TRUE/FALSE

1. The degree to which the managers of a firm attempt to magnify the returns to
owners' capital using financial leverage is captured in solvency ratios. False
2. One of the biggest noncash items on the income statement is depreciation which
needs to be added from net income to determine cash flows for the firm. False
3. "If a firm has high current and quick ratios, this is always a good indication of a
firm's liquidity position." TRUE
4. A statement reporting the impact of a firm's operating, investing, and financing
activities on cash flows over an accounting is the statement of financial position.
False
5. Fairy Tail Corporation has seen its days sales outstanding (DSO) decline from 68
days last year to 42 days this implying that more of the firm's customers pay on
time. True
6. The current ratio and inventory turnover ratio measure the liquidity of a firm. True
7. Depreciation is regarded as a use of cash because it is an expense. False
8. The value of the firm depends upon its growth opportunities and current cash
flows. true
9. Payoff matrix of returns is calculated by multiplying the expected return outcome
by 1 True
10. "The effective annual rate is always greater than or equal to the simple rate as a
result of compounding effects, assuming positive interest rates." True
11. An uneven cash flow is a series of equal payments made at fixed equal-length
intervals for a specified number of periods. False
12. If an investor can earn a steady 10% annually with security A, while security B
will yield a constant 11% annually. Within 5 years time, the compounded value of
security B will be more than twice the compounded value of security A (ignore
risk)."
13. Being ethical in the business world is a wonderful idea but an impractical
standard. False
14. A proprietorship is an unincorporated business owned by more than one
individual and the owner benefits from the limited liability for business which
limits his losses to what he has invested in the company. False
15. A proxy takeover involves an attempt by one group of stockholders to solicit
votes from other stockholders in order to put a new management team into place
and is usually motivated by low stock price. True
16. Exchange rate risk is the risk that the cash flows from a foreign project will be
worth less than those same cash flows denominated in the parent company's
home currency. true
17. The disadvantages associated with a proprietorship are like those under a
partnership. But partnerships do not have difficulty raising large amounts of
capital. true
18. Economic profits are those that result in rates of return that are just enough to
attract new capital in financial markets.
19. "Because of differences in the expected returns of different securities, the
standard deviation is not always an adequate measure of risk. However, the
coefficient of variation always will allow an investor to properly compare the
relative risks of any two securities." True
20. "A listing of all possible outcomes, or events, with a probability assigned to each
is called a distribution network. False
21. We can use the fixed asset turnover ratio to legitimately compare firms in the
same industry if the firms being compared are using the same proportion of fixed
assets to total assets.
22. "When a firm pays off a notes payable using cash, the source of funds is the
decrease in the asset account, cash, while the use of funds involves a decrease
in a liability account, debt." true
23. Fairy Tail Corporation has seen its days sales outstanding (DSO) decline from 68
days last year to 42 days this implying that more of the firm’s customers pay on
time.
24. An decrease in an asset account is a source of cash, whereas an increase in an
equity account is a use of cash." True
25. "If the current ratio of Company X is greater than the current ratio of Company Y,
we cannot be sure that the quick ratio of Company X is greater than that of
Company Y. However, if the quick ratio of Company X exceeds that of Company
Y, we can be assured that Company X's current ratio also exceeds Y's current
ratio."
26. The standard deviation is the weighted average of all the deviations from the
expected value, and it indicates how far above or below the expected value the
actual value is expected to be. True
27. Risk is a significant factor when making financial decisions because all business
decisions involve predictions about the future which are unknown. True
28. Market risk refers to the tendency of a stock to move with a specific industry. A
stock with above-average market risk will tend to be more volatile than an
average stock and it will have a beta which is greater than 1.0. False
29. Ceteris parilbus, a dollar received sooner is worth more than a dollar received at
some later date because the sooner the dollar is received the more quickly it can
be invested to earn a positive return. False
30. Exchange rate risk is the risk that the cash flow from a foreigner project will be
worth less than those same cash flows denominated in the parent company’s
home currency. True
31. The difference between an ordinary annuity and an annuity dues is that each of
the payments of the annuity due earns interest for one additional year (which
makes the ordinary annuity greater than annuity due) True
32. The current ratio and inventory turnover are related. The combination of a low
inventory turnover ratio and a high current ratio relative to the industry norm
might indicate that the firm is maintaining high inventory levels or part of the
inventory is obsolete or damaged. True xx
33. Taxes, payment patterns, and reporting consideration as well as credit sales and
non-cash costs are reasons why operating cash flows can differ from profits.
34. Non-cash assets are not expected to produce cash over time because, as the
name implies, these are assets that aren’t cash
35. The difference between the PV of an annuity due and the PV of an ordinary
annuity is that each of the payments of the deferred annuity is discounted by one
more year. False
36. The income statement measures the operating performance of the firm over a
certain time period. It is always based on accounting data. True
37. The role of the financial manager is to raise and use funds in order to maximize
the value of the firm. True
38. Cultural difference do impact the multinational corporations as they expand into
different geographic regions True
39. Two key limitations of the proprietorship form of business involve potential
difficulty in raising needed capital and the presence of limited personal liability for
business debts. False
40. The proper goal of the financial manager should be to maximize the firm's expected
profit, because this will add the most wealth to each of the individual shareholders
(owners) of the firm. False
41. One way to state the decision framework most useful for carrying out the firm's objective
is that the financial managers should seek that combination of assets, liabilities, and
capital which will generate the largest expected shareholder value over the long run.
42. The financial manager must execute his or her duties dependent on the other activities
of the firm in order to properly maximize the value of the firm. True
43. "The greater the number of compounding periods within a year, the greater the future
value of a lump sum invested initially, and the lesser the present value of a given lump
sum to be received.
44. A firm’s beta can change through any managerial decision.True
 45. An asset that is deemed to be liquid can be easily converted into cash without a
significant loss of its original value. True
46. The information contained in the annual report is used by stakeholders to form
expectations about future earnings and dividends. True
47. selling new stock is an equity transaction; it does not affect any asset or liability account
and but it appears on the statement of cash flows.True
48. Risk is indicated by variability, whether the variability is considered positive or negative. Both
the positive and negative outcomes must be evaluated when considering risk because all expected
possibilities should be examined, even the positive ones. True
49. A firm can take cost-increasing, socially responsible actions in a competitive marketplace and
expect to continue to compete, even if those cost-increasing actions yield significant benefits to
the firm. True

PROBLEM SOLVING

1. San Miguel has a beta coefficient of 0.8 and a required rate of return of 12
percent. The market risk premium is currently 6 percent. If the inflation premium
increases by 1.5 percentage, and San Miguel acquires new assets which
increase its beta to 1.2, what will be San Miguel's new required rate of return?
Round off to three decimal places.
15.9%
2. You are given the following cash flows: Year 1 = $5; Year 2 = $10; Year 3 = $30;
Year 4 = $120 Year 5 = -$150. What is the present value (t = 0) if the discount
rate is 15 percent? The Final answer should be rounded off to two decimal
places.
25.67

3. "Ignoring taxes, how long would it take to double your money at a simple rate of 5
percent, compounded annually? Final answer should be a whole number."
14 years

4. At an effective annual interest rate of 15 percent, how many years will it take a
given amount to triple in value? (Round to the closest year.)
7 YEARS AND 9 MONTHS OR 8 YEARS

5. You are given the following cash flow information. The appropriate discount rate
is 8 percent for Years 1 5 and 6 percent for Years 6 10. Payments are received
at the end of the year: Year 1 to 5 = 10,000; Year 6 to 10 = 15,000. What should
 you be willing the price of the security today to receive the income stream
above? Round off your answer to two decimal places 6,805.83

6. What is the future value of a 10-year ordinary annuity with annual payments of
$200, evaluated at a 5 percent interest rate? Final answer should be rounded to
two decimal places. 2515.58

7. Scofield is about to purchase an investment. Scofield will receive $100 every

month for two years. The first $100 payment will be made as soon as he
purchases the security. If Scofield's required rate of return is 10 percent, to the
nearest dollar, how much should she be willing to pay for this security?

8. You are given the following information about a firm: The growth rate equals 8
percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and
the stock is selling at $36. What is the return on equity (ROE)? (Final answer
should be rounded to two decimal places)

9. Salabat Inc. has $500,000 of debt outstanding, and it pays an interest rate of 8
percent annually on its bank loan. Salabat's annual sales are $4,200,000; its
average tax rate is 40 percent; and its net profit margin on sales is 3 percent. If
the company does not maintain a TIE ratio of at least 4 times, its bank will refuse
to renew its loan, and bankruptcy will result. What is Salabat's current TIE ratio?
(Final answer should be rounded to a two decimal places)
6.25
10. "Watson sells all its merchandise on credit. It has a profit margin of 3 percent,
days sales outstanding equal to 40 days, receivables of $200,000, total assets of
$2 million, and a debt ratio of 0.60. What is the firm's return on equity (ROE)?
(Final answer should be rounded to four decimal places)"

11. A perpetuity pays $1000 annually and your required rate of return on this
security is 10 percent. You should be essentially indifferent to buying or not
buying the security if it were offered at a price of? Round off to the nearest whole
number.
(Present Value of a Perpetuity = Annual Payment ÷ Discount Rate)
10,000
12. At approximately what rate would you have to invest a lump sum amount today. If
you need the amount to quadruple in 12 years? Assume interest is compounded
annually. The final answer should be rounded to four decimal places.

13. If you buy a condominium unit for 5,000,000 and the terms are 20% down, the
balance to be paid off over 20 years at a 10 percent rate of interest on the unpaid
balance. What are the 20 equal annual payments? Round off to the nearest
dollar.

14. You invest an amount of money in five year certificate of deposit (CD) at your
bank. The stated interest rate applied to the CD is 4 percent, compounded
quarterly. How much must you invest, if you want the balance in the CD account
to be $8,500 in five years? Final answer should be rounded to two decimal
places

15. "HP Inc. has a profit margin of 10 percent on sales of $10,000,000. HP has debt
of $1,500,000, total assets of $12,000,000, 40 percent tax rate and an after-tax
interest cost on total debt of 5 percent, what is the HP's ROA?(Final answer
should be rounded to four decimal places)"

16. How long to the nearest year would it take the purchasing power of $1 to be cut
in half if the inflation rate were 6%

17. "ABC Company's interest expense is $5,000 per year, sales of $3 million, a tax
rate of 50 percent, and a net profit margin of 5 percent. What is ABC Company's
times-interest-earned ratio? (Final answer should be rounded to a whole
number)" 5

18. "The Happy Company is a privately owned firm. Last year the company had
after-tax income of $10,000, and 5,000 shares were outstanding. A similar firm
which is publicly traded had a price/earnings ratio of 4.0. Using only the
information given, estimate the market value of one share of Charleston's stock.
(Final answer should be rounded to a whole number)"

19. "Assume that you can invest to earn a stated annual rate of return of 6 percent,
but where interest is compounded semiannually. If you make 40 consecutive
semiannual deposits of $400 each, with the first deposit being made today, what
will your balance be at the end of Year 20? Round off to two decimal places."
20. "Assume that you will receive $3,000 a year in Years 1 through 5, $4,000 a year
in Years 6 through 8, and $5,000 in Year 9, with all cash flows to be received at
the end of the year. If you require a 10 percent rate of return, what is the present
value of these cash flows? Round off to two decimal places."

21. "You purchase an investment of $2,000 that pays 6 percent interest,

compounded semiannually, planning to use it to pursue a master s degree.
Eighteen months later, you decide to go to the Maldives to live there rather than
continue in school, so you close out your account. How much money will you
receive? Final answer should be rounded to two decimal places." 17024.33 di
sure

22. At approximately what rate would you have to invest a lumpsum amount today if
you need the amount to quadruple in 12 years? Assume interest is compounded
annually. Final answer should rounded to four decimal places.

23. "In 2008 the average tuition for one year at UST was Php 45,000. Twelve years
later, in 2020, the average cost was Php 65,000. What was the growth rate in
tuition over the 12-year period? Round off to four decimal places." 30.7692%

24. "You expect to receive $3,000 at the end of each of the next 3 years. You will
deposit these payments into an account which pays 10 percent compounded
semiannually. What is the future value of these payments, that is, the value at the
end of the third year? Round off to the nearest dollar." 2592 di ko sure

25. Based on the following information, what is the security s expected return?
Probabilities: 0.3, 0.4, and 0.3 Payoffs: -10%, 5.0%, 15%. Round off your
answers to three decimal places."

26. "You have a diversified portfolio of 20 different common stocks, equally weighted.
The portfolio beta is equal to 1.08. You sell one of the stocks in your portfolio with
a beta equal to 1.03 and use the proceeds to buy another stock for your portfolio.
Assume that the new stock s beta is equal to 1.15. Calculate your portfolio s new
beta. Round off to three decimal places."

27. Merrymill’s common stock currently is selling $10 per share, which represent a
P/E ratio of 5. If the firm has 300 shares of common stock outstanding, a return
on equity of 15 percent, and a debt ration of 40%, what is its return on total
assets (ROA)? (Final answer should be rounded to two decimal places)
28. Nine nine Inc. has a beta coefficient equal to 2.25 and a required rate of return
equal to 18.75%. If the expected return on the market is 10 percent, what is the
risk free rate of return, nRF? Round off your ansers to two decimal places.

29. Terry determined that the risk-free rate of return, nRF, is 4 percent, the required
return on the market portfolio, rM, is 8 percent, and the required rate of return on
Stock K, rK, is 14 percent. Terry finds out that investors are more risk averse,
such that the market risk premium, RPM, is 2 percent higher than estimated.
What will be the new rK to be using the new information? Round off to three
decimal places.

30. A portfolio of 10 stocks are help in equal amounts. The beta of the portfolio is
1.24, and the beta First Stock is sold, what should be the beta of the replacement
stock to produce a portfolio beta of 1.36?

31. "Given the following information, calculate the market price per share of WIN Ltd..
Earnings after interest and taxes = $150,000, Earnings per share = $2.00, Stockholders'
equity = $1,000,000, Market/Book ratio = 0.60 (Final answer should be rounded to a
whole number)" 1,2 or 3
32. "Suppose rRF = 6%, rM = 12%, and rB = 18%. Calculate Stock B s beta, ?."

33. "Mike and Harvey Inc. has a current ratio of 5.0, a quick ratio of 2.4, and an inventory
turnover ratio of 12. Mike and Harvey's total assets are $1 million and its debt ratio is
0.10. The firm has no long-term debt. What is Harvey's sales figure if the total cost of
goods sold is 75% of sales? (Final answer should be rounded to a whole number)" 4,160
34.