ReSA -The Review School of Accountancy Management Services 

May 2023 Batch

1. The internal rate of return method assumes that the project funds are reinvested at the
D a. Hurdle rate c. Cost of equity capital
b. Cost of debt capital d. Rate of return earned on the project
2. Based on DuPont Formula, which one of the following will not increase a profitable firm’s return on equity?
D a. Increasing total asset turnover c. Lowering corporate income taxes
b. Increasing net profit margin d. Lowering equity multiplier
NOTE: DuPont Formula: Return on Equity = Return on Sales x Asset Turnover x Equity Multiplier
3. The standard deviation of a stock investment is best described as the
D a. Variability of expected returns c. Trade-off between risk and return
b. Sensitivity to market movements d. Variation around the mean return
NOTE: Usual mistake is choice A. The precise description is in choice D where “mean return” refers to the
weighted average of returns with a given probability distribution.
4. A major benefit of portfolio diversification is:
B a. Reduction of systematic risk c. A more favorable borrowing position
b. Minimization of unsystematic risk d. Reduced exposure to foreign exchange rates
5. In order to enhance the wealth of shareholders and to send positive signals to the market, corporations
generally raise funds using the following order:
A a. Retained earnings, debt, equity c. Debt, retained earnings, equity
b. Equity, retained earnings, debt d. Retained earnings, equity, debt
NOTE: Due to flotation costs, internal financing thru retained earnings is generally cheaper than external
financing. For external financing, debt capital is often preferred over equity capital because of its tax shield
features (i.e., interest payments are deductible for tax purposes). This is also consistent with the Pecking
Order Theory regarding optimal capital structure.
6. The most important considerations with respect to short-term investments are
B a. Return and value c. Return and risk
b. Risk and liquidity d. Growth and value
7. A project’s net present value, ignoring income tax considerations, is normally affected by the
A a. Proceeds from sale of the asset to be replaced
b. Carrying amount of the asset to be replaced by the project
c. Amount of annual depreciation on the asset to be replaced
d. Amount of annual depreciation on fixed assets used directly on the project
8. Discounted cash flow techniques for capital budgeting decisions are not normally applied to projects
C a. That are essential to the business
b. Involving replacement of existing assets
c. Having useful lives shorter than one year
d. Requiring no investment after the first year of life
NOTE: Time value of money is usually ignored for cash realizable within one year or less (i.e., short-term
cash flows) as the amount of discount or opportunity cost is usually deemed immaterial.
9. A measure of “risk per unit of expected return”
D a. Beta c. Correlation coefficient
b. Standard deviation d. Coefficient of variation
10. Which of these transactions does not change both the current ratio and the total current assets?
A a. A cash advance is made to a divisional office
b. A cash dividend is declared
c. Short-term notes payable are retired with cash
d. Equipment in purchased with a three-year not and a 10 percent cash down payment

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ReSA - The Review School of Accountancy MS Quiz 4
Coverage: MS – 11 to 13 (ReSA Batch 45 – May 2023 Batch)

11. An underlying premise in applying Capital Asset Pricing Model (CAPM) to estimate cost of equity is:
C a. Investor attitude toward risk will not change
b. Dividends are expected to grow at a constant compound rate
c. The return rate equals the risk-free rate of return plus a premium for risk
d. Individual capital components must be weighted based on their contributions to the firm’s
capital structure.
12. A company has made the decision to finance next year’s capital projects through debt rather than additional
equity. The benchmark cost of capital for these projects should be
D a. Before-tax cost of debt financing c. Cost of equity financing
b. After-tax cost of debt financing d. Weighted average cost of capital
NOTE: Usual mistake is B. WACC shall still be used as benchmark cost of capital since the terms of any
financing raised at the time of initiating a project do not represent the cost of capital for the firm.
13. Times interest earned is equal to:
D a. Net income divided by earnings per share
b. Interest expense divided by total long-term debt
c. Net income after income taxes divided by interest expense
d. Net income before interest expense and income taxes divided by interest expense
14. All of the following are advantages of debt financing, EXCEPT
B a. Interest is tax deductible
b. The acquisition of debt decreases stockholders’ risk
c. The use of debt will assist in lowering the firm’s cost of capital
d. In periods of inflation, debt is paid back with pesos that are worth less than the ones borrowed
15. In evaluating the ability to pay a 60-day loan, a creditor would probably be most interested in
C a. Debt ratio c. Quick ratio
b. Price-earnings ratio d. Number of times interest earned
16. The payback method assumes that all cash inflows are reinvested to yield a return equal to
D a. The discount rate c. The internal rate of return
b. The hurdle rate d. Zero
17. When establishing optimal capital structure, firms should strive to
D a. Maximize the marginal cost of capital
b. Maximize the amount of equity financing
c. Minimize the amount of debt financing used
d. Minimize the weighted average cost of capital
18. The current market price of Black Company stock is P 80 per share and its price-earnings ratio is 8 to 1. A
P 4 annual dividend was just paid to current shareholders. If dividends and earnings are expected to grow at
a constant rate of 12%, what is Black Company’s cost of retained earnings?
B a. 50% c. 17.0%
b. 17.6% d. 12.5%
Solution: 4 (1.12)* ÷ 80] + 12% *Past dividend must be adjusted to expected dividend.
19. During 2023, Pink Co. purchased P 1,920,000 of inventory. The 2023 cost of goods sold was P 1,800,000
and the ending inventory at December 31, 2023 was P 360,000. What was the 2023 inventory turnover?
C a. 5.0 c. 6.0
b. 5.3 d. 6.4
Solution: Beginning inventory: 1.8 M + 360,000 – 1.92 M = 240,000
Inventory turnover: 1.8 M ÷ [(240,000 + 360,000) ÷ 2]
20. Assuming P 20,000 net annual cash inflows from a 3-year P 36,000-capital investment project, then what is
the closest estimate of the break-even cash flow rate of return (IRR) for the project?
D a. 30.9% c. 30.7%
b. 30.8% d. 30.6%
Solution: Target PV factor: 36,000 ÷ 20,000 = 1.800
Based on trial & error, compute Present Value annuity factor for 3 years based on the rates
indicated in the choices; among the choices, 30.6% is closest to exact IRR.

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ReSA - The Review School of Accountancy MS Quiz 4
Coverage: MS – 11 to 13 (ReSA Batch 45 – May 2023 Batch)

21. Carnation Corporation projects the following for the year 2023:
Earnings before interest and taxes P 35 million
Interest expense P 5 million
Preferred stock dividends P 4 million
Common stock dividend payout ratio 30%
Common shares outstanding P 2 million
Effective corporate income tax rate 40%
What is the expected common stock dividend per share for Carnation Corporation for 2023?
A a. P 2.10 c. P 2.70
b. P 2.34 d. P 3.90
Solution: Net income after tax: (35 M – 5 M) x (100% - 40%) = 18 M
EPS = (18 M – 4 M) ÷ 2 M = P 7.00 Common dividend per share: 7 x 30%
22. Flamingo Co. is replacing a grinder purchased 5 years ago for P 15,000 with a new one costing P 25,000.
The old grinder is being depreciated on a straight-line basis over 15 years to a zero-salvage value; Flamingo
will sell this old equipment to a third party for P 6,000. The new equipment will be depreciated on a straight-
line basis over 10 years with a zero-salvage value. Assuming a 40% tax rate, what is Flamingo’s net cash
investment at the time of purchase if the old grinder is sold and the new one purchased?
C a. P 25,000 c. P 17,400
b. P 19,000 d. P 15,000
Solution: Costs → present cash OUT: P 25,000
Savings → present cash IN: 6,000 + 40% (10,000* – 6,000) = P 7,600
* Book value of old machine: 15,000 (10 ÷ 15) = P 10,000 (depreciated for 5 years)
23. Return on sales: 4.5%; assets turnover: 2 times; debt ratio: 40%; determine the return on equity.
C a. 7.5% c. 15.0%
b. 11.25% d. 22.5%
Solution: Equity multiplier: 1 ÷ equity ratio = 1 ÷ (100% - 40%) = 1.6666…
Return on equity: 4.5% (2) 1.6666666 or 4.5% (2) ÷ (100% - 40%) = 15%
24. Punch Inc. has determined that it can minimize its WACC by using a debt-equity ratio of 2/3. The firm’s cost
of debt is 9% before taxes while the cost of equity is estimated to be 12% before taxes. If the tax rate is 40%,
then what is the firm’s WACC?
C a. 6.48% c. 9.36%
b. 7.92% d. 10.80%
Solution: WACC: 40% [9% (100-40%)] + 60% (12%)
Debt-equity of 2/3 means that debt ratio is 40% or 2/5 and equity ratio is 60% or 3/5.
25. Magenta Company has a payback goal of 3 years for a new sorter being evaluated that costs P 450,000 and
has a 5-year life. Straight-line depreciation will be used; no salvage value is anticipated. Tax rate is 40%.
To meet the payback goal, how much must the sorter generate as pre-tax cash savings?
D a. P 60,000 c. P 150,000
b. P 100,000 d. P 190,000
Solution:
Using indirect method to compute cash flows: net income + depreciation = net cash flows
Net income = net cash flow – depreciation = (450,000 ÷ 3) – (450,000 ÷ 5) = 60,000
Pre-tax cash savings: income before tax + depreciation = (60,000 ÷ 0.6) + 90,000
Cash savings before tax P 190,000
- Depreciation (90,000)
Earnings before tax P 100,000
- Tax (40%) (40,000)
Earnings after tax P 60,000
+ Depreciation 90,000
Cash inflows after tax P 150,000

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