Final Exam

BM 240
Financial Management

Answer FOUR (4) of the following questions exhaustively. Support your answer with
computation in good form.
1) CC, Inc. manufactures a variety of heating and air conditioning units. The
company is currently manufacturing all of its own component parts. An outside
supplier has offered to sell a thermostat to CC, Inc for P20 per unit. To evaluate
this offer, CC, Inc. has gathered the following information relating to its own cost
of producing the thermostat internally:
Per Unit 15,000 units/ year
Direct materials P6 P90,000.00
Direct labor 8 120,000.00
Variable manufacturing overhead 1 15,000.00
Fixed manufacturing overhead, traceable 5* 75,000.00
Fixed manufacturing overhead, common
but allocated 10 150,000.00
total costs P30 P450,000.00
======= ==========
*Note: P 5 is 40% supervisory and 60% depreciation of special equipment (no
resale value)
Required:
a) Assuming that the company has no alternative use for the facilities, now
being used to produce the thermostat, should the outside suppliers offer
be accepted?
b) Suppose that if the thermostats were purchased CC, Inc. could use the
freed capacity to launch a new product. The segment margin of the new
product would be P65,000.00 per year. Should CC, Inc. accept the offer to
buy the thermostats from the outside supplier for P20 each?
2) Boyles Home Center, a retailing company, has two (2) departments, Bath
and Kitchen. The companys most recent monthly contribution format statement of
income follows:
Bath Dept. Kitchen Dept. Total
Sales------------------------------------ P1,000,000 P4,000,000 P5,000,000
Variable expenses 300,000 1,600,000 1,900,000
Contribution margin 700,000 2,400,000 3,100,000
Fixed expenses 900,000 1,800,000 2,700,000
net operating income (200,000) 600,000 400,000
========= ========= =========
A study indicates that P370,000 of the fixed expenses being charged to the Bath
Department are sunk costs or allocated costs that will continue even if the Bath
Department is dropped. In addition, the elimination of the Bath Department would result
in a 10% decrease in the sales of the Kitchen Department.
Required: if the Bath department is dropped, what will be the effect on the net operating
income of the company as a whole?

3). Katiwasayan, Inc. has P2M in excess cash that it might invest in
Marketable Securities. In order to buy and sell the securities, however, the firm
must pay a transaction fee of P45,000.

Required:
a. Would you recommend purchasing the securities if they yield 12% annually
and are held for:
a. One month?
b. Two months?
c. Three months?
d. Six months?
e. One year?

b. What minimum required yield would the securities have to return for the firm to
hold them for three months?
4). XYZ Co.s product sells for P10 a unit of which P7 represents variable
costs before taxes including credit department costs. Current annual credit sales
are P2.4 M. the firm is considering a more liberal extension of credit, which will
result is a slowing in the average collection period from one month to two
months.
The relaxation in credit standards is expected to produce a 25% increase
in sales. Assume that the firms required rate of return on investment is 20%
before taxes. Bad debts losses will be 5% of incremental sales and collection
expenses will increase by P20,000.

REQUIRED: Should the company liberalize its credit policy?
HYY Co. has 12% opportunity cost of capital and currently sells on terms n/20. It
has a current annual sales of P10M, 80% of which are on credit. Current average
collection period is 60 days. It is now considering to offer the terms of 2/10, n/30
in order to reduce the collection period. It expects 60% of its customers to take
advantage of the discount and the collection period to be reduced to 40 days.
REUIRED: Should the company change its credit term from n/20 to 2/10, n/30?

5). You are given the following data and relationships for the Baguio
Corporation:
a. Orders can be placed only in multiples of 100 units
b. Annual usage is 300,000 (assume a 50-week year )
c. The carrying cost is 30% of the purchase price of the goods
d. The purchase price is P10 per unit
e. The ordering cost is P50 per order
f. The desired safety stock is 1,000 units (exclusive of delivery-time stock)
g. Delivery time is 2 weeks
REQUIRED:
Economic Order Quantity
How many orders will be placed annually?
At what inventory level should a reorder be made?

6).Brown company is a new firm just starting operations. The firm will
produce backpacks which will sell P22 per piece. Fixed costs are P500,000 per year.
Variable costs are P2.00 per piece. The company expects to sell 50,000 units
per year and its effective tax rate is 40%. Brown needs P2M to build
facilities, obtain working capital and start operations. If Brown borrows money,
the interest charges will depend on the amount borrowed as follows:
Amount borrowed percentage in debt capital structure int. rate on
borrowed
200,000 10 9
400,000 20 9.5
600,000 30 10
800,000 40 15
1M 50 19
1.2M 60 26
Assume that stock can be sold at a price of P20 per share on the initial
offering regardless of how much debt the company uses. Then after the company
begins operating, its price will rise and will be determined as a multiples of its
earnings per share. The multiple (or the P/E ratio) will depend upon the capital
structure as follows:
Debt/Assets Price/Earnings
0 12.5
10 12
20 11.5
30 10
40 8
50 6
60 5



REQUIRED:
a. What is Browns optimal capital structure, which maximizes stock price, as
measured by the debt/assets ratio?
b. What is Browns degree of operating leverage at the expected level of sales?
c. What is Browns degree of financial leverage at the expected level of sales?



End of exam

Prepared by:



DR. EVA U. CAMMAYO, CPA
Subject Professor