XYZ Corporation plans to produce and sell Products A and B.

Both products will be manufactured using

the same plant. The total Fixed costs per year will remain the same at P380,000. Each product will be
sold at P120 each. Variable cost is 60%. The demand for Product A is 10,000and Product B is 15,000 with
a probability of 80% and 60%, respectively.

Considering the probability of 80% for Product A and 60% for Product B, which will be more profitable to
produce and sell?

b. Product B

It is a graphical representation of possible solutions to a decision based on certain conditions.

a. Decision Tree

XYZ Corporation plans to produce and sell Products A and B. Both products will be manufactured using
the same plant. The total Fixed costs per year will remain the same at P380,000. Each product will be
sold at P120 each. Variable cost is 60%. The demand for Product A is 10,000and Product B is 15,000 with
a probability of 80% and 60%, respectively.

The break-even point is units for both products is

b. 5,277.77 units

XYZ Corporation plans to produce and sell Products A and B. Both products will be manufactured using
the same plant. The total Fixed costs per year will remain the same at P380,000. Each product will be
sold at P120 each. Variable cost is 60%. The demand for Product A is 10,000and Product B is 15,000 with
a probability of 80% and 60%, respectively.

The net income if Product A is chosen to be produced?

c. P 4,000

It is the amount that a firm is willing to pay in exchange for the errorless advice from a market analyst.

a. Expected Value of perfect information

In probability of two events, if one event will occur given that the other has occurred already , it is
termed

b. Conditional probability

The difference between the selling price and the variable cost is called

a. Contribution Margin

One of the basic principles of risk management identified by ISO is that it should be used to handle
certainty.

b. False

It means apportioning with a third party the burden of loss or benefits from risk.

a. Sharing the risk

The risk that securities cannot be converted quickly to cash is called

c. Liquidity risk

---------------------------------------------------------Q2-----------------------------------------------

It is an investment with a return that is not warranted.

Risky financial asset

It is the arrangement of probabilities related with the values of a variable that can assume a limited or
determinate number of outcomes.

Discrete probability distribution

It is the possibility that an event will happen.

Probability

It is the standard measure of the risk per unit of return.

coefficient of variation

It is the variability of returns of the portfolio as a whole.

portfolio risk

They are the decision makers who are willing to pay more than the expected value of an investment.

risk-takers investors

Given the following for Asset A and Asset B: (Note: If the answer is a whole number, only put the whole
number. If the answer has decimals, round off your answer to the nearest hundredths.)

25

31

1. Probability distribution based on past results of similar events.

objective probability distribution

2. Listing of possible events and their assigned probability.

Probability distribution

3. Difference between the highest and the lowest possible outcome.

Range of a probability distribution

4. The weighted average of an expected return from individual assets in the portfolio.
expected portfolio return

4. The weighted average of an expected return from individual assets in the portfolio.

risk-averse investors

Accounts Payables and Accruals are provided by suppliers and workers as part of the normal operations
and are not included in the category of capital.

b. True

Asset liquidity pertains to an easy conversion of company’s assets into cash in the event of unexpected
substantial need for additional cash flow.

a. True

Business Risk is the possibility that shareholders will lose their investment in a company with debt, if the
cash flows will not be sufficient to meet its financial obligations.

b. False

Contemporary approach to capital structure asserts that there is an optimal capital structure for every
firm.

a. True

Earnings per share are zero at financial break-even point.

b. True

Financial break-even point is the earnings before interest and taxes level at which after paying interest
on bonds, dividends on preferred shares, and income taxes, nothing is left for ordinary equity
shareholders.

a. True
The contemporary approach to capital structure management recognizes tax effects, bankruptcy costs
and agency cost.

a. True

The Modigliani and Miller (MM) approach to capital structure with corporate taxes states that the use of
financial leverage lowers the company’s cost of capital and raises the firm’s value because interest in
debt is not tax deductible.

a. False

The traditional approach to capital structure proposes that a firm can lower its weighted average cost of
capital and decrease its market value with the use of financial leverage.

a. False

Traditional and MM approaches or theories have several common assumptions including no taxes, all
earnings are paid as dividends, earnings before interest and taxes is constant so with business risks.

a. True

certainty

means that for each decision action there is only one event and only a single outcome for each action.

If the conditional probability of each event equals its unconditional probability, the two events are

independent
probabilistic

inputs in simulation process that includes the circumstances beyond the control of the decision-makers.

RST Corporation is planning of introducing two new products in the market this 2017. Either will be
produced using the current company facilities. Each product will sell at P 100 and the same variable cost
of P 60 per unit. Annual fixed cost will increase by P 400,000 in both products. Based on previous
experiences, the management team has arrived at the following probability distribution:

---------------------------------Q3---------------------------------------------

_____is the interest rate that determines the amount of interest to be paid by the issuer and to be
received by the bondholder each year.

Standard Interest Rate

Debenture bonds are bonds backed up by ____-of the bond issuer.

Good Faith

Preferred shares have the right to receive assets of the company before ordinary shares is the event of
the firm’s ______.

Liquidation

The ordinary equity share valuation model that assumes that dividends grow at a constant rate each
period is the _____.

Gordon constant Growth Model

_____refers to the internal rate of return of bonds.

yield to maturity
Calculating the weighted average cost of capital is the most widely used method of approximating the
cost of ordinary shares.

False

Capital components include bonds, preferred shares, ordinary shares, and retained earnings.

False

Market value weights are historical weights used in computing the weighted average cost of capital that
determined the actual proportion of each kind of permanent capital in the structure based on the values
given in the Balance Sheet.

False

Preferred shares are also rated like bonds that is why, some investors consider them to be more like
debt than equity.

True

The cost of capital includes interests on bonds and dividends on shares.

True

The cost of current ordinary shares and retained earnings are the same but the cost of the new ordinary
shares and retained earnings are not equal.

True

The optimal capital structure is the combination of debt and equity that maximizes the firm's market
value and minimizes its weighted average cost of capital at the same time.

True
There is no direct cost associated with retained earnings.

True

Initial cash outflow

Installation Cost

Simpliest frm of ‘what if” analysis

Scenario Analysis

Capital asset pricing model calculates the expected return on asset based on its beta and the expected
market return.

True

Capital budgeting refers to a budgeting for the acquisition of assets that will be used for a long period of
time and are considered as investments.

True

Developing a new product is an example of a preference capital investment decision.

False

Historical costs have no effect on the future capital investment options.

True

If the optimistic scenario has a high positive net present value and it seems to be difficult to assume that
it can certainly happen, it is safer to choose the most likely scenario that has a lesser positive net
present value.

True
One variable change on many values is allowed in simulation analysis.

True

Under the pessimistic scenario, the minimum set present value of a project is shown and the least
favorable value is assigned to each variable.

True

The excess of bond’s issue price over its par value is called _____.

Bond Premium

Preferred shares has the right to receive assets of the company before ______shares in the event of
liquidation.

Ordinary shares

A(n) ____lease agreement gives the lessee a limited right to use the asset.

Operating Lease

------------------------------------------------------------

According to the Capital Asset Pricing Model, a well-diversified portfolio's rate of return is a function of

b. Market risk

Investments in security A with a beta of 1.6 and in security B with a beta of 0.7 was made on a 50:50
basis. The portfolio beta is

d. 1.15

The expected return - beta relationship of the CAPM is graphically represented by the
d. Security market line.

The following statements regarding beta coefficient are true except

b. It is the weighted sum of all individual asset betas.

The Security Market Line (SML) is

d. The line that represents the expected return-beta relationship

You invest P6, 000 in security X with a beta of 1.2 and P4, 000 in security Y with a beta of 0.90. The beta
of the resulting portfolio is

d. 1.08

A portfolio beta of greater than 1 indicates greater instability and less than 1 beta means less volatility.

True

In graphing the security market line, the risk is plotted on the x-axis and the expected return on the y-
axis and from the SML slope, the market risk premium is defined.

True

Individual securities are plotted in the SML and if a security is plotted below the SML, it is overvalued
and the investor should expect a lower return for the assumed risk.

True

The CAPM describes the relationship between the unsystematic risk and the expected return for assets.

False
The most logical and reliable tool in valuing a merger.

NET PRresent value

A tactic to resist unfriendly mergers where the target corporation may retaliate with a tender offer to
acquire the business of the tender offeror.

reverse tender

“Company A + Company B = Company A” is an example of what type of business combination?

merger

It is the kind of merger that combines two companies producing non-related products and has no
common market.

Conglomerate merger

Another term for deferred payment plan.

earn-out

An approach in purchasing another firm where the acquiring firm can have a surprise takeover of the
target firm without communication the latter’s management

tender offer

The kind of payment scheme on mergers that use a combination of securities to pay the new
shareholders of the acquiring company.

debt and preferred

A kind of divestiture which involves the separation of a subsidiary from its parent company without
changing its equity ownership
spin off

It is described as using combined inputs from two firms to produce multiple products.

economies of scope

It is the occurrence of a condition when the whole is greater than the sum of the parts as a resulting of
eliminating overlapping functions or resources in the event of mergers or acquisitions.

synergy

Budget

is a business entity’s financial management plan for a specified future period of time, generally a fiscal
year.

asset

is something of value held by the SNP for use in carrying out its mission.

Average daily participation

is the average number of student reimbursable meals served in the school nutrition program on a daily
basis.

Accounts receivable

refers to the amount of funds the SNP has earned, but not yet collected, for services provided.
Balance sheet

presents a business entity’s financial position, which consists of its assets, liabilities, and the difference
between the two (called “Net Assets” or “Fund Balance”).

Direct expenses

are costs directly related to the principal activity of the business.

Deficit

is a financial outcome where expenses exceed revenue.

Encumbrance

functions as a fund control device. It is the amount of money reserved for outstanding purchase orders
and unpaid bills.

Expenditures

may be made by either giving up assets (such as by paying cash) or by increasing liabilities (such as by
incurring debt).

Food Cost

is the cost of food used in school nutrition service to prepare meals and other food items such as à la
carte.

Borrowed capital is also called _______.

Debt Financing

____is an evidence of a promise in writing under seal to pay a definite sum of money with a fixed rate of
interest at a definite future date made by one person to another.

Bond Certificate

The excess of bond’s issue price over its par value is called _____.

Bond Premium

Preferred shares has the right to receive assets of the company before ______shares in the event of
liquidation.

Ordinary shares

The dividend valuation model that assumes that an investor will buy equity shares and hold it
indeterminately is called ________.

Infinite Period Dividend Valuation Model

A(n) ____lease agreement gives the lessee a limited right to use the asset.

Operating Lease

The cost of ___ is the minimum rate of return required by the bondholder.

Operating Lease

In calculating the weighted average cost of capital, ____is the capital component that has a tax
adjustment .

Debt
In computing the weighted average cost of capital, the firm uses ____weights to establish proportions
on the basis of optimal capital structure the firm wants to achieve.

Target

The cost of new ordinary equity is similar to _______ but it is not equal.

Ordinary shares

The capital components consist of debt, preferred shares, and ________.

Ordinary shares

The following are given for the two stocks of XYZ Co.

Stock X Beta 1.6

Stock Y Beta .5

Risk-free rate is 12%; expected rate of return is 16%

The rate of return for Stock X is

a. 18.4%

The following are given for the two stocks of XYZ Co.

Stock X Beta 1.6

Stock Y Beta .5

Risk-free rate is 12%; expected rate of return is 16%

The rate of return for Stock Y is

b. 14%

A BC Corp.‘s proposed project with an estimated life of 20 years and salvage value of P100,000 requires
an initial investment of P 1,000,000. It will yield yearly cash inflow of P100, 000. Straight line method will
be used.

The annual rate of return based on the initial investment is

c. 5.5%

A positive net present value would mean that the investment proposal should be accepted.

True

Beta coefficient is a measure of volatility.

True

In general, if the level of investment risk increases the possible returns on investment also goes up.

True

Mutually exclusive project decision are contending proposals that will give the firm positive benefits and
accepting one or a combination of such projects might disregard others for consideration.

True
Payment of cash dividend will reduce the retained earnings at the same time will lower the company's
most liquid asset.

True

Retained earnings are portion of the corporation's earnings not paid out as dividends but kept for
possible reinvestment.

True

Stock repurchase pertains to treasury shares.

True

Stock split will lower the par value of outstanding equity shares.

True

The net present value method is one popular capital budgeting models wherein the cash flows are
discounted at the company's cost of capital.

True

An international bond guaranteed by an international consortium of banks.

a. Eurobond

Relative to number 4 above, the Canadian$ -Swiss Franc exchange rate is

c. 1.3182

The exchange rate at which a party to a contract agrees to receive or deliver a currency at some future
date is
b. Forward exchange rate

A security is undervalued if it is plotted below the Security Market Line.

False

Declaration of stock dividends will change the total stockholders' equity.

False

Profitability index is used in ranking investment projects is an ascending order of desirability.

False

The expected return-beta relationship of the CAPM is represented by a Capital market line.

True

Unique risk is a function of a well-diversified portfolio per CAPM.

False

Vertical merger is a case of combining two companies who are competitors in the same industry.

False
cost of capital

for a project proposal and estimating its cash flows will help management to decide on what project will
they invest their resources and determine if it is really worth investing.

Net present value is the difference between the present value of cash inflows and cash outflows
resulting from undertaking an

investment project

Zero net present value

occurs when the present value of cash inflow is the same or equal to the present value of cash outflow
and the investment proposal is also considered acceptable.

evaluating

the project proposals.

Net present value method

is also known as discounted cash flow method.