes a small portion of the financial manager’s value.
d. consists of those assets that are most manageable.
7. The optimal level of working capital depends on all of the following factors except the:
a. kind of firm.
b. stability of dividends.
c. variability of cash flows.
d. length of the cash cycle.
8. Which of the following does not underlie risk-return tradeoffs in managing working
capital?
a. Fixed assets remain constant.
b. Current assets are less profitable than fixed assets.
c. The yield curve is downward sloping.
d. Short-term financing is less expensive than long-term financing.
9. Which of the following theories explains only upward-sloping yield curves?
a. Expectation theory
b. Liquidity preference theory
c. Market segmentation theory
d. Optimal capitalization theory
10. A firm following an aggressive working capital strategy would:
a. hold substantial amounts of liquid assets.
b. minimize the amount off short-term financing.
 lOMoARcPSD|47945818

c. finance fluctuating assets with long-term financing.

d. minimize the amount of funds held in liquid assets.
11. Conservative working capital management strategies involve:
a. low risk, low return.
b. low risk, high return
c. high risk, high return.
d. moderate risk, moderate return.
12. According to the hedging approach, working capital should be financed with:
a. spontaneously generated funds.
b. short-term financing.
c. short-term and long-term financing.
d. long-term financing.
13. The profitability of technical insolvency is reduced by:
a. financing permanent assets with short-term debt.
b. financing fluctuating assets with long-term debt.
c. maintaining a high level of liquid assets.
d. both b and c.
14. Which of the following actions would increase risk?
a. Increase the level of working capital.
b. Change the composition of working capital to include more liquid assets.
c. Increase the amount of short-term borrowing.
d. Increase the amount of equity financing.
Multiple Choice Questions
1. Investment instruments used to invest temporarily idle cash balances should have the
following characteristics:
a. high expected return, low marketability, and a short-term to maturity.
b. high expected return, readily marketable, and no maturity date.
c. low default risk, low marketability, and a short term maturity.
d. low default risk, readily marketable, and a short term maturity.
 lOMoARcPSD|47945818

2. A typical objective sought in the effective management of a company’s cash could be

expressed as follows:
a. To attain that level of profit margin per sales pesos and receivables turnover that
maximizes sales.
b. To coordinate the activities of the manufacturing and the marketing areas so that
the corporation can maximize its profit.
c. To provide the means of paying off accounts when due and thereby helping to
maintain the firm’s credit rating.
d. To minimize the corporate investments in the accounts receivable.
3. The cash budget is one of the prime instruments used to aid in the cash management
process and
a. provides a quick method of projecting profits for manufacturing firms.
b. is basically a longer term forecasting mechanism.
c. is rather inflexible and consequently, cannot be adjusted very well for risk.
d. aids in determining when cash deficits and cash surpluses are expected to
arise within the budget period.
4. A precautionary motive for holding excess cash is
a. to enable a company to meet the cash demands from the normal flow of business
activity.
b. to guard against a failure of the box technique used to speed up the collections of
cash.
c. to enable a company to avail itself of a special inventory purchase before prices
arise to higher levels.
d. to enable a company to have a cash to meet emergencies that may arise
periodically.
5. In the process of investing of surplus cash, the term “riding the yield curve” refers to:
a. purchasing only the longest maturities for given rates of return.
B, diversifying a securities portfolio so that the firm has an equal balance of
longterm versus short-term securities.
c. adherence to the liquidity-preference theory of securities investments.
d. swapping different maturities of similar quality debt securities in order to
obtain a higher yields.
 lOMoARcPSD|47945818

6. One of the responsibilities of a financial manager is to make efficient use of idle cash for
short periods of time. Which one of the following would not qualify as a satisfactory
investment for idle cash?
a. Common stocks of Manila corporations.
b. Banko Sentral Treasury bills.
c. Prime commercial paper.
d. Negotiable certificates of deposit.
7. The risk in our economy which is typically associated with the holding of cash is referred
to as
a. market risk
b. money rate risk
c. business risk
d. purchasing power risk
8. In smaller business where the management of cash is but one of the numerous functions
performed by the treasurer, various cost incentives and diversification arguments suggest
that surplus cash should be invested in
a. commercial paper
b. banker’s acceptance
c. money market mutual funds
d. coroporate bonds
9. Which of the following investment alternatives is commonly used to hold cash earmarked
to meet a firms short-term periodic variation in cash needs?
a. Treasury Bills
b. Treasury Stock
c. High grade, corporate mortgage bonds
d. High grade, corporate debentures.
10. The primary reason financial analyst often focus on net cash inflows rather than when
evaluating company performance is that
a. net cash inflows are not subject to distortion.
b. net cash inflows are subject to less distortion than profits.
c. net cash inflows indicate the company’s liquidity.
 lOMoARcPSD|47945818

d. net cash inflows measure the present value of profits.

11. A method of delaying the disbursement of cash by a corporation with a liquidity problem
would be to
a. install a lock box program.
b. pay its bills through the use of bank drafts.
c. utilize a concentration banking program.
d. take as many cash discounts as possible.
12. If a corporation held marketable equity security for one year, the total return on
investment for this security would be
a. the sum of the cash dividends for the year divided by the purchases price
b. the earnings per share on the stock for the year divided by the purchase price. cthe
capital gain (loss) on the stock for the year divided by the purchase price.
d. the sum of cash dividends received plus any capital gain (loss) for the year
divided by the purchase price.
13. The primary factor to consider when evaluating any investment alternative as a use for
short-term excess cash is the
a. yield to maturity
b. tax payable on the return
c. maturity date.
d. safety of principal
14. The net effect of a compensating balance requirement on a loan from the viewpoint of
theborrower is
a. the effective borrowing costs will be lower than if the compensating balance were
notrequired
b. the effective borrowing costs will be higher than if the compensating balance
werenot required.
c. the compensating balance has no effect on financing costs.
d. the compensating balance will seldom be used if the loan maturity is less than 5
years.

15. Experience with compensating balances in corporate bank accounts reveals that
a. the use of compensating balances tends to lower the cost of borrowing.
b. banks tend to be very strict and require that compensating balances be
maintainedexactly as agreed.
 lOMoARcPSD|47945818

c. banks tend to be flexible in administering compensating balances and, based

onthe different business conditions, allow fluctuations from the required
level. d. the use of compensating balances has no effect on the cost of borrowing.

16. When a company is evaluating whether the ration of cash and marketable securities to
totalassets should be high or low, its decision will be based upon
a. financial leverage considerations.
b. operating leverage considerations.
c. cost of capital considerations.
d. risk-profitability trade-off considerations.

17. If the average age of inventory is 90 days, the average age of accounts payable is 60
days,and the average age of accounts receivable is 65 days, the number of days in the
cash flow cycle is
a. 215 days.
b. 150 days
c. 95 days.
d. 85 days.

18. Ken Lumber Company obtained a short-term bank loan for P1,000,000 at an annual
interestrate of 12%. As a condition of the loan, Ken is required to maintain a
compensating balance of P200,000 in its checking account. The checking account earns
interest at an annual rate of 6%.
Ken would otherwise maintain only P100,000 in its checking account for transactional purposes.
Ken’s effective interest cost of the loan is PhilCPA
a. 12.00%.
b. 14.00%.
c. 13.50%
d. 12.67%

19. A compensating balance

a. earns interest at the same rate as a saving deposit.
b. can be held in the form of a banker’s acceptance.
c. increases the effective rate of return on savings accounts.
d. may be required in lieu of a fee for bank services.

20. If the average age of inventory is 60 days, the average age of accounts receivable is 40
days,and the average age of accounts payable is 35 days, the length of the cash flow cycle
is
a. 100 days.
b. 135 days.
c. 55 days
d. 65 days.
 lOMoARcPSD|47945818

21. A firm needs a total of P30 million in new cash for transaction purposes. The annual
interestrate on marketable securities id 10% and the brokerage fee cost per transaction of
selling securities to replenish cash is P1000. Which of the following is closest to the
firm’s optimal average cash balance? CMA
a. P774,597.
b. P353,432.
c. P790,213.
d. P387,298

22. A company uses the following formula in determining its optimal level of cash.
C*=√2 i
Where:b = Fixed cost per transaction i = Interest rate
on marketable securities T = Total demand for
cash over a period of time

This formula is a modification of the Economic Order Quantity (EOQ) formula used for
inventory management. Assume that the fixed cost of selling marketable securities is P10 per
transaction, and the interest rate on marketable securities is 6 percent per year. The company
estimates that it will make cash payments of P12,000 over a one-month period. What is the
average cash balance (rounded to the nearest peso)? CMA
a. P1,000
b. P2,000
c. P3,464
d. P6,928

23. A firm has daily cash receipts of P100,00. A bank has offered to reduce the collection
timeon 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

24. Fabella Company budgeted sales on account of P120,000 for July, P211,000 for August,
andP198,000 for September. Collection experience indicates that 60 percent of the
budgeted sales will be collected the month after the sale, 36 percent the second month,
and 4 percent will be uncollectible. The cash receipts from accounts receivable that
should be budgeted for September would be PhilCPA
a. P169,800
b. P147,960
c. P197,880
d. P194,760
 lOMoARcPSD|47945818

25. Average daily cash outflows are P3 million for Evans, Inc. A new cash management
systemcan add two days to the disbursement schedule. Assuming Evans earns 10 percent
on excess funds, how much should the firm be willing to pay per year for this cash
management system? a. P6,000,000
b. P3,000,000
c. P1,500,000
d. P600,000

26. Shown below is a forecast of sales for Sabrina, Inc. for the first four months of 2003 (all
amounts are in thousand pesos).
2003
January February March April
Cash Sales P 15 P 24 P 18 P 14
Sales on credit 100 120 90 70
On average, 50 percent of credit sales are paid for in the month of sale, 30 percent in the month
following the sale, and the remainder is paid two months after the month of sale. Assuming there
are no bad debts, the expected cash inflow for Sabrina in March is
a. P138,000
b. P122,000
c. P119,000
d. P108,000

27. When managing cash and short-term investments, a corporate treasurer is primarily
concerned with
a. maximizing rate of return
b. minimizing taxes
c. investing in Treasury bonds since they have no default risk
d. liquidity and safety

28. Foster, Inc. is considering implementing a lockbox collection system at a cost of P80,000
peryear. Annual sales are P90 million, and the lock-box system will reduce collection
time by 3 days. If Foster can invest funds at 8 percent, should it use the lock-box system?
Assume a 360day year.
a. Yes, producing savings of P140,000 per year
b. Yes, producing savings of P60,000 per year
c. No, producing a loss of P20,000 per year
d. No, producing a loss of P60,000 per year

29. A firm can best delay disbursements through the use of

a. a centralized disbursement function
b. electronic funds transfer
 lOMoARcPSD|47945818

c. drafts
d. factoring

30. The most direct way to prepare a cash budget for a manufacturing firm is to include
CMA
a. projected sales, credit terms, and net income
b. projected net income, depreciation, and goodwill amortization
c. projected purchases, percentages of purchases paid, and net income
d. projected sales and purchases, percentages of collection, and terms of
payments
 lOMoARcPSD|47945818

Multiple Choice Questions

1. Which of the following statements is false?
a. Working capital management concerns decisions about all of a firm’s assets
b. Net working capital equals working capital less current liabilities
c. A firm with a current ratio greater than one has positive net working capital
d. Net working capital is that portion of a firm’s current assets financed with long-
termfunds

2. Which of the following statements is false?

a. Working capital management uses only a small portion of the financial
manager’stime
b. Liquidity is the ability to convert an asset into cash without significant loss
c. The goal of working capital management is to maintain the optimal level of net
working capital
d. Lengthening the cash cycle increases a firm’s required level of working capital

3. Which of the following statements is true?

a. The greater the stability of cash flows, the higher the requirement for net working
capital b. Short-term interest rates are generally higher than long-term interest rates
c. Expectations theory can be used only to explain upward sloping yield curves
d. The traditional yield curve is upward sloping

4. Which of the following statements is true?

a. The hedging approach is an example of an aggressive working capital management
strategy
b. Long-term financing is used to finance current assets under the hedging approach
c. A higher level of working capital increases the firm’s profitability
d. Technical insolvency is the inability of a firm to pay its obligations as they
comedue

5. Which of the following statements is false?

a. Maintaining a high level of current assets in the form of marketable securities reduces
the profitability of technical insolvency
b. Using short-term debt to finance permanent assets increases the risk of insolvency
c. Financing fluctuating current assets with long-term financing is a conservative strategy
d. The term permanent assets refers only to fixed assets such as machinery,
buildings, and equipment

6. Working capital is important for all the following reasons except that is:
a. consists of a large portion of a firm’s total assets
b. affects a firm’s liquidity and profitability
c. consumes a small portion of the financial manager’s time
 lOMoARcPSD|47945818

d. consists of those assets that are most manageable

7. The optimal level of working capital depends on all of the following factors except the: a.
kind of firm
b. stability of dividends
c. variability of cash flows
d. length of the cash cycle

8. Which of the following assumptions does not underlie risk-return tradeoffs in

managingworking capital?
a. Fixed assets remain constant
b. Current assets are less profitable than fixed assets
c. The yield curve is downward sloping
d. Short-term financing is less expensive than long-term financing

9. Which of the following theories explains only upward-sloping yield curves?

a. Expectations theory
b. Liquidity preference theory
c. Market segmentation theory
d. Optimal capitalization theory

10. A firm following an aggressive working capital strategy would:

a. hold substantial amounts of liquid assets
b. minimize the amount of short-term financing
c. finance fluctuating assets with long-term financing
d. minimize the amount of funds held in liquid assets

11. Conservative working capital management strategies involve:

a. low risk, low return
b. low risk, high return
c. high risk, high return
d. moderate risk, moderate return

12. According to the hedging approach, working capital should be financed with:
a. spontaneously generated funds
b. short-term financing
c. short-term and long-term financing
d. long-term financing

13. The profitability of technical insolvency is reduced by:

a. financing permanent assets with short-term debt
b. financing fluctuating assets with long-term debt
c. maintaining a high level of liquid assets
d. both b and c
 lOMoARcPSD|47945818

14. Which of the following actions would increase risk?

a. Increase the level of working capital
b. Change the composition of working capital to include more liquid assets
c. Increase the amount of short-term borrowing
d. Increase the amount of equity financing
 lOMoARcPSD|47945818

Multiple Choice Questions

1. Investment investments used to invest temporarily idle cash balances should have the
following characteristics:
a. high expected return, low marketability, and a short term to maturity
b. high expected return, readily marketable, and no maturity date
c. low default risk, low marketability, and a short term to maturity
d. low default risk, readily marketable, and a short term to maturity

2. A typical objective sought in the effective management of a company’s cash could be

expressed as follows:
a. To attain that level of profit margin per sales pesos and receivable turnover that
maximizes sales
b. To coordinate the activities of the manufacturing and the marketing areas so that the
corporation can maximize its profits
c. To provide the means of paying off accounts when due and thereby helping
tomaintain the firm’s credit rating
d. To minimize the corporate investment in the accounts receivable

3. The cash budget is one of the prime instruments used to aid in the cash management
processand
a. provides a quick method of projecting profits for manufacturing firms
b. is basically a longer term forecasting mechanism
c. is rather inflexible and consequently, cannot be adjusted very well for risk
d. aids in determining when cash deficits and cash surpluses are expected to
arisewithin the budget period

4. A precautionary motive for holding excess cash is

a. to enable a company to meet the cash demand from the normal flow of business
activity
b. to guard against a failure of the box technique used to speed up the collections of cash
c. to enable a company to avail itself of a special inventory purchase before prices rise to
higher levels
d. to enable a company to have cash to meet emergencies that may arise periodically

5. In the process of investing of surplus cash, the term “riding the yield curve” refers to
a. purchasing only the longest maturities for given rates of return
b. diversifying a securities portfolio so that the firm has an equal balance of long-term
versus short-term securities
c. adherence to the liquidity-preference theory of securities investments
d. swapping different maturities of similar quality debt securities in order to
obtainhigher yields
 lOMoARcPSD|47945818

6. One of the responsibilities of a financial manager is to make efficient use of idle cash for
shortperiods of time. Which one of the following would not qualify as a satisfactory
investment for idle cash?
a. Common stocks of Manila corporations
b. Bangko Sentral Treasury bills
c. Prime commercial paper
d. Negotiable certificates of deposit

7. The risk on our economy which is typically associated with the holding of cash is referred
toas
a. market risk
b. money rate risk
c. business risk
d. purchasing power risk
8. In smaller business where the management of cash is but one of numerous functions
performed by the treasurer, various cost incentives and diversification arguments suggest that
surplus cash should be invested in
a. commercial paper
b. banker’s acceptance
c. money market mutual funds
d. corporate bonds

9. Which one of the following investment alternatives is commonly used to hold cash
earmarkedto meet a firm’s short-term periodic variation in cash needs?
a. Treasury Bills
b. Treasury stock
c. High grade, corporate mortgage bonds
d. High grade, corporate debentures

10. The primary reason financial analysts often focus on net cash inflows rather than profitswhen
evaluating company performance is that
a. net cash inflows are not subject to distortion
b. net cash inflows are subject to less distortion than profits
c. net cash inflows indicate the company’s liquidity
d. net cash inflows measure the present value of profits

11. A method of delaying the disbursement of cash by a corporation with a liquidity

problemwould be to
a. install a lock box program.
b. pay its bills through the use of bank drafts
c. utilize a concentration banking program
d. take as many cash discounts as possible
 lOMoARcPSD|47945818

12. If a corporation held a marketable equity for one year, the total return on investment for
thissecurity would be
a. the sum of the cash dividends for the year divided by the purchase price
b. the earnings per share on the stock for the year divided by the purchase price
c. the capital gain (loss) on the stock for the year divided by the purchase price
d. the sum of the cash dividends received plus any capital gain (loss) for the
yeardivided by the purchase price

13. The primary factor to consider when evaluating any investment alternative as a use for
shortterm excess cash is the
a. yield-to-maturity
b. tax payable on the return
c. maturity date
d. safety of principal

14. The net effect of a compensating balance requirement on a loan from the viewpoint of
theborrower is
a. the effective borrowing costs will be lower than if the compensating balance were not
required.
b. the effective borrowing costs will be higher than if the compensating balance werea.
not required.
b. the compensating balance has no effect on financing costs.
c. the compensating balance will seldom be used if the loan maturity is less than 5 years.

15. Experience with compensating balances in corporate bank accounts reveals that
a. the use of compensating balances tends to lower the cost of borrowing.
b. banks tend to be very strict and require the compensating balances be maintained exactly
as agreed.
c. banks tend to be flexible in administering compensating balances and, based on the
different business conditions, allow fluctuations from the required level.
d. the use of compensating balances has no effect on the cost of borrowing.

16. When a company is evaluating whether the ratio of cash and marketable securities to
totalassets should be high or low, its decision will be based upon
a. financial leverage considerations.
b. operating leverage considerations.
c. cost of capital considerations.
d. risk-profitability trade-off considerations.
 lOMoARcPSD|47945818

17. If the average age of inventory is 90 days, the average age of accounts payable is 60 days,and
the average age of accounts receivable is 65 days, the number of days in the cash flow
cycle is
a. 215 days. c. 95 days.
b. 150 days. d. 85 days.
18. 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
P200,000 in its checking account. The checking account earns interest at an annual rate of
6%. Ken would otherwise maintain only P100,000 in its checking account for transactional
purposes. Ken’s effective interest cost of the loan is (PhilCPA)
a. 12.00% c. 13.50%
b. 14.00% d. 12.67%
19. A compensating balance
a. earns interest at the same rate as a saving deposit.
b. can be held in the form of a banker’s acceptance.
c. increases the effective rate of return on savings accounts.
d. may be required in lieu of a fee for bank services.

20. If the average age of inventory is 60 days, the average age of accounts receivable is 40 days,
and the average age of accounts payable is 35 days, the length of the cash flow cycle is
a. 100 days. c. 55 days.
b. 135 days. d. 65
days.
21. A firm needs a total of P30 million in new cash for transaction purposes. The annual
interestrate on marketable securities is 10% and the brokerage fee cost per transaction of
selling securities to replenish cash is P1,000. Which of the following is closest to the firm’s
optimal average cash balance? (CMA)
a. P774,597. c. P790,213.
b. P353,432. d.
P387,298.

22. A company uses the following formula in determining its optimal level of cash.
(CMA) Where: b = Fixed cost per transaction. i =
Interest rate on marketable securities. t = Total
demand for cash over a period of time.
 lOMoARcPSD|47945818

This formula is a modification of the Economic Order Quantity (EOQ) formula used for
Inventory management. Assume that the fixed cost of selling marketable securities is P10
per transaction, and the interest rate on marketable securities is 6 percent per year. The
company estimates that it will make cash payments of P12,000 over a one-month period.
What is the average cash balance (rounded to the nearest peso)?
a. P1,000. c. P3,464.
b. P2,000. d. P6,928.

23. A firm has daily cash receipts of P100,000. A bank has offered to reduce the collection
timeon 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. c. P0.
b. P12,000. d. P6,000.
24. Fabella Company budgeted sales on account of P120,000 for July, P211,000 for August,
andP198,000 for September. Collection experience indicate that 60 percent of the budgeted
sales will be collected the month after the sale, 36 percent the second month, and 4 percent
will be uncollectible. The cash receipts from account receivable that should be budgeted for
September would be (PhilCPA)
a. P169,800. c. P197,880.
b. P147,960. d. P194,760.
25. Average daily cash outflows are P3 million for Evans, Inc. A new cash management system
can add two days to the disbursement schedule. Assuming Evans earns 10 percent on excess
funds, how much should the firm be willing to pay per year for this cash management
system?
a. P6,000,000. c. P1,500,000.
b. P3,000,000. d. P600,000.
26. Shown below is a forecast of sales for Sabrina, Inc. for the first four months of 2003
(allamounts are in thousands of pesos).
2003
January February March April
Cash sales P 15 P 24 P 18 P 14
Sales on credit 100 120 90 70
 lOMoARcPSD|47945818

On average, 50 percent of credit sales are paid for in the month of sale, 30 percent in the
month following the sale, and the remainder is paid two months after the month of sale.
Assuming there are no bad debts, the expected cash inflow for Sabrina in March
is a. P138,000. c. P119,000.
b. P122,000. d. P108,000.
27. When managing cash and short-term investments, a corporate treasurer is primarilyconcerned
with
a. maximizing rate of return.
b. minimizing taxes.
c. investing in Treasury bonds since they have no default risk.
d. liquidity and safety.
28. Foster, Inc. is considering implementing a lockbox collection system at a cost of P80,000
peryear. Annual sales are P90 million, and the lock-box system will reduce collection time by
3 days. If Foster can invest funds at 8 percent, should it use the lock-box system? Assume a
360- day year.
a. Yes, producing savings of P140,000 per year.
b. Yes, producing savings of P60,000 per year.
c. No, producing a loss of P20,000 per year.
d. No, producing a loss of P60,000 per year.

29. A firm can best delay disbursement through the use of

a. a centralized disbursement function.
b. electronic funds transfers.
c. drafts.
d. factoring.

30. The most direct way to prepare a cash budget for a manufacturing firm is to include (CMA)
a. projected sales, credit terms, and net income.
b. projected net income, depreciation, and goodwill amortization.
c. projected purchases, percentages of purchases paid, and net income.
d. projected sales and purchases, percentages of collections, and terms of payments.
Multiple Choice Questions

1. Changing a firm’s credit terms from 2/20, net/60 to 2/10, net/30 will generally (PhilCPA)
a. increase the average collection period and increase sales.
b. increase the average collection period and reduce sales.
c. reduce the average collection period and increase sales.
 lOMoARcPSD|47945818

d. reduce the average collection period and reduce sales.

2. The primary objective in the management of accounts receivable is (CMA)

a. to achieve that combination of sales volume, bad debt experience, and receivables
turnover that maximizes the profits of the corporation.
b. to realized no bad debts because of the opportunity cost involved.
c. to provide the treasurer of the corporation with sufficient cash to pay the company’s bills
on time.
d. to coordinate the activities of manufacturing, marketing, and financing so that the
corporation can maximize its profits.

3. At any point in the time, the level of the accounts receivable on a corporate balance sheet is
least affected by which one of the following factors?
a. a.“Tight Money”.
b. Credit standards of the seller.
c. Collections practices of the seller.
d. Length of the company’s production process.

4. An increase in a firm’s collection period means

a. the firm’s current ratio is increasing.
b. the firm’s receivable turnover ratio is increasing.
c. the firm’s collection expenses have fallen.
d. the firm has become less efficient in the collection of its receivables.

5. If a firm purchases raw materials from its supplier on a 2/10, net 60 cash discount basis, the
equivalent annual interest rate (using a 360-day year) of foregoing the cash discount
andmaking payment on the 60th day is (PhilCPA)

a. 14.7%
b. 73,5%
c. 12.2%
d. some amount other than those given above.

6. The one item listed below that would warrant the least amount of consideration in credit and
collection policy decision is the
a. quality of accounts accepted. c. credit period.
 lOMoARcPSD|47945818

b. quantity if discount given. d. cash discount given.

7. Ram electronics sells on terms of net 30 days, but its accounts receivable average 20
daysoverdue. Assuming a 360-day year and annual credit sales of P1.8 million, the book
value of
Ram’s receivables is (AICPA)
a. P150,000. c. P50,000.
b. P100,000. d. P250,000.
8. An aging of accounts receivable measures the
a. ability of the firm to meet short-term obligations.
b. average length of time that receivables have been outstanding.
c. percentage of sales which have been collected after a given time period.
d. amount of receivables that have been outstanding for given lengths of time.

9. The collection of accounts receivable can be accelerated by the use of

a. turnaround documents. c. bank draft.
b. a lockbox system. d. remittance advices.
10. An increase in sales resulting from an increased cash discount for prompt payment would
beexpected to cause a(n)
a. increase in the operating cycle.
b. increase in the average collection period.
c. decrease in the cash conversion cycle.
d. decrease in purchase discounts taken.
11. Bidder’s budgeted sales for the coming year are P60,000,000, of which 80 percent are
expected to be made on credit. Bidder wants to change its credit terms from n/30 to 2/10,
n/30. If the new credit terms are adopted, Bidder estimates that the cash discounts would be
taken on 40 percent of the credit sales and the uncollectible amount would be unchanged.
The adoption of the new credit terms would result in expected discounts taken in the coming
year of
a. P1,200,000. c. P960,000.
b. P384,000. d.
P480,000.
12. Rom Corporation’s budgeted credit sales for the coming year are P72,000,000 and the
shortterm interest rates are expected to average 11%. Rom believes that its collection costs
would be reduced through an easing of collection procedures. However, this action would
increase the average collection period from 27 days to 34 days with no increase in
uncollectible accounts expense. Using a 360-day year, the minimum savings in collection
costs for the coming year, in order to make the easing of collection procedures feasible,
would have to be
a. P784,000. c. P7,920,000.
 lOMoARcPSD|47945818

b. P594,000. d. P154,000.
13. BalyCo’s budgeted sales for the coming year are P48,000,000, of which 80 percent are
expected to be credit sales at terms of n/30. BalyCo estimates that a proposed relaxation of
credit standards would increase credit sales by 30 percent and increase the average collection
period from 30 days to 45 days. Based on a 360-day year, the proposed relaxation of credit
standards would result in an expected increase in the accounts receivable balance of
a. P3,440,000. c. P3,040,000.
b. P1,440,000. d. P960,000.
14. A change in credit policy has caused an increase in sales, an increase in discounts taken,
areduction in the investment in accounts receivable, and a reduction in the number of
doubtful accounts. Based upon this information, we know that
a. net profit has increased.
b. the average collection period has decreased.
c. gross profit has declined.
d. the size of the discount offered has decreased.
15. 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 percent and a variable cost ratio
of 60 percent.
Old Credit Policy New Credit
Policy
Sales P3,600,000 P3,960,000
Average collection period 30 days 36 days
The pretax cost of carrying the additional investment in receivables, using a 360-day year,
would be
a. P5,760. c. P8,160.
b. P9,600. d. P960.

16. If a firm’s credit terms require payment within 45 days but allow a discount of 2 percent
ifpaid within 15 days (using a 360-day year), the approximate cost/benefit of the trade credit
terms is (PhilCPA)
a. 2 percent. c. 48 percent.
b. 16 percent. d. 24 percent.
17. Best Computer believes that its collection costs could be reduced through modification of
collection procedures. This action is expected to result in a lengthening of the average
collection period from 28 days to 34 days; however, there will be no change in uncollectible
accounts. The company’s budgeted credit sales for the coming year are P27,000,000, and
short-term interest rates are expected to average 8 percent. In order to make the changes in
collection procedures cost beneficial, the minimum savings in collection costs (using a 360-
day year) for the coming year would have to be
 lOMoARcPSD|47945818

a. P30,000. c. P180,000.
b. P360,000. d. P36,000.
18. X'or Publishing is considering a change in its credit terms from n/30 2/10, n/30. The
company's budgeted sales for the coming year are P24,000,000, of which 90 percent are
expected to be made on credit. If the new credit terms are adopted, X'or estimates that
discounts would be taken on 50 percent of the credit sales; however, uncollectible account
would be unchanged. The new credit terms would result in expected discounts taken in the
coming year of
a. P216,000. c.P240,000.
b. P432,000. d. P480,000.
19. Northern Company's budgeted sales for the coming year are P40,500,000, of which 80
percent are expected to be credit sales at terms of n/30. Northern estimates that a proposed
relaxation of credit standards would increase credit sales by 20 percent and increase the
average collection period from 30 days to 40 days. Based on a 360-day year, the proposed
relaxation of credit standards would result in an expected increase in the average accounts
receivable balance of
a. P540,000. c. P900,000.
b. P2,700,000. d. P1,620,000.
20. Which one of the following represents methods of converting accounts receivable to cash?
a. Trade discounts, collection agencies, and credit approval.
b. Factoring, pledging, and electronic funds transfers.
c. Cash discounts, electronic funds transfers, and credit approval.
d. Cash discounts, collection agencies, and electronic funds transfers.
21. When a company offers credit terms of 2/10, net 30, the annual interestcost, based on a 350-
day year, is (PhilCPA)
a. 24.0%. c. 35.3%.
b. 24.5% . d 36.7%.
22. An organization would usually offer credit terms of 2/10, net 30 when
a. the organization can borrow funds at a rate exceeding the annual interest cost.
b. the organization can borrow funds at a rate less than the annual interest cost.
c. the cost of capital approaches the prime rate.
d. most competitors are offering the same terms, and the organization has a shortageof
a. cash.
23. A firm that often factors its accounts receivable has an agreement with its company that
requires the firm to maintain a six percent reserve and charges one percent commission on
the amount of receivables. The net proceeds would be further reduced by an annual interest
 lOMoARcPSD|47945818

charge of 10 percent. Assuming a 360-day year, what amount of cash (rounded to the nearest
peso) will the firm receive from the finance company at the time a P100,000 account that is
due in 90 days is turned over to the finance company?
a. P93,000. c. P83,000.
b. P90,000. d.
P90,675.
24. All of the following are valid reasons for a business to hold cash and marketable
securitiesexcept to
a. satisfy compensating balance requirements.
b. maintain adequate cash needed for transactions.
c. earn maximum returns on investment assets.
d. maintain a precautionary balance.

25. Assume that each day a company writes and receives checks totalling P10,000. If it iakes
fivedays for the checks to clear and be deducted from the company's account, and only four
days for the deposits to clear, what is the float?
a. P10,000. c. P(10,000).
b. P0. d. P50,000.
 lOMoARcPSD|47945818

Multiple Choice Questions

1. The use of EOO analysis in inventory management can be modified to improve
themanagement of inventory by (CMA)
a. employing a minimum safety stock level because delivery times and inventory usage
levels do not conveniently match quantitative formulas.
b. purchasing inventory only once a year in order to save on ordering costs.
c. purchasing inventory on a monthly basis in order to save on carrying costs.
d. eliminating semi-variable costs from any consideration in the EOQ analysis due to the
difficulty of estimating those costs.

2. Which of the following would tend to increase the holdings of inventory quantity in
thefuture?
a. Increased computer control.
b. Increased rate of sales growth.
c. Standardization of products.
d. Limited variety of products.

3. The size of safety stocks for inventory is important for most firms. Though several factors
canbe cited as contributing to the determination of the size of safety stock that a firm should
carry, the issue can often be reduced to a single factor. Which one of the following statements
best summarizes the factor that affects the level of safety stock that a firm will carry?
(PhilCPA)
a. The amount of idle cash management believes it has to invest in safety stock.
b. The rapidity with which the inventory position will turn over.
c. The level of production the firm's bank is willing to finance.
d. The level of uncertainty with respect to an out-of-stock condition that management
iswilling to accept.

4. Which of the following sources of short-term financing generally supplies the largest
portionof short-term funds for manufacturing companies?
a. Commercial paper.
b. Trade credit.
c. Factored accounts receivable.
d. Marketable securities.

5. A small retail business would most likely finance its merchandise inventory with
 lOMoARcPSD|47945818

a. commercial paper.
b. a terminal warehouse receipt loan.
c. a line-of-credit.
d. chattel mortgage.

6. The amount of inventory that a company would tend to hold in safely stock would increase
as the
a. sales level falls to a permanently lower level.
b. cost of carrying inventory decreases.
c. variability of sales decreases.
d. cost of running out of stock decreases

7. Southern Company's budgeted sales and budgeted cost of sales for the coming year are
P144,000,000 and P90,000,000 respectively. Short-term interest rates are or acted to average
10%. If Southern can increase inventory turnover from its present level of nine times per year to
a level of 12 times per year, its cost savings in the coming year would be (AICPA)
a. P450,000. c. P600,000.
b.P400,000. d. P250,000.
8. Jun Company purchased an item on credit with terms of 3/10, net 45. Based on a 360-day
year, Jun’s annual interest cost of foregoing the cash discount and making payment on the
last day of the credit period is
A. 24.00%
B. 24.74%
C. 30.86%
D. 31.81%
9. In inventory management, the safety stock will tend to increase if the
A. carrying cost increases
B. cost of running out of stock decreases
C. variability of the lead time increases
D. variability of the usage rate decreases
10. The following information regarding inventory policy was assembled the JRJ
Corporation. The company uses a 50-week year in all calculations. (PhilCPA adapted)
Sales 10,000 units per
year
Order Quantity 2,000 units
Safety Stock 1.300 units
Lead time 4 weeks
The reorder point is
 lOMoARcPSD|47945818

A. 3,300 units
B. 2,100 units
C. 100 units
D. 1,300 units
11. The amount of inventory that a company would tend to hold in stock would increase as the
A. sales level falls to a permanently lower level
B. cost of carrying inventory decreases
C. variability of sales decreases
D. cost of running out of stock decreases
12. The level of safety stock in inventory management depends on all of the following except the
A. level of uncertainty of the sales forecast
B. level of customer dissatisfaction for back orders
C. cost of running out of inventory
D. cost to reorder stock

13. The optimal level of inventory would be affected by all of the following except the
A. usage rate of inventory per time period
B. cost per unit of inventory
C. current level of inventory
D. cost of placing an order for merchandise

14. Moore Company’s budgeted sales and budgeted cost of sales for the coming year are
P54,000,000 and P36,000,000, respectively. Moore has made changes in its inventory system
which will increase turnover from its present level of nine times per year to 12 times per
year. If short term interest rates average 8 percent, Moore’s cost savings in the coming year
would be
A. P20,000
B. P40,000
C. P80,000
D. P120,000

Situational
The following data apply to items 15 through 17.
Cantor Creations, which has 250 business days per year, manufactures desks for desktop
workstations. The annual demand for the desks is estimated to be 5,000 units. The annual cost of
 lOMoARcPSD|47945818

the carrying one unit in inventory is P10, and the cost to initiate a production run is P1,000.
Cantor has scheduled four equal production runs for the coming year, the first begin
immediately. Currently, there are no desks on hand. Assume that sales occur uniformly
throughout the year and that production is instantaneous.
15. If Cantor Creations does not maintain a safety stock, the estimated total carrying costs for the
desks for the coming year is
A. P5,000
B. P6,250
C. P4,000
D. P10,250
16. If Cantor Creations were to schedule only two equal production runs of the desks for the
coming year, the sum of carrying costs and set-up costs would increase (decrease) by
A. P4,250
B. P(2,000)
C. P6,250
D. P(250)
17. A safety stock for a five-day supply of desks would increase the number of units in
CantorCreations’ planned average inventory by
A. zero
B. 500
C. 100
D. 250
18. A decrease in inventory order costs will
A. decrease the economic order quantity
B. increase the reorder point
C. have no effect on the economic order quantity
D. increase the economic order quantity
19. Safety stocks are used to compensate for
A. variations in inventory usage rats and lead times
B. variations in inventory prices and lead times
C. variations in inventory usage rates and prices
D. inventory obsolescence and sales returns
20. In a situation where inventories are expected to change, the type of costing that provides the
best information for breakeven analysis is
A. job order costing
B. variable (direct) costing
 lOMoARcPSD|47945818

C. joint costing
D. absorption (full) costing
21. XYZ Coat Company estimates that 60,000 special zippers will be used in the manufacture of
men’s jackets during the next year. ABC Zipper Company has quoted a price of P0.60 per
zipper. XYZ would prefer to purchase 5,000 units per month, but ABC is unable to guarantee
this delivery schedule. In order to ensure availability of these zippers, XYZ is considering the
purchase of all 60,000 unit at the beginning of the year. Assuming XYZ can invest cash at
eight percent, the company’s opportunity cost of purchasing the 60,000 units at the beginning
of the year is
A. P1,320
B. P1,440C. P1,500
D. P2,640
22. Hardrock, Inc. operates a chain of hardware stores in Metro Manila. The controller wants to
determine the optimum safety stock levels for an air purifier unit. The inventory manager has
compiled the following data.
• The annual carrying cost of inventory approximates 20 percent of the investment in
inventory
• The inventory investment per unit average P50
• The stockout cost is estimated to be P5 per unit
• The company orders inventory on the average of 10 times per year
• Total cost = carrying cost + expected stockout cost
• The probabilities of a stockout per order cycle with varying levels of safety stock are as
follows:
Units
Safety Stock Stockout Probability
200 0 0%
100 100 15
0 100 15
0 200 12

The total cost of safety stock on an annual basis with a safety stock level of 100 units is
A. P1,750
B. P1,950
C. P550
D. P2,000
23. An example of a carrying cost is
A. disruption of production schedules
B. quantity discounts lost
C. handling costs
 lOMoARcPSD|47945818

D. Obsolescence
24. Companies that adopt just-in-time purchasing systems often experience
A. an increase in carrying costs
B. a reduction in the number of suppliers
C. fewer deliveries form the supplier
D. a greater need for inspection of goods as the goods arrive
25. Canseco Enterprise uses 84,000 units of Pat 256 in manufacturing activities over a 300-day
work year. The usual lead-time for the part is six days; occasionally, however, the lead-time
has gone as high as eight days. The company now desires to adjust its safety stock policy.
The safety stock size and the likely effect in stockout costs and carrying costs, respectively,
would be
A. 560 units, decrease, increase
B. 560 units, decrease, decrease
C. 1,680 units, decrease, increase
D. 1,680 units, increase, no change
 lOMoARcPSD|47945818

Multiple Choice Questions

1. Which of the following sources of a short-term financing generally supplies the largest
portionof a short-term funds for manufacturing companies?
A. commercial paper
B. trade credit
C. Factored accounts receivable
D. marketable securities
2. Short-term debt financing generally has the following three characteristics from the
viewpoint of the borrower when compared with long-term debt financing:
A. Greater flexibility, lower total cost, and greater risk
B. Greater flexibility, higher total cost, and greater risk
C. Greater flexibility, higher total cost, and lower risk
D. Less flexibility, lower total cost, and lower risk
3. The most appropriate tool for determining in what month a short-term bank loan can be
repaid
is
A. the monthly Statement of Changes in Financial Position
B. the earnings as a percent of sales for the month
C. the monthly cash budget
D. the asset turnover for the month
4. As a corporation grows from a small business into a larger, more profitable business,
thecorporation tends to rely
A. more trade credit because of its unlimited availability
B. more on government secured loans which are available to the larger more profitable
firmsin the company
C. more on bank credit and similar resources rather than trade credit because
tradecredit is not adequate to meet the financing needs beyond certain levels of
growth
D. more on cash purchases due to the cash flow generated through collection of accounts
receivable
5. Given that each of the following short-term sources is available, which source of financing is
likely to have the highest cot for a small business?
A. Trade credit
B. Commercial bank loan
C. Factoring
D. Advances by owners
 lOMoARcPSD|47945818

6. The financing of the basic level of current assets by issuing commercial paper is inconsistent
with
A. the maximization of shareowners’ wealth
B. the objective of matching the maturities of assets and liabilities
C. the goal of minimizing the cost of debt financing
D. the expectation that long-term interest rates will decrease in the coming year
7. Commercial paper tends to be quite popular with large, profitable corporations because
A. even though interest costs are higher than the interest on ordinary bank loans, the interest
is tax deductible
B. interest cost are lower than the interest on ordinary bank loans and
compensatingbalances are not required of borrowers
C. the market distribution for commercial papers is very narrow
D. purchasers of the commercial papers typically use this type of investment on a long-
termbasis
8. Factoring is a credit arrangement
A. which involves the outright sale id accounts receivable to a factor
B. which should be used only as a last resort when all other resources of financing fail
C. in which the factor is free to request new receivables for those accounts it deems
uncollectible
D. in which the cash advances from the factor is essentially a loan secured by the eventual
collection of the receivables factored
9. A firm which finances through a factor
A. maintains a compensating balance
B. uses another company to endorse or guarantee a loan
C. sells approved accounts receivable without recourse
D. uses inventory as collateral for a loan
10. The principal difference between factoring and pledging receivables rests in the fact that in
factoring
A. the accounts receivable are merely pledged as security for a loan
B. the financial institution factoring the accounts reserves the right to substitute newer
receivables for those accounts that appear difficult to collect
C. the accounts receivable are pledged on a non-notification basis
D. the accounts receivable are sold outright to a financial institution
11. From the viewpoint of a borrower, a field warehouse arrangement is frequently
consideredsuperior to a terminal (public) warehouse arrangement because
A. insurance does not have to be carried on the inventory when a field warehousing
arrangement is employed making the cost much less
 lOMoARcPSD|47945818

B. a warehouseperson is required for a public warehouse arrangement, but no supervision

isrequired for a field warehouse
C. pledged inventory can be released to the borrower in cases of emergency
withoutauthorization from the lender
D. pledged inventory is not removed from the borrower’s property to another
specifiedlocation
12. Three suppliers of baseball equipment offer different credit terms to City Sports. X Co.
offersterms of 1 ½ / 15, net 30. Y Enterprises offers terms of 1/10, net 30. Z Inc. offers terms
of 2/10, net 60.City Sports would have to borrow from a bank at an annual rate of 10 percent
in order to take any cash discounts. Which one of the following would be the most attractive
for City Sports?
A. Purchase from X and pay in 30 days
B. Purchase from X, pay in 15 days, and borrow any money needed from the bank
C. Purchase from Y and pay in 30 days
D. Purchase from Z and pay in 60 days
13. Inc. can issue a three-month commercial paper with a face value pf P1,000,000 for
P980,000. Transaction costs would be P1,200. The annualized percentage cost of the financing
would be
A. 2.17%
B. 8.48%
C. 8.67%
D. 8.00%
14. Which of the following is a spontaneous source of financing?
A. Noted payable
B. long term debt
C. Prepaid Interest
D. Trade credit
15. The Cabrera Corporation was recently quoted terms on a commenrcial bank loan of 7
percentdiscounted interest with a 20% compensating balance. The terms of the loan is one
year. The effective cost of borrowing is (rounded to the nearest thousandth)?
A. 6.54%
A. B 8.75%
B. 9.41%
C. 9.59%
16. The principal advantage of using commercial paper as a short-term financing instrument is
that it
A. is generally cheaper than a commercial bank loan
B. is readily available to almost all companies
 lOMoARcPSD|47945818

C. offers security, i.e., collateral, to the lender

D. can be purchased without commission costs
17. Which of the following is/are true in relation to the Baumol model of cash management?
A. the optimal cash balance rises when interest rates rise
B. the optimal cash balance falls when interest rates rise
C. the optimal cash balance rise when brokerage fees rise
D. both b and c are correct
18. Which one of the following provides a spontaneous source of financing for a firm?
A. Accounts payable
B. Mortgage bonds
C. Accounts receivable
D. Debentures
19. Which one of the following financial instruments generally provides the largest source
ofshort-term credit for small firms?
A. installment loans
B. commercial paper
C. trade credit
D. Mortgage bonds
20. A firm’s current ratio is 2 to 1. Its bound indenture states that its current ratio cannot fall
below 1.5 to 1. If current liabilities are P200,000, the maximum amount of new short-term
debt the firm can assume in order to finance inventory without defaulting is
A. P200,000
B. P66,667
C. P266,667
D. P150,000
21. If a firm increases its cash balance by issuing additional share of common stock, working
capital
A. remains unchanged and the current ratio remains unchanged
B. increases and the current ratio remain unchanged
C. increases and the current ratio decreases
D. Increases and the current ratio increases
22. The pledging of receivables differs from factoring in that, under pledging, the lender has
recourse against the borrower
A. true
B. false
23. Inventory financing can take the form of a
 lOMoARcPSD|47945818

A. blanket lien
B. trust receipt
C. warehouse receipt
D. all of the above
24. Which of the following statements concerning commercial paper is false?
A. Commercial paper is generally written for terms less than 270 days
B. Commercial paper generally carries an interest rate below the prime rate
C. Commercial paper is sold to money market mutual funds, as well as to other
financialinstitutions and non-financial corporations
D. Commercial paper can be issued by virtually all firms
 lOMoARcPSD|47945818

Multiple Choice Questions

1. Fixed costs include all of the following except:
A. interest expense
B. direct labor
C. rent
D. depreciation
2. Business risk is influenced by all of the following except:
A. product demand
B. uncertainty of selling prices
C. financial leverage
D. operating cost structure of the firm
3. All of the following are properties of financial leverage except:
A. The degree of financial leverage changes when measured at different base EBIT levels
B. Financial leverage applies only to positive changes in EBIT.
C. A degree of financial leverage greater than 1.0 indicates favorable financial leverage
D. Financial leverage is favorable when a firm earns more on invested funds than it pays
forthe related financing costs
4. The degree of combined leverage indicates:
A. the percentage change in sales that results from a percentage in EPS
B. the percentage change in EBIT that results from a percentage change in sales
C. the percentage change in EPS that results from a percentage change in EBITD. the
percentage change in EPS that results from a percentage change in sales
5. Which of the following statements is false?
A. Breakeven analysis is most applicable using a long term planning horizon
B. Linear breakeven analysis assumes that both selling price and fixed cost per unit remain
constant over the relevant range of output
C. Breakeven analysis assumes that a multiproduct firm maintains a constant product and
sales mix
D. Breakeven analysis can be used to determine the impact that changing the selling price
has on profits
6. Which of the following statement is false?
A. Linear breakeven analysis assumes that both selling price and fixed cost per unit remain
constant over the relevant range of output
B. A breakeven chart is plotted with peso revenues and costs on the horizontal axis
andunits sold on the vertical axis
C. A firm’s earnings before interest and taxes (EBIT) is zero at the operating breakevenpoint
 lOMoARcPSD|47945818

D. The operating breakeven point is determined by dividing fixed operating costs y the
contribution margin per unit
7. Which of the following statements is false?
A. Total operating revenues equal total operating costs at the breakeven point
B. The cash breakeven point is lower than the operating breakeven point if a firm has
anoncash outlays
C. Nonlinear breakeven analysis may result in more than one breakeven pointD. Breakeven
analysis is most applicable using a long-term planning horizon
9. Which of the following statement is true?
A. Leverage involves a multiplier effect which described the ability of fixed costs to
magnify returns
B. Fixed financing costs involve interest expense and ordinary share dividends
C. The degree of operating leverage (DOL) gets smaller as the base sales level
approachesthe operating breakeven point
D. The degree of combined leverage (DCL) may be obtained by adding the degree of
operating leverage (DOL) to the degree of financial leverage (DFL)
10. Which of the following is false?
A. Business risk is the variability or uncertainty of operating profits
B. Operating leverage effects business risk
C. The greater the degree of financial leverage (DFL), the greater the sensitivity of EPS to a
change in EBIT
D. Operating leverage is caused by the presence of fixed financing costs
11. Sylvian Corporation has the following capital structure:
Debenture bonds P10,000,000
Preference equity 1,000,000
Ordinary equity 39,000,000

The financial leverage of Sylvian Corporation would increase as a result of

A. Issuing ordinary shares and using the proceeds to retire preference shares
B. Issuing ordinary share and using the proceeds to retire debenture bonds
C. Maintaining the same peso level of cash dividends as the prior year, even though
earningshave increased by 7%
D. Financing its future investments with a higher percentage of bonds
12. For 2006, Nelson Industries increased earnings before interest and taxes by 17%. During the
same period, net income after tax increased by 42%. The degree of financial leverage that
existed during 2006 is
A. 1,70
 lOMoARcPSD|47945818

B. 4.20
C. 2.47
D. 5.90
13. Which one of the following statements is correct when comparing bond financing
alternatives?
a. A bond with a call provision typically has a lower yield to maturity than a similar
bondwithout a call provision.
b. A convertible bond must be converted to common stock prior to its maturity.
c. A call provision is generally considered detrimental to the investor.
d. A call premium requires the investor to pay an amount greater than par at the time
ofpurchase
14. A firm’s target or optimal capital structure is consistent with which one of the following?
a. Maximum earnings per share
b. Minimum cost of debt
c. Minimum risk
d. Minimum weighted average cost of capital
15. A firm’s current ratio is presently 1.75 to 1. According to a working capital restriction in
thefirm’s bond indenture, the firm will have technically defaulted if the current ratio falls
below 1.5 to 1. If current liabilities are presently P250million, the maximum new commercial
paper than can be issued to finance inventory expansion an equivalent amount without
technically defaulting is:
a. P41.67million c. P125million
b. P375million d. P62.50million
16. Osgood Products has announced that it plans to finance future investments so that the
firmwill achieve an optimum capital structure. Which one of the following corporate
objectives is consistent with this announcement?
a. Maximize earnings per share b. Minimize the cost of debt
c. Maximize the net worth of the firm d. Minimize the cost of equity
17. In general, it is more expensive for a company to finance with equity capital than with
debtcapital balance because:
a. long-term bonds have maturity date and must therefore be repaid in the future
b. investors are exposed to greater risk with equity capital
c. the interest on debt is a legal obligation
d. equity capital is in greater demand than debt capital
 lOMoARcPSD|47945818

18. For 2006, XYZ Industries increased earnings before interest and taxes by 24.70%. During
thesame period, net income after tax increased by 42%. The degree of financial leverage that
existed during 2006 is:
a. 1.70 b. 4.20 c. 2.47 d. 5.90
19. Karen, Inc.’s current capital structure is shown below. This structure is optimal, and
thecompany wishes to maintain it.
Debt 25%
Preference equity 5
Ordinary equity 70
Karen’s management is planning to build a P75million facility that will be financed according to
this desired capital structure. There is currently P15million of cash that is available for capital
expansion. The percentage of the P75million that will come from a new issue of ordinary share
is:
a. 52% b. 50% c. 56.25% d. 56%

20. By using the dividend growth model, estimated the cost of equity capital for a firm with
astock price of P30.00, an estimated dividend at the end of the first year of P3.00 per share,
and an expected growth rate of 10%
a. 21.1% b. 12.2% c. 11% d. 20%

21. Which one of the following factors might case a firm to increase the debt in its
financialstructure?
a. An increase in the corporate income tax rate.
b. Increased economic uncertainty
c. An increase in the Bangko Sentral funds rate
d. An increase in the price/earnings ratio
22. The yield to maturity of a bond is:
a. The discount rate in a present value equation that equates the market price of a
bondwith the present value of its future debt-service obligations.
b. The average annual rate of return an investor expects to receive from buying
andholding the bond until maturity
c. Equal to the coupon rate if the bond sells at par value.
d. All of the above
23. For a given company, the cost of preference shares is less than the cost of ordinary
sharesbecause:
 lOMoARcPSD|47945818

a. Dividends paid on preference shares are tax deductible expenses for the company
whiledividends paid on ordinary shares are paid out of after-tax earnings.
b. Preference share represents a less risky source of funds from the company’s
viewpointthan ordinary shares.
c. Investors’ expected cash flows from ordinary shares have a higher degree
ofuncertainty than the expected cash flows from preference shares. d. All of the
above
24. For a given company, investors’ required return on the company’s ordinary shares is:
a. Equal to the company’s cost of retained earnings.
b. Equal to the company’s cost of new ordinary shares if flotation costs are zero.
c. Always less than the cost of new ordinary shares if flotation costs are not zero. d. All
of the above.
25. Which of the following situations never occur?
a. Within one company, the required return on common equity is less than the
required return on preference shares.
b. The required return on one company’s ordinary shares is lower than the required yield
on another company’s preference shares.
c. Within one company, the cost of debt is less than the cost of equity.
d. A and B.
26. GBF Co. is preparing to float a new issue of bonds. The bonds will have the
followingcharacteristics:
Coupon Rate 8.4%
Term to Maturity 10
years
Face Value P1,000
Issue Price P900.30
GBF’s marginal tax rate is 34%. The coupon payments are paid semiannually. GBF’s cost of debt
(ki) for this bond issue will be nearest:
a. 5.0% b. 1.7% c. 3.3% d. 6.6%
27. DRW, Inc. is preparing to issue preference shares. The preference share will have a P100
parvalue and will pay P8 per year in dividends. DRW’s marginal tax rate is 34%. Flotation
costs for the new issue will be P2.38 per share. The issue price is expected to be P96.50 per
share. Based on this information, DRW’s cost of preference shares is nearest:
a. 5.3% b. 8.5% c. 5.6% d. 8.0%
 lOMoARcPSD|47945818

SITUATIONAL
Use this information for questions 28 and 29:
Ames Co. is preparing to issue new ordinary shares. Ames stock is currently selling in the market
for P50. Very recently, the stock paid a dividend of P2 per share. Dividends are expected to grow
at 10% per year through the foreseeable future. Flotation costs on the new issue will be P3 per
share. Ames’ marginal tax rate is 34%. Assume that the new stock can be sold to investors at the
current price of the existing shares.
28. Based on the following given above. Ames’ cost of retained earnings is nearest:
a. 4.4% b. 4.7% c. 14.0% d. 14.4%
29. Based on the information given above. Ames’ cost of new ordinary shares is
nearest: a.8.33% b. 14.40% c. 14.68% d. 14.25%
30. GMR Corporation is preparing to issue ordinary shares. The Chief Financial Officer
isattempting to estimate GMR’s cost of new ordinary shares. The next dividend is expected
to be P4.25 and will be paid one year from now. The current market price reflects an 18%
expected annual return to investors. Dividends are expected to grow at a constant 8% per
year. Flotation costs on the new issue will be P1.25 per share. GMR’s cost of new ordinary
shares is nearest:
a. 18.30% b. 19.25% c. 18% d. 19.44%
31. RMG Corporation is preparing to issue ordinary shares. The Chief Financial Officer
isattempting to estimate RMG’s cost of new ordinary shares. The next dividend is expected
to be P3.70 and will be paid one year from now. Dividends are expected to grow at a constant
7% per year. Flotation costs on the new issue will be P2.25 per share. RMG’s Beta
coefficient is 1.5, the risk-fee rate is 7.5%, and the expected return on the DJ Industrial
Average is 12.5%. Based on this information, RMG’s cost of new ordinary shares is nearest:
a. 8.4% b. 12.5% c. 13.7% d. 15.4%

SITUATIONAL
The following data apply to items 32 through 35
Williams, Inc. is interested in measuring its overall cost of capital and has gathered the following
data. Under the terms described below, the company can sell unlimited amounts of all
instruments.
• Williams can raise cash by selling P1,000, 8 percent, 20-year bonds with annual interest
payments. In selling the issue, an average premium of P30 per bond would be received,
and the firm must pay flotation costs of P30 per bond. The after-tax cost of funds is
estimated to be 4.8%.
 lOMoARcPSD|47945818

• Williams can sell 8% preference shares at par value, P105 per share. The cost of issuing
and selling the preference shares is expected to be P5 per share.
• Williams’ ordinary shares is currently selling for P100 per share. The firm expects to pay
cash dividends of P7 per share next year, and the dividends are expected to remain
constant. The stock will have to be underpriced by P3 per share, and flotation costs are
expected to amount to P5 per share.
• Williams expects to have available P100,000 of retained earnings in the coming year;
once these retained earnings are exhausted, the firm will use new ordinary shares as the
form of ordinary shares equity financing.
• Williams’ desired capital structure is

Long term debt 30%

Preference shares 20
Ordinary shares 50

32. The cost of funds from the sale of ordinary shares for Williams, Inc. is:
a. 7%b. 7.6% c. 7.4% d. 8.1%
33. The cost of funds from retained earnings for William, Inc. is:
a. 7% b. 7.6% c. 7.4% d. 8.1%

34. If Williams, Inc. needs a total of P200,000, the firm’s weighted average cost of capital
wouldbe:
a. 19.8% b. 4.8% c. 6.5% d. 6.8%
35. If Williams, Inc. needs a total of P1,000,000, the firm’s weighted average cost of
capitalwould be:
a. 6.8% b. 4.8% c. 6.5% d.27.4%
36. The overall cost of capital is the:
a. Rate of return on assets that covers the costs associated with the funds employed.
b. Average rate of return a firm earns on its assets.
c. Minimum rate a firm must earn on high risk projects.
d. Cost of the firm’s equity capital at which the market value of the firm will remain
unchanged
37. If Golda Corporation’s bonds are currently yielding 8% in the marketplace, why would
thefirm’s cost of debt be lower?
a. Market interest rates have increased
 lOMoARcPSD|47945818

b. Additional debt can be issued more cheaply than the original debt.
c. There should be no difference; cost of debt is the same as the bonds’ market yield
d. Interest is deductible for tax purposes.
38. The theory underlying the cost of capital is primarily concerned with the cost of
a. Long-term funds and old funds
b. Short-term funds and new funds
c. Long-term funds and new funds
d. Short-term funds and old funds
39. A preference share is sold for P101 per share, has a face value of P100 per share,
underwriting fees of P5 per share, and annual dividends of P10 per share. If the tax rate is
40%; the cost of funds (capital) for the preference share is:
a. 4.2% b. 6.2% c. 10% d. 10.4%
40. Which one of a firm’s sources of new capital usually has the lowest after-tax cost?
a. Retained earnings c. Preference shares
b. Bonds d. Ordinary shares
41. Using the Capital Asset Pricing Model (CAPM), the required rate of return for a firm with
abeta of 1.25 when the market is 14% and the risk-free rate is 6% is:
a. 14% b. 6% c. 7.5% d. 16%
42. Which one of the following statements is correct when comparing bond
financingalternatives?
a. A bond with a call provision has a lower yield to maturity than a similar bond withouta
call provision.
b. A convertible bond must be converted ordinary shares prior to its maturity.
c. A call provision is generally considered detrimental to the investor.
d. A call provision requires the investor to pay an amount greater than par at the time
ofpurchase.
43. Maybelle Corporation has 6,000 shares of 5%, cumulative, P100 par value preference
sharesoutstanding and 200,000 ordinary shares outstanding. Maybelle’s Board of Directors
last declared dividends for the year ended May 31, 2003, and there were no dividends in
arrears. For the year ended May 31, 2005, Maybelle 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 Maybelle at May 31, 2005 is:
a. P350,000 b. P380,000 c. P206,000 d.P210,000
 lOMoARcPSD|47945818

SITUATIONAL
The following data apply to items 44 and 45
Shen Corporation
Statement of Financial Position
December, 31, 2004
(Pesos in millions)
Assets
Current Assets P75
Plant and equipment 250
Total Assets P325

Liabilities and shareholder’s equity

Current Liabilities P46
Long-term debt (12%) 64
Common equity:
Ordinary shares, P1 par 10
Additional paid-in capital 100
Retained earnings 105
Total liabilities and shareholder’s equity P325
Additional data:
• The long-term debt was originally issued at par (P1,000/bond) and is currently trading at
P1,250 per bond.
• Shen Corporation can now issue debt at 150 basis points over Metro Manila treasury
bonds.
• The current risk-free rate is 7%.
• Shen’s ordinary shares is currently selling at P32 per share.
• The expected market return is currently 15%.
• The beta value for Shen is 1.25.
• Shen’s effective corporate income tax rate is 40%.

44. Shen Corporation’s current net cost of debt is:

a. 5.5% b. 7% c. 5.1% d. 8.5%
45. Using the Capital Asset Pricing Model (CAPM), Shen Corporation’s current cost of
commonequity is:
a. 8.75% b. 10% c. 15% d. 17%
 lOMoARcPSD|47945818

46. The Dizon Corporation has outstanding one-year bank loan of P300,000 at a stated
interestrate of 8%. In addition, Dizon is required to maintain a 20% compensating balance in
its checking account. Assuming the company would normally maintain a zero balance in its
checking account, the effective interest rate on the loan is:
a. 6.4% b. 8.0% c. 9.6% d. 10%
47. Elan Corporation is considering borrowing P100,000 from a bank for one year at a
statedinterest rate of 9%. What is the effective interest rate to Elan if this borrowing is in the
form of a discounted note?
a. 8.10% b. 9% c. 9.81% d. 9.89%

SITUATIONAL
The following data apply to items 48 through 50.
Analen Company presently sells 400,000 bottles of perfume each year. Each bottle costs P0.84 to
produce and sells for P1.00. Fixed costs are P28,000 per year. The firm has annual interest
expense of P6,000 preference share dividends of P2,000 per year, and a 40% tax rate. Analen
uses the following formulas to determine the company’s leverage.
(Q )−(−
Operating leverage =

𝐸𝐸𝐸𝐸
Q(−)−

Financial leverage =
−[(−−[ (−/)
(Q−(−)
Total leverage = Q(−)−−−
[/((−−)

Where: Q= Quantity
FC = Fixed Cost
VC = Variable Cost
S = Selling Price I = Interest
expense
P= Preferred dividends
T= Tax Rate
Earnings Before Interest and
EBIT = Taxes
 lOMoARcPSD|47945818

48. The degree of operating leverage for Analen Company is: a. 2.4 b.1.78 c. 1.35 d. 1.2
49. The degree of financial leverage for Analen Company is:
a. 2.4 b.1.78 c.1.35 d. 1.2
50. If Analen Company did not have preference shares, the degree of total leverage would:
a. Decrease in proportion to a decrease in financial leverage.
b. Increase in proportion to an increase in financial leverage.
c. Remain the same.
d. Decrease but not be proportional to the decrease in financial leverage.
51. Pelagio Corporation has sold P50million of P1,000 par value, 12% coupon bonds. The
weresold at a discount and the corporation received P985 per bond. If the corporate tax rate is
40%, the after-tax cost of these bonds for the first year (rounded to the nearest hundredth
percent) is:
a. 7.31% b. 12.18% c. 4.87% d. 12.00%
52. Horario Corporation is selling P25million of cumulative, non-participating preference
shares.The issue will have a par value of P65 per share. with a dividend rate of 6%. The issue
will be sold to investors for P68 per share and issuance costs will be P4 per share. The cost of
preference shares to Horario is:
a. 5.42% b. 5.74% c. 6% d. 6.09%
53. Anabel, Inc. is planning to use retained earnings to finance anticipated capital
expenditures.The beta coefficient for Anabel’s stock is 1.15, the risk-free rate of interest is
8.5%, and the market return is estimated at 12.4%. If a new issue of ordinary shares was used
in this model, the flotation costs would be 7%. By using the Capital Asset Pricing Model
equation [R = RF + β (RM – RF)], the cost of using retained earnings to finance capital
expenditures is:
a. 13.96% b. 12.99% c. 12.40% d. 14.26
54. Mariday, Inc. paid a cash dividend to its common shareholders over the past 12 months
ofP2.20 per share. The current market value of the ordinary shares is P40 per share and
investors are anticipating the common dividend to grow at a rate of 6% annually. The costs to
issue new ordinary shares will be 5% of the market value. The cost of a new ordinary shares
issue will be:
a. 11.50% b. 11.79% c. 11.83% d. 12.14%
55. Datacomp Industries, which has no current debt, has a beta of 0.95 for its ordinary
shares.Management is considering a change in the capital structure to 30% debt and 70%
equity. This change would increase the beta on the stock to 1.05, and the after-tax cost of
 lOMoARcPSD|47945818

debt will be 7.5%. The expected return on equity is 16%, and the risk-free rate is 6%. Should
Datacomp’s management proceed with capital structure change?
a. No, because the cost of equity capital will increase.
b. Yes, because the cost of equity capital will decrease.
c. Yes, because the weighted average cost of capital decrease.
d. No, because the weighted average cost of capital will increase.
56. A company obtained a short-term bank loan of P500,000 at an annual interest rate of 8%. Asa
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
three percent.
Ordinarily, the company maintains a balance of P50,000 in its account for transaction purposes.
What is the effective interest rate of the loan?
a. 7.77% b. 8.50% c. 9.44% d. 8.56%
57. An automated clearinghouse (ACH) electronic transfer is a(n):
a. Electronic payment to a company’s account at a concentration bank
b. Check that must be immediately cleared by the Bangko Sentral.
c. Computer-generated deposit ticket verifying deposit of funds.
d. Check-life instrument drawn against the payer and not against the bank.
58. Assume that each day a company writes and receives checks totaling P10,000. If it takes
fivedays for the checks to clear and be deducted from the company’s account, and only four
days for the deposits to clear, what is the float?
a. P10,000 b. P0 c. (P10,000) d. P50,000
SITUATIONAL
The following data apply to items 59 through 61
WXY Telecom is considering a project for the coming year which will cost P50million. WXY
plans to use the following combination of debt and equity to finance the investment.
• Issue P15million of 20-year bonds at price of 101, with a coupon rate of 8%, and
flotation costs of 2% to par.
• Use P35million of funds generated from earnings.

The equity market is expected to earn 12%. The treasury bonds are currently yielding 5 percent.
The beta coefficient for WXY is estimated to be 0.60. WXY is subject to an effective corporate
income tax of 40%.
 lOMoARcPSD|47945818

59. The before-tax cost of WXY’s planned debt financing, net of flotation costs, in the first
yearis:
a. 11.80% b. 8.08% c. 9.50% d. 6.30%
60. Without prejudice to your answer to item 59, assume that the after-tax cost of debt is 7%
andthe cost of equity is 12%. Determine the weighted average cost of capital.
a. 10.50% b.8.50% c. 9.50% d. 6.30%
61. The Capital Asset Pricing Model (CAPM) computes the expected return on a security
byadding the risk-free of return to the incremental yield of the expected market return which is
adjusted by the company’s beta. Compute WXY’s expected rate of return.
a. 9.20% b. 12.20% c.7.20% d. 12%
Multiple Choice Questions
1. Which of the following statements properly describe an advantage of ordinary shares
over long-term bonds as a source of financing?
a. Ordinary share is less costly, and liquidity risk is less.
b. Ordinary share is less costly, and current owners retain control.
c. There is less liquidity risk with ordinary shares, and financing flexibility is
maintained.
d. There is lower underwriting cost with ordinary shares, and financing flexibility is
maintained.
2. Using an investment banker to underwrite a firm’s ordinary shares issue means that
a. private placement rather than a public offering will be made.
b. the investment banker guarantees to the public that the ordinary share is a good buy.
c. the issuing firm bears the risk of fluctuating market prices and economic conditions
during the stock issue.
d. the investment banker buys the stock from the firm at a negotiated price
andthen resells it to the public.
3. Which one of the following would be the most likely to cause an immediate increase in
primary earnings per share? a. A merger.
b. A conversion of convertible bonds.
c. An exercise of warrants.
d. Purchase of treasury shares.
4. The preemptive right
a. gives holders of ordinary shares first option to purchase additional ordinary
shares.
b. gives bondholders first claim on assets in liquidation.
c. gives preference shareholders the right to vote at annual meetings.
d. gives bankers the right to demand prepayment of the principal amount of a loan.
5. A right offering will probably fail
a. if the new issue is small compared to the total ordinary shares outstanding.
 lOMoARcPSD|47945818

b. if the issue has shown price stability over the past year.
c. if the stock is very widely held.
d. if the subscription price is close to the market price.
6. A financial instrument which promises to repay the principal at a specified date but will
pay interest only when earned is called
a. a non-participating preference share.
b. a revenue bond.
c. an income bond.
d. a mortgage bond.
7. Which of the following does not help to explain the existence of a premium in the price
of a convertible bond?
a. The downside protection offered by the convertible that is unavailable with the stock.
b. The opportunity to participate in gains in excess of the return available to
debtholders.
c. Higher transaction costs on convertibles than the cost of trading ordinary
shares.
d. Restrictions on the ability of certain institutions to invest in ordinary shares.
8. A convertible debenture is used
a. as a sweetener when raising capital by debt instruments.
b. to sell ordinary shares at a prices higher than those prevailing when funds are needed.
c. when low cost capital is needed during construction.
d. when capital cannot be raised by a straight debt instrument at a reasonable rate.
e. for all of the reasons enumerated above.
9. The least desirable of the following forms of financing for a small corporation
whose shareholders are concerned about maintaining control over the firm is a. a
rights offering.
b. participating preference share.
c. subordinated debentures.
d. income bonds.
10. A firm floats a new stock issue and uses the proceeds from the issue to retire a bond
issuewhich has matured. Which one of the following statements will hold in all
cases? a. The firm has increased its operating leverage.
b. The firm has decreased its financial leverage.
c. The firm has increased its earnings per share.
d. The firm has decreased its earnings per share.
11. The document that outlines the covenants and duties existing between bondholders
andthe issuing corporation is called a. An indenture.
b. A debenture.
c. Secured debt.
d. Protective covenants.
12. The “call” provision on some bonds allows
 lOMoARcPSD|47945818

a. The bond holder to redeem the bond earlier than maturity, but usually involves a call
premium.
b. The corporation to request additional capital contributions from the bondholder.
c. The corporation to redeem the bonds earlier than maturity but usually for a
premium over the par value.
d. The bondholder to convert the bond into preference shares.
13. A “subordinated debenture”
a. Must be transferred with the bond to which it is attached.
b. Is used mainly by railroad companies and usually specifies equipment as collateral.
c. Entitles the bondholder to purchase ordinary shares at a specific price.
d. Is an unsecured bond with an inferior claim on assets in the event of liquidation.
14. Which of the following bonds offers the most security to the bondholder?
a. Junior mortgage bonds
b. Senior mortgage bonds
c. Debenture bond
d. Income bond
15. Which of the following are advantages of leasing?
a. A lease obligation may be substantially less restrictive than the provisions of a bond
indenture.
b. There may be no down payment as in a purchase.
c. The negative effects of obsolescence may be eliminated.
d. All of the above.
16. Long-term financing leases currently
a. Show up on the balance sheet.
b. Appear in the footnotes to the annual report.
c. Appear on the company’s income statements.
d. Do not appear on any financial statements,
17. Which of the following is not an advantage of debt?
a. Debt is paid back in “cheaper” pesos during inflationary periods.
b. Bond holders have no control over the actions of management.
c. Cost of debt can lower the weighted overall cost of capital.
d. All are advantages.
18. Which of the following is not a characteristic of convertible bond issues?
a. The average size of the offering is small.
b. A 15-20% conversion premium at time of issue is common.
c. Large companies with billions of pesos in sales and assets are the primary
issuers.
d. Primary issuers tend to have less than AAA credit ratings.
19. When a company has a convertible bond in its capital structure,
a. It can reduce its debt-to-equity ratio by calling the bond.
b. There is no effect on the firm’s primary earnings per share.
c. There is no advantage to the firm in forcing conversion of the bonds.
 lOMoARcPSD|47945818

d. All of the above.

20. Warrants are
a. Long-term options to sell shares of the issuing firm’s stock.
b. Fairly stable, low-risk investments
c. Investments whose value is directly related to the price of the underlying stock.
d. Structured to sell for precisely their intrinsic value.