Name: Mia Marie T.

Uy FinaMgt – Finals William Co Bautista

1. The right side of the balance sheet of the GM Corp. shows the following:

Accounts payable P 100,000 Additional information:

Loans payable (18%, 5 yrs) 180,000 Annual dividend on preferred
stock P 50
Preferred stock, par P500 270,000 Market price per share of common stock
P 325
Common stock, par P200 300,000 Earnings per share of common stock
P 81.25
Retained earnings 150,000 Income tax rate
30%

Required: Specific cost of each capital source and the weighted average cost of
capital? (15 pts)
a. Cost of Debt (Loan)
Cost of debt = [interest (1-r)/Debt] x 100 Interest = 0.18 x 180,000
= 32,400
= [32,400 (1-0.30)/180,000] x 100
= 12.6% or 0.126

b. Cost of Preferred Stock Capital

Cost of Preferred Stock Capital = Preferred Stock Dividend per share / Current price of
preferred stock x 100
= 50 / 500 x 100
= 10% or 0.10

c. Cost of Common Shares Capital

Cost of Common Shares Capital = Earnings per share of common stock / Market price
per share of common
stock x 100
= 81.25 / 325 x 100
= 25% or 0.25

d. Cost of Retained earning

Same as cost of equity/common shares since all other constraints remain the same.
Cost of retained earning = 25% or 0.25

Account Amount Rate Nominal Effective WACC

Loan 180,000 0.20 12.6% 0.126 0.0252
Preferred Stock 270,000 0.30 10% 0.10 0.03
Capital
Common Shares 300,000 0.33 25% 0.25 0.0825
Capital
Retained earning 150,000 0.17 25% 0.25 0.0425
Total 900,000 1.00 0.1802
Weighted Average Cost of Capital (WACC) is 0.1802.

2. The following projected 2022 figures were provided to you by the Marikit Company for
analysis:
Sales (80% on credit) P 8,872,500

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 Cost of goods sold 3,629,585
Operating expenses 1,822,420
Non-cash charges included in
Cost of goods sold P 220,500
Operating expenses 88,725
The company operates on a five working days per week or 260-days per year.

Required: a. Minimum cash balance for two weeks?

(10 pts) b. Average collection period if the accounts receivable on the
average amounted to P443,625?
c. If receivable turnover is expected to increase by 15%, how
much will average receivable be?
Marikit Company
Income Statement for 2022
Sales 8,872,500.00
Cash of goods sold 3,629,585
Gross profit 5,242,915.00
Operating expenses 1,822,420.00
Net income 3,420,495.00

a. Minimum cash balance for 2 weeks

Notes
Net income 3,420,495.00
Non-cash charges
cash of goods sold 220,500.00
operating expenses 88,725.00
Minimum cash balance 3,729,720.00
Divided by: 52 weeks 260 days divided by 5 working days
Weekly cash balance 71,725.38
Multiplied by: 2 weeks
Minimum cash balance for 2 weeks 143,450.77
Minimum cash balance for 2 weeks = P 143,450.77

b. Average collection period

Average collection period (days) = Average AR / (Sales/# of days in period)
= 443,625 / (8,872,500/260 days)
= 13 days

c. Average receivable
AR turnover = # of days in period / average collection period
= 260 days / 13 days
= 20 days
20 days x 15% increase = 23

Average AR = Sales/AR turnover

= 8,872,500 / 23
= P 385,760.87

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 3. A projected proposal requiring P840,000 initial investment will result to annual cash
return of:
Year 1. P65,000 Year 2. P150,250. Year 3. P275,750. Year 4. P350,600. Year 5.
P245,600. Year 6. P120,400

Required: a. If the current cost of funds is 12% and the decision criteria are
the net present value and
(10 pts) discounted payback, should the project be implemented?
b. What is the project’s payback period?

a. Net Present Value and Discounted payback

Present value
Cumulative normal Discount (cash flow /
Year Cashflows
cashflows factor (1 + r)n discount
factor)
0 (840,000.00) (840,000.00) 1.0000 (840,000.00)
1 65,000.00 (775,000.00) 1.1200 58,035.71
2 150,250.00 (624,750.00) 1.2544 119,778.38
3 275,750.00 (349,000.00) 1.4049 196,273.40
4 350,600.00 1,600.00 1.5735 222,812.64
5 245,600.00 247,200.00 1.7623 139,360.04
6 120,400.00 367,600.00 1.9738 60,998.39

NPV P (42,741.44)

 The NPV of the project is negative and does not pay itself back using the discount
payback period method. Thus, the project should not be implemented.

b. Payback period
Based on the cumulative normal cash flows, payback period is:
= 3 years + (349,000/350,600)
= 3 years + 0.9954
= 3.9954 or 4 years

4. In anticipation of an increased in sales for the coming peak season, Manila Care Inc.
needs to increase its working capital for receivables and inventory by P740,000. The
following alternatives are available:
a. Issue a commercial paper at 13% p.a. less 2% service charge.
b. Discount a 180-day note for 14%.
c. Avail a bank loan at 12% p.a. with a 20% required compensating balance.
d. Delay credit payment to the supplier’s term of 2/10, n/45.

Required: What is the annual effective cost for each short term financing
source. (10 pts)
Which of the four alternatives should be pursued and why?

a. Commercial paper at 13% p.a. less 2% service charge

Working Capital Requirement 740,000.00

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 Computation
Gross value of commercial paper 755,102.04 740,000 / 98%

Service charge 15,102.04 755,102.04 x 2%

Annual interest 98,163.27 755,102.04 x 13%
Total financing cost 113,265.31

Annual effective cost 15.31% (113,265.31 / 740,000) x 100

b. Discount a 180-day note for 14%

Working Capital Requirement 740,000.00

Computation
Gross value of note 795,698.92 740,000 / 93%
(14% /2 = 7%)

Total financing cost 55,698.92 795,698.92 - 740,000.00

Effective cost (180-day) 7.53% 55,698.92 / 740,000

Annual effective cost 15.06% 7.53 x 2

c. Bank loan at 12% p.a. with a 20% required compensating balance

Working Capital Requirement 740,000.00

Computation
Bank loan 925,000.00 740,000 / 80%

Total financing cost 111,000.00 925,000 x 12%

Annual effective cost 15.00% 111,000 / 740,000

d. Credit payment to supplier’s term of 2/10, n/45

Annual effective cost = Discount % / (1 - Discount %) x [(360 days) / (Full allowed payment days - Discount days)]
= 2% / (1 - 0.02) x [(360) / (45-10)]

Annual effective cost = 20.99%

 A bank loan at 12% p.a. with a 20% required compensating balance would be the best
alternative for increasing the working capital of Manila Care Inc since it has the lowest
annual effective cost (15%) among all other choices. In short, the Manila Care Inc. will
incur a smaller fee annually if it will choose to do a bank loan to increase its working
capital to P740,000.

5. Identification. (10 pts)

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 Secured loan 1. Loan that is in effect when the borrower provides property collateral for
money borrowed.
Line of credit 2. Loanable amount a client can avail, in case of need, with commitment
fee for unused portion.
Warehouse loan 3. The loan obtained using inventory in a specified warehouse as property
pledged.
Commercial paper 4. Unsecured instruments and issued by big firms of
unquestionable credit rating.
Loan security deposit 5. Deposit that a borrower is required to maintain with the bank
relative to a load applied.
Working capital 6. Funds revolving within business operations to support
receivables and inventory need.
Weighted average cost of capital 7. A firm’s cost of funds as invested in the company,
considering the different
sources thereof.
Financial Management 8. The art and science of managing the financial
resources of a business entity.
Preferred stock 9. Kind of stock having preferences over the common
stock such as dividend
distribution.
Payback period of the project 10. The length of period during which productive
benefits can be expected
from the project.

6. From the following, Calculate the collection for the first quarter 2022 for Chico Company:
(15 pts)
December January February March April
Sales (75% credit) P 85,000 42,500 55,000
67,500 72,000
Cash customers are given 2% discounts. 40% of Credit customers usually settle their
accounts within 15 days to avail 1% discount while the rest pays within 31-45 days.

Chico Company
Collection for the First Quarter of 2022

December January February March April

Sales 85,000.00 42,500.00 55,000.00 67,500.00 72,000.00

Cash Sales (25%) 21,250.00 10,625.00 13,750.00 16,875.00 18,000.00

Discount (2%) -425.00 -212.50 -275.00 -337.50 -360.00
31,875.0 50,625.0 54,000.0
Credit Sales (75%) 63,750.00 0 41,250.00 0 0

40% with discount 25,500.00 12,750.00 16,500.00 20,250.00 21,600.00

with discount x 0.01 -255.00 -127.50 -165.00 -202.50 -216.00
60% without discount
December 38,250.00
January 19,125.00

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 February 24,750.00
March 30,375.00
Total Collections 46,070.00 61,285.00 48,935.00 61,335.00 69,399.00

Collection for First Quarter (Jan-Mar 2022) P 171,555.00

 Formula to compute for the collection per month
Current month collection = [Cash Sales – (0.02)(Cash Sales)] + {[(0.40)(Credit Sales)]
– (0.01) [(0.40)(Credit Sales)]} + [(0.60)(Credit Sales of previous month)]

7. Determine the effects of the following transactions on the items stated in column
heading by writing the amount under the column: (15 pts)

Current Current Working

Assets Liabilities Capital
a. Buys equipment for P35,000 by
- 35,000 -35,000
issuing a 12%, 180 days note.
b. Sell old machine for P80,000;
Terms: 30% cash and a 9%, 240 80,000 - 80,000
days note for the balance
c. Settled a long-term debt of
P150,000 with dated check -150,000 - -150,000
issued.
d. Declared cash dividends of P1.25
per share on 8,400 outstanding - 10,500 -10,500
shares, due next month
e. Acquires trading securities for
12,500 12,500 0
P12,500 on account
 Working capital = Current assets – Current liabilities
 Increase in current assets, increases working capital
 Decrease in current assets, decreases working capital
 Increase in current liabilities, decreases working capital
 Decrease in current liabilities, increases working capital
To breakdown the entries recorded above:
a. Equipment 35,000
Notes payable 35,000
b. Cash (80,000 x 30%) 24,000
Notes receivable 56,000
Machine 80,000
c. Long-term debt 150,000
Cash 150,000
d. Retained earnings 10,500
Dividends payable 10,500
e. Trading securities 12,500
Accounts payable 12,500

8. A project proposal submitted to you for evaluation follow:

Investment, including depreciable assets of P195,000 with
economic life of six years P 240,000
Annual sales revenue 250,000

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 Variable cost of sales 43%
Annual cash operating costs 95,000
Income tax rate 30%

Required: a. Annual cash return, payback period and internal rate of return.
(15 pts) b. If the corporate cost of capital is 10%, should the project be
implemented?

Project Proposal Submitted

Sales 250,000.00
Variable cost of sales (43%) -107,500.00
Gross Income 142,500.00
Operating cost -95,000.00
Depreciation expense -32,500.00
Income before tax 15,000.00
income tax expense -4,500.00
Net income 10,500.00

a. Annual cash return, payback period and internal rate of return

Annual cash return = Net income

= P10,500.00

Payback period = Total investment / Annual cash return

= 240,000 / 10,500
= 22.86 years

Internal rate of return = Net income / Total investment x 100

= (10,500 / 240,000) x 100
= 0.04375 or 4.375%

b. If the corporate cost of capital is 10%, should the project be implemented?

According to conventional wisdom, an annual ROI of approximate 7% or greater is
considered a good ROI. Hence, if the estimated ROI of this project is 10%, the project
must be implemented.

End of Exam.

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