Financial Management

(B. Working Capital Management)

B. WORKING CAPITAL MANAGEMENT tend to have a(n)

A. Increase in the ratio of current liabilities to noncurrent liabilities.
B. Increase in the operating cycle.
THEORIES: C. Decrease in the operating cycle.
Working capital management D. Increase in the ratio of current assets to current liabilities.
1. Working capital management involves investment and financing decisions related to:
A. plant and equipment and current liabilities. Moderate
B. current assets and capital structure. 3. Short-term financing plans with high liquidity have:
C. current assets and current liabilities. A. high return and high risk
D. sales and credit. B. moderate return and moderate risk
C. low profit and low risk
17. The goal of managing working capital, such as inventory, should be to minimize the: D. none of the above
A. costs of carrying inventory
B. opportunity cost of capital Temporary & Permanent working capital
C. aggregate of carrying and shortage costs 4. Temporary working capital supports
D. amount of spoilage or pilferage A. the cash needs of the company. C. acquisition of capital equipment.
B. payment of long term debt. D. seasonal peaks.
Working capital financing policy
Aggressive Cash Management
5. Zap Company follows an aggressive financing policy in its working capital management while Motives for holding cash
Zing Corporation follows a conservative financing policy. Which one of the following 7. The transaction motive for holding cash is for:
statements is correct? A. a safety cushion C. compensating balance requirements
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short- B. daily operating requirements D. none of the above
term debt to total debt.
B. Zap has a low current ratio while Zing has a high current ratio. Float
C. Zap has less liquidity risk while Zing has more liquidity risk. 8. The difference between the cash balance on the firm's books and the balance shown on the
D. Zap finances short-term assets with long-term debt while Zing finances short-term bank statement is called:
assets with short-term debt. A, the compensating balance C. a safety cushion
B. float D. none of the above
6. Which of the following would increase risk?
A. Raise the level of working capital. Cash conversion cycle
B. Decrease the amount of inventory by formulating an effective inventory policy. 9. The length of time between payment for inventory and the collection of cash is referred to as:
C. Increase the amount of short-term borrowing. A. payables deferral period C. operating cycle
D. Increase the amount of equity financing. B. receivables conversion period D. cash conversion cycle

Conservative 10. As a firm's cash conversion cycle increases, the firm:

2. As a company becomes more conservative with respect to working capital policy, it would A. becomes less profitable

124
 Financial Management
(B. Working Capital Management)

B. increases its investment in working capital A. decreases by the amount of the safety stock.
C. reduces its accounts payable period B. is one-half the level of the safety stock.
D. incurs more shortage costs C. Increases by one-half the amount of the safety stock.
D. Increases by the number of units of the safety stock.
11. The longer the firm's accounts payable period, the:
A. longer the firm's cash conversion cycle is. 19. Which of the following statements is correct for a firm that currently has total costs of carrying
B. shorter the firm's inventory period is. and ordering inventory that are 50% higher than total carrying costs?
C. more the delay in the accounts receivable period. A. Current order size is greater than optimal
D. less the firm must invest in working capital. B. Current order size is less than optimal
C. Per unit carrying costs are too high
12. The average length of time a peso is tied up in current asset is called the: D. The optimal order size is currently being used
A. net working capital. C. receivables conversion period.
B. inventory conversion period. D. cash conversion period. Trade credit
20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
Receivables management A. Three days after the invoice is received.
13. All of these factors are used in credit policy administration except: B. The 8th day is the customer’s decision date.
A. credit standards C. peso amount of receivables C. Anytime during the period, 8th to the 30th.
B. terms of trade D. collection policy D. The 30th day is the primary decision date.

14. Which of the following statements is most correct? If a company lowers its DSO, but no PROBLEMS
changes occur in sales or operating costs, then: Working capital financing
i
A. the company might well end up with a higher debt ratio. . Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials
B. the company might well end up with a lower debt ratio. and variable conversion cost. It takes the firm 18 days to convert raw materials into
C. the company would probably end up with a higher ROE. calculator. Casie’s usual credit terms extended to its customers is 30 days, and the firm
D. the company's total asset turnover ratio would probably decline. generally pays its suppliers in 20 days.
If the foregoing cycles are constant, what amount of working capital must Casie Company
15. All but which of the following is considered in determining credit policy? finance?
A. Credit standards C. Accounts payable deferral period A. P1,400,000 C. P 900,000
B. Credit limits D. Collection efforts B. P2,400,000 D. P1,800,000

Inventory management Cash conversion cycle

ii
16. The use of safety stock by a firm will: . Luke Company has an inventory conversion period of 60 days, a receivables conversion
A. reduce inventory costs C. have no effect on inventory costs period of 45 days, and a payments cycle of 30 days. What is the length of the firm’s cash
B. increase inventory costs D. none of the above conversion cycle?
A. 90 days C. 54 days
18. When a specified level of safety stock is carried for an item in inventory, the average B. 75 days D. 105 days
inventory level for that item

125
 Financial Management
(B. Working Capital Management)

iii
. The Spades Company has an inventory conversion period of 75 days, a receivables are to be paid uniformly. Hyperbole has the opportunity to invest the money at 9% per
conversion period of 38 days, and a payable payment period of 30 days. What is the length of annum. The company spends, on the average, P25 for every cash conversion to marketable
the firm’s cash conversion cycle? securities and vice versa.
A. 83 days C. 67 days What is the opportunity cost of keeping cash in the bank account?
B. 113 days D. 45 days A. P3,825.00 C. P4,190.00
B. P1,912.50 D. P 188.55
iv
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its Annual savings
ix
average daily purchases are P50,000. What is the length of the company’s cash conversion . What are the expected annual savings from a lock-box system that collects 150 checks per
period? day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 days
A. 50 days C. 30 days respectively, if the annual interest rate is 7%?
B. 20 days D. 40 days A. P 5,250 C. P 21,000
B. P 13,125 D. P300,000
Days inventory
v
. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5 Receivables management
million in average inventory, and a cash conversion cycle of 75 days? Carrying cost
x
A. 6.56 days C. 52.60 days . The Camp Company has an inventory conversion period of 60 days, a receivable
B. 18.75 days D. 67.50 days conversion period of 30 days, and a payable payment period of 45 days. The Camp’s
variable cost ratio is 60 percent and annual fixed costs of P600,000. The current cost of
vi
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its capital for Camp is 12%.
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying
average daily purchases are P50,000. What is the length of the company’s inventory cost on accounts receivable, using 360 days year?
conversion period? A. P281,250 C. P 20,250
A. 50 days C. 120 days B. P168,750 D. P 56,250
B. 90 days D. 40 days
Average receivables
xi
Cash management . Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty
Economic conversion quantity (ECQ) percent of the customers pay on the tenth day and take discounts; the other 60 percent pay,
vii
. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid on average, 45 days after their purchases.
uniformly. Simile has the opportunity to invest the money at 24% per annum. The company What is the average amount of receivables?
spends, on the average, P40 for every cash conversion to marketable securities. A. P70,000 C. P77,200
What is the optimal cash conversion size? B. P77,500 D. P67,500
A. P60,000 C. P45,000
xii
B. P55,000 D. P72,500 . Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are
expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of
Opportunity cost credit standards will increase credit sales by 20% and increase the average collection period
viii
. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to

126
 Financial Management
(B. Working Capital Management)

standards will result in an expected increase in the average accounts receivable balance of
xvi
A. P 540,000 C. P2,700,000 . The incremental after tax profit from the change in credit terms is
B. P 900,000 D. P1,620,000 A. P68,493 C. P60,615
B. P65,640 D. P57,615
Investment in receivables
xiii
. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection Inventory management
period is 45 days, and bad debts are 3 percent of sales. The credit and collection manager EOQ
xvii
is considering instituting a stricter collection policy, whereby bad debts would be reduced to . What is the economic order quantity for the following inventory policy: A firm sells 32,000 bags
1.5 percent of total sales, and the average collection period would fall to 30 days. However, of premium sugar per year. The cost per order is P200 and the firm experiences a carrying
sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of cost of P0.80 per bag.
sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent A. 2,000 bags C. 8,000 bags
and 360 days per year. B. 4,000 bags D. 16,000 bags
What would be the decrease in investment in receivables if the change were made?
A. P 9,688 C. P 96,875 Annual demand
xviii
B. P 12,988 D. P129,975 . Marsman Co. has determined the following for a given year:
Economic order quantity (standard order size) 5,000 units
Comprehensive Total cost to place purchase orders for the year P40,000
Question Nos. 14 through 16 are based on the following data: Cost to place one purchase order P 100
Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in Cost to carry one unit for one year P 4
order to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2 What is Marsman’s estimated annual usage in units?
percent discount. Under the new term, discount customers are expected to rise to 50 percent. A. 1,000,000 C. 500,000
Regardless of the credit terms, half of the customers who do not take the discount are expected B. 2,000,000 D. 1,500,000
to pay on time, whereas the remainder will pay 10 days late. The change does not involve a
relaxation of credit standards; therefore bad debt losses are not expected to rise above their Required annual return on investment
xix
present 2 percent level. However, the more generous cash discount terms are expected to . BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which sells
increase sales from P2 million to P2.6 million per year. Sonata Company’s variable cost ratio is blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at P300.00
75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s per tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freight,
income tax rate is 40 percent. and Pirate Mart does not inspect the tapes due to BIBO Company's reputation for high
quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart
xiv
. What are the days sales outstanding (DSO) before and after the change of credit policy? earns 20% on its cash investments. The purchase-order lead time is two weeks.
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively The following cost data are available:
B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively Relevant ordering costs per purchase order P80 P90.50
Carrying costs per package per year 3
Relevant insurance, materials handling, breakage, etc., per year 2 P 4.50
xv
. The incremental carrying cost on receivable is What is the required annual return on investment per package?
A. P 843.75 C. P 643.75 A. P6,000 C. P1,200
B. P8,889.00 D. P6,667.00 B. P 250 D. P 600

127
 Financial Management
(B. Working Capital Management)

B. 300 units D. 400 units

Order quantity
xx
. For Raw Material L12, a company maintains a safety stock of 5,000 pounds. Its average Annual inventory costs
xxiii
inventory (taking into account the safety stock) is 12,000 pounds. What is the apparent order . Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The
quantity? fabric costs P25 per yard. The current policy is to order the fabric four times a year.
A. 18,000 lbs. C. 14,000 lbs. Incremental ordering costs are about P200 per order, and incremental carrying costs are
B. 6,000 lbs. D. 24,000 lbs about P0.75 per yard, much of which represents the opportunity cost of the funds tied up in
inventory.
Optimal safety stock level How much total annual costs are associated with the current inventory policy?
xxi
. Each stockout of a product sold by Arnis Co. costs P1,750 per occurrence. The A. P19,550 C. P38,300
company’s carrying cost per unit of inventory is P5 per year, and the company orders B. P18,750 D. P62,500
1,500 units of product 20 times a year at a cost of P100 per order. The probabilities
of a stockout at various levels of safety stock are: Maximum interest rate
xxiv
Units of Safety Stock Probability of Stockout . Narra Company is considering a switch to level production. Cost efficiencies will occur
0. 0.50 under level production and after tax cost would decline by P70,000 but inventory would
100. 0.30 increase from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory at
200. 0.14 a cost of 10.5 percent.
300. 0.05 What is the maximum interest rate that makes level production feasible?
400. 0.01 A. 7.00 percent C. 8.75 percent
The optimal safety stock level for the company based on the units of safety stock level B. 5.83 percent D. 10.00 percent
above is
A. 200 units C. 100 units Opportunity cost
xxv
B. 300 units D. 400 units . Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high
selling products for the coming year. Its supplier quoted a price of P25 per zipper. Diesel
xxii
. Paeng Company uses the EOQ model for inventory control. The company has planned to purchase 7,500 units per month but its supplier could not guarantee this delivery
schedule. In order to ensure availability of these zippers, Diesel is considering the purchase
an annual demand of 50,000 units for part number 6702 and has computed an
of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, the
optimal lot size of 6,250 units. Per-unit carrying costs and stockout costs are company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is
P9 and P4, respectively. The following data have been gathered in an attempt A. P127,500 C. P123,750
to determine an appropriate safety stock level: B. P135,000 D. P264,000
Units Short Because of Excess Number of Times Short
Demand during the Lead Time Period in the last 40 Reorder Cycles Trade credit
100 8 xxvi
. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the
200 10 discount is:
300 14 A. 2.0%. C. 36.7%
400 8 B. 30.0%. D. 10.0%.
What is the optimal safety stock level?
A. 100 units C. 200 units

128
 Financial Management
(B. Working Capital Management)

xxvii
. The cost of discounts missed on credit terms of 2/10, n/60 is wait until the 30th day when it will receive revenues to cover the payment. If it borrows funds
A. 2.0 percent C. 12.4 percent on the last day of the discount period in order to obtain the discount, its total cost will be
B. 14.9 percent D. 21.2 percent A. P 51,000 less C. P 75,500 less
B. P100,000 less D. P 24,500 more
Bank loans
xxxiii
Discount loan . Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The
xxviii
. You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10 credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day
percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if the after each delivery. Thus, the company is considering a 1-year bank loan for P9,800 (98% of
loan is a discount loan? the invoice amount). If the effective annual interest rate on this loan is 12%, what will be the
A. 10.00% C. 12.45% net peso savings over the year by borrowing and then taking the discount on the materials?
B. 11.11% D. 14.56% A. P3,624 C. P4,800
B. P1,176 D. P1,224
Discount loan with compensating balance
xxix xxxiv
. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% . An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent
compensating balance? Assume 360 days per year. can be arranged at any time. When should the customer pay the invoice?
A. 20.0% C. 17.4% A. Pay on the 1st. C. Pay on the 40th
B. 15.0% D. 22.2% B. Pay on the 10th D. Pay on the 60th

Compensating balance with interest

xxx xxxv
. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual . The Peninsula Commercial Bank and Island Corporation agreed to the following loan proposal:
interest rate 12%. As a condition of the loan, Premiere is required to maintain a  Stated interest rate of 10% on a one-year discounted loan; and
compensating balance of P300,000 in its checking account. The checking account earns  15% of the loan as compensating balance on zero-interest current account to be
interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its maintained by Island Corporation with Peninsula Commercial Bank.
checking account for transactional purposes. Premiere’s effective interest costs of the loan The loan requires a net proceeds of P1.5 million. What is the principal amount of loan applied
is for as part of the loan agreement?
A. 12.00% C. 16.30% A. P1,666,667 C. P1,764,706
B. 14.25% D. 15.86% B. P2,000,000 D. P1,125,000

Add-on
xxxi
. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12%
stated rate in an add-on arrangement, payable in 12 equal monthly installments.
A. 22.15% C. 25.05%
B. 24.00% D. 12.70%

Financing alternative
xxxii
. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net
30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can

129
i
. Answer: A
Daily working capital required: 200 x 250 50,000
Total working capital needed: 28 days x 50,000 1,400,000
CCC = 18 + 30 – 20 28 days
ii
. Answer: B
Cash Conversion Cycle = Ave. collection period + Inventory cycle days – Ave. Accounts Payable payment days
Inventory cycle in days 60 days
Average collection period 45 days
Operating cycle 105 days
Deduct Accounts payable payment days 30 days
Cash conversion cycle 75 days
iii
. Answer: A
Inventory cycle in days 75 days
Average collection period 38 days
Operating cycle 113 days
Deduct Accounts payable payment days 30 days
Cash conversion cycle 83 days
iv
. Answer: D
Inventory conversion period (See #4) 50.0 days
Average collection period (2M/0.1M) 20.0 days
Operating cycle 70.0 days
Less: Ave. Accounts Payable payment days (1.5M/0.5M) 30.0 days
Cash conversion period 40.0 days
v
. Answer: D
Inventory turnover:
Cost of goods sold/Ave. Inventory (8M/1.5M) 5.33x
Inventory conversion period (360 days/5.33) 67.5 days
vi
. Answer: A
Annual sales 360 days x 100,000 36.0M
Inventory turnover 36M/5M 7.2x
Inventory conversion period 360/7.2 50.0 days
vii
. Answer: B
Optimal cash conversion size = (9,075,000 x 40 / 0.24)^1/2 = 55,000
viii
. Answer: B
OTS: (2 x P3,251,250 x P25 ÷ 0.09)^1/2 = P42,500
Opportunity cost: P42,500 ÷ 2 x 0.09 P 1,912.50
ix
. Answer: C
Reduction in cash float (2.5 + 1.5) 4.0 days
Additional free cash (4 days x 150 x P500) P300,000
Annual savings (P300,000 x 0.07) P 21,000
x
. Answer: C
Average AR 3,375,000/360 x 30 days 281,250
Average investment: 281,250 x 0.60 168,750
Carrying cost: 168,750 x 0.12 20,250
xi
. Answer: B
DSO = (.4 x 10) + (.60 x 45) 31 days
Average AR: 900,000/360x31 days P77,500
xii
. Answer: D
Credit sale = 40,500,000 x 80% = 32,400,000
Increased credit sales: 32,400,000 x 1.2 = 38,880,000
New Average AR 38,880,000/360 x 40 = 4,320,000
Old Average AR 32,400,000/360 x 30 = 2,700,000
Increase in Average AR 1,620,000
xiii
. Answer: C
Change in average accounts receivables:
Planned: 2,200,000/360x30 183,333
Present: 2,500,000/360x45 312,500
 Decrease in AR balance 129,667
Variable cost ratio 75%
Decrease in investment in AR 96,875
xiv
. Answer: A
Days’ sales outstanding
Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days
xv
. Answer: A
Average receivable
New policy: 2.6M/360 x 22.5 162,500
Old policy: 2.0M/360 x 27 150,000
Incremental Accounts Receivable 12,500
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09 843.75
xvi
. Answer: A
Incremental sales 600,000
Variable cost (.75 x 600,000) ( 450,000)
Additional bad debts (600,000 x 2%) ( 12,000)
Additional carrying cost ( 844)
Additional discounts (2,600,000 x .5 x 03) –(2,000,000 x .4 x .02) ( 23,000)
Before tax increase in income 114,156
Less tax 45,663
Incremental income 68,493
xvii
. Answer: B
EOQ = (2 x 32,000 x 20  0.8)^1/2 = 4,000 bags
xviii
. Answer: B
Number of orders made 40,000/100 400
Annual requirement 400 x 5,000 2,000,000
xix
. Answer: C
Investment in 1 package (20 x P300) P6,000
Required annual return: P6,000 x 0.2 P1,200
xx
. Answer: C
Average inventory units 12,000
Less safety units 5,000
Average inventory based on EOQ 7,000
Order size 7,000 x 2 14,000
xxi
. Answer: D
Safety stockStock out Costs (1)Carrying Costs @
P5Total10010,500500P11,0002004,9001,0005,9003001,7501,5003,2504003502,0002,350
Stockout Costs
100 1750 x .30 x 20 orders = 10,500
200 1750 x .05 x 20 = 4,900
300 1750 x .05 x 20 = 1750
400 1750 x .01 x 20 = 350
Optimal safety stock is 400-unit level with a cost of only P2,350 cost.
xxii
. Answer: B
The optimal safety stock level represents the level that gives the lowest sum of stock out costs and additional
carrying costs. Based on the computation below, the lowest combined costs is P3,340, corresponding to 300-unit
level
First compute the stockout costs based on given probability of demand. Starting with 100-unit level as safety stock, if
the additional demand is 200, the company has stockout of 100 units.
100: (100 x 32* x 0.25) + (200 x 32 x 0.35) + (300 x 32 x 0.20) + (100 x 9) 4,960
200: (100 x 32 x 0.35) + (200 x 32 x 0.20) + (200 x 9) 4,200
300: (100 x 31 x 0.20) + (300 x 9) 3,340
400: (400 x 9) 3,600
stockout per unit x 8 orders per year.
xxiii
. Answer: A
Ordering costs 4 x P200 800
Carrying costs (50,000 ÷ 2 x 0.75 18,750
Total 19,550
xxiv
. Answer: C
Savings in Expenses/additional Investment in Inventory = Maximum Interest Rate
70,000 / (1,800,000 – 1,000,000) = 8.75%
xxv
. Answer: C
Number of units to be purchased in advance: 90,000 – 7,500 82,500
Average investments in working capital: 82,500 x 0.5* x P25 1,031,250
Opportunity cost 1,031,250 x 0.12 123,750
*The average investment is one-half (82,500 + 0) ÷ 2
xxvi
. Answer: C
k = (2  98) x (360  20 = 36.7%
The solution assumes that the company foregoes the discount only once during the year.
xxvii
. Answer: B
With credit terms of 2/10, n/60 one must pay on the 10th day choosing to finance the net payment (invoice price minus
the cash discount) at the rate of 2 percent for 50 days, paying the loan on the 60th day. The annualized rate of foregoing
the discount is 14.9 percent.
k = 2/98 x 365/50 = 14.9%
xxviii
. Answer: B
k = 10 ÷ (100 – 10) = 11.11%
xxix
. Answer: C
Principal 200,000
Less: Discount 200,000 x 0.15 x 90/360 ( 7,500)
Compensating balance ( 20,000)
Net proceeds 172,500
Effective rate: (7,500/172,500) x 360/90 17.4%
xxx
. Answer: B
Interest expense 1M x 0.12 120,000
Less interest income on additional CA balance (200,000 x 0.03) 6,000
Net interest cost 114,000
Effective interest rate 114,000/(1,000,000 – 200,000) 14.25%
xxxi
. Answer: A
Interest for 1 year 1M x 12% 120,000
Average Principal: [1M + (1M/12)] ÷ 2 541,667
Estimated effective rate 120,000/541,667 22.15%
Alternative solution for approximate effective rate:
(2 x No. of payments x Interest) ÷ [(1 + No. of payments) x Principal]
(2 x 12 x P120,000) ÷ (13 x P1M) = 22.15%
xxxii
. Answer: C
Discount 5M x 0.02 100,000
Interest (5M x 0.98 x 0.12) x 15/360 = 24,500
Savings = 75,500
xxxiii
. Answer: A
Purchase discount 10,000 x 0.02 x 200 purchases 4,800
Interest on borrowed money 9,800 x 0.12 1,176
Savings 3,624
Number of purchases: 360 days/15-day interval 200
xxxiv
. Answer: B
The cost of discounts missed is 12.3% which is more than the 8 percent that the bank charges. The company should
borrow on the 10th, pay the invoice, and finance at 8% for the next 30 days (pay off the bank on the 40th).
Cost of foregoing discount: (1  99) x (360  30) = 12.31%
xxxv
. Answer; B
Net proceeds in pesos P1,500,000
Divided by net proceeds percentage 1.00 – 0.1 – 0.15 0.75
Principal amount P2,000,000