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Olson uses straight-line depreciation for tax purposes and will depreciate the building over 10
years and the equipment over 5 years. Olson’s effective tax rate is 40%
Revenues from the special contract are estimated at P 1.2 million annually, and cash expenses
are estimated at P300,000 annually. At the end of the fifth year, the assumed sales values of the
land and building are P800,000 and P500,000, respectively (not considered in depreciation
calculations, rule when silent). It is further assumed the equipment will be removed at a cost of
P50,000 and sold for P300,000.
As Olson utilizes the net present value (NPV) method to analyze investments, the cash flow for
the period 3 would be:
a. 940,000
b. 860,000
c. 880,000
d. 680,000
3. A project has a NPV of P30,000 when the cut off rate is 10%. The annual cash flows are P41,010
on an investment of P100,000. The profitability index for this projects is
a. 1.367
b. 3.333
c. 2.438
d. 1.300
4. Althea invested P300,000 in a project that pays her an even amount per year for 10 years. The
payback period is 6 years. What is Althea’s yearly cash inflows from the project?
a. 25,000
b. 50,000
c. 75,000
d. 100,000
5. Your portfolio consists of 150,000 invested in a stock that has a beta of 0.40, P25,000 invested in
a stock that has a beta of 1.50, and P75,000 invested in a stock that has a beta 1.60. the risk free
rate is 6%. Last year, this portfolio had a required return of 12%. This year, nothing has changed
except for the fact that the market risk premium has increased by 2% (2 percentage points).
What is the portfolio’s current required rate of return?
a. 7.66
b. 12.28
c. 14.30
d. 17.42
6. Determine which beta coefficient for stock A is consistent with equilibrium given that the rate of
return is 14%, the risk-free rate is 6.25% and the market risk is 12.50%
a. 0.81
b. 0.87
c. 1.12
d. 1.24
7. Chelsea Hotels has a beta of 1.60, while Rebelyn Farms has a beta of 0.86. The required return
on an index fund that holds the entire stock market is 15%. The risk-free rate of interest is 9%.
By how much does Chelsea’s required return exceed Rebelyn’s required return?
a. 4.55
b. 7.59
c. 9.10
d. 9.86
8. Identify which of the following decisions would likely involve capital budgeting:
a. Purchase of new ship by a freight company
b. Planning and execution of major marketing program
c. Allocation of overhead costs to product lines using departmental rather than plant-wide
rates
d. Trade for a star shooting guard by a basketball team
9. Rising Moon Corporation wishes to replace its vendo machine (book balue: P50,000), which
recently broke down. This replacement is intended to avoid future breakdowns as well as
increase revenues owing to its larger shelf size. The purchase price of the vendo machine is
P250,000. Delivery costs and insurance during the transit amount to a total of P5,000. The old
vendo machine could be sold to a scrap shop for P35,000. Should the new machine be
purchased, repairs amounting to P20,000 to fix the old machine after the recent breakdown
could be avoided. However, because of the larger shelf size of the new machine, an additional
working capital of P25,000 will be needed.
I. Answer the following assuming no taxes
a. What is the net investment?
b. What amount is subject to depreciation?
II. Assume that Rising Moon is subject to a 30% income tax rate. Answer the following:
a. What is the net investment?
b. What amount is subject to depreciation?
10. A new investment in an equipment made by Jupert Corp. cost P850,000. Additional information
relating to the use of this equipment is presented below. Discount rate is 10%
Year Increase in net income Increase in net cash inflows
1 240,000 540,000
2 200,000 500,000
3 120,000 420,000
4 100,000 400,000
5 20,000 320,000
11. Joy technology is considering an expansion project. The following income statement items are
expected to materialize if (1) there is no expansion, and (2) there is an expansion:
No expansion Expansion
Sales 9,000 12,000
Cash expenses 6,000 6,900
Depreciation 1,500 2,100
Scenario I. No taxes
a. What is the incremental net income due to the expansion?
b. What is the incremental after-tax cash flows due to the expansion?
Scenario II. Assume Joy is subject to a 30% tax rate.
a. What is the incremental net income due to the expansion?
b. What is the incremental after-tax cash flows due to the expansion?
12. FerFer Company plans to purchase a cutting machine costing P70,000 that will increase its
efficiency in the production of its goods. Annual increases in cash flows due to the use of the
machine and the estimated salvage value at any point pf each year is given below:
Year Cash inflow Salvage value
1 30,000 25,000
2 20,000 14,000
3 15,000 5,000
4 15,000 1,000
I. Recommend whether Queen’s management should proceed with the capital structure change.
During 2016, the entity reported revenues of P500,000, net income of P100,000, and dividends of
P6,000. Sales are projected to grow by 20% next year. Both profit margin and the dividend pay-out
ratio will remain the same. Operations are at full capacity. Assume external funds will be raised
through issuance of long-term debt.
I. Calculate how much long-term debt will the company have to issue next year.
II. If the operations are not a full capacity, what will be your answer in the previous item?
18. Oneng corporation’s present capital structure consists of 30% debt, 10% preferred equity, and
60% common equity. This capital structure is considered optimal and Oneng corporation wishes
to maintain it. For the coming year, Oneng corporation is planning to invest in an P80M project
that will be financed according to the desired capital structure. Currently, Oneng Corporation
has P20M cash available for the project.
a. The percentage of P80M that will come from long-term debt is
a. 30%
b. 22.5%
c. 24%
d. 18%
b. The percentage of P80M that will come from a new issuance of common stock is
a. 60%
b. 40.8%
c. 30.6%
d. 45%
c. If the company will maintain the optimal capital structure to finance the project, and
preferred stocks are issued, the proceeds should be
a. 6M
b. 8M
c. 10M
d. 7.5M