Reviewer Financial Management

Comprehensive Examination Reviewer
MBA
Vincent Ray Boron
Financial Management
Time Value of Money
Determining Future Value

You are contributing money to an investment account so that you can
purchase a house in five years. You plan to contribute six payments of
P3,000 a year--the first payment will be made today (t = 0), and the final
payment will be made five years from now (t = 5). If you earn 11 percent in
your investment account, how much money will you have in the account five
years from now (at t = 5)?
Determining the Present Value

You have been offered an investment that pays P500 at the end of every 6
months for the next 3 years. The nominal interest rate is 12 percent;
however, interest is compounded quarterly. What is the present value of the
investment?
Financial Statement and Financial Statement Analysis
Financial Statement Analysis - involves careful selection of data from

financial statements in order to assess and evaluate the firm's past
performance, its present condition, and future business potentials.
Objective: The primary purpose of FS analysis is to evaluate and forecast the

company's financial health.. Interested parties, such as the managers,
investors, and creditors, can identify. the company's financial strengths and
weaknesses and know about the (1) profitability of the business (2) firm's
ability to meet its obligations (3) safety of the investment in the business;
and (4) effectiveness of management in running the firm.
Techniques:
1. Horizontal Analysis (trend ratios and percentages)
2. Vertical Analysis (common-size statements)
3. Ratio Analysis
4. Analysis of variation in gross profit and net income 5.
Ratio Analysis - Ratios are calculated from the financial statements to
provide users with relevant information about the firm's liquidity, use of
leverage, asset management, cost control, profitability, growth, and
valuation.
The company presented the following data for analysis:

2020 2021
Cash 72,000.00 65,000.00
Accounts Receivable 439,000.00 328,000.00
Inventories 894,000.00 813,000.00
Accounts Payable 80,000.00 72,708.00
Notes Payable 476,990.00 457,912.00
Retained Earnings 254,710.00 261,602.00
Cost of Goods Sold 3,680,000.00 2,980,000.00
Land and Building 238,000.00 271,000.00
Machinery 132,000.00 133,000.00
Other Fixed Assets 61,000.00 57,000.00
Sales 4,240,000.00 3,635,000.00
Accrued Liabilities 45,010.00 40,880.00
General Administrative and Selling Expenses 303,320.00 297,550.00
Long-Term Debt 404,290.00 258,898.00
Common Stock 575,000.00 575,000.00
Depreciation 159,000.00 154,500.00
Interest 67,000.00 43,000.00
Taxes 12,272.00 63,980.00
Industry Financial Ratios
Current Ratio 2.7x

Inventory Turnover 7.0x
Days Sales Outstanding 32 days
Fixed Assets Turnover 13x
Total Assets Turnover 2.6x
Return on Assets 9.10%
Return on Equity 18.20%
Return on Invested Capital 14.5
Profit Margin 3.5
Debt to Capital Ratio 50%
P/E Ratio 6x
Requirements: Construct the financial statements and perform ratio analysis

for 2021 and 2020. Discuss your observation on the following aspect:
1. Profitability
2. Liquidity
3. Solvency
4. Efficiency
Capital Budgeting
It is the process of identifying, evaluating, planning, and financing capital
investment projects of an organization.
When evaluating projects, identify the following:
1. Net-Investment = Cost/Cash outlay less savings/cash inflows
incidental to acquiring the projects.
2. Cost of Capital – Required rate of return / WACC of financing used /
discount rate
3. Net-Returns – Either accounting net-income or net-cash inflows.
Example:
Ysabelle Corporation is planning to buy production machinery costing
P380,000. The machine's estimated useful life is five (5) years, with a
residual value of P5,000 at the end of its useful life.
Ysabelle Corporation requires a rate of return of 12% and has calculated the
following annual cash inflows, net of income tax, pertaining to the operations
of the new machine:
Year Annual Net-Cash Inflow

1 P240,000
2 120,000
3 80,000
4 80,000
5 80,000
Requirement: Recommend whether the corporation should buy the

production machinery using net-present value, payback period (discounted),
and profitability index.
Cost of Capital and Weighted Average Cost of Capital
 The cost of using funds; it is also called hurdle rate, required rate of
return, cut-off rate.
 The weighted average rate of return the company must pay to its long-
term creditors and shareholders for the use of their funds.
Source Capital Cost of Capital

Creditors Long-Term Debt Rd = interest rate (1-tax rate)
Shareholders:
Preferred Preferred Stock Dividends per share /Current Market
Price or Issue Price
Common Common Stock CAPM:
(new) Risk Free Rate + Beta Coefficient
(Market Return – Risk Free Rate)
Dividend Growth Model:

{Expected Dividends / [Current Price
*(1-Flotation Cost)]} + Growth Rate
Retained Earnings CAPM:

Risk Free Rate + Beta Coefficient
(Market Return – Risk Free Rate)
Dividend Growth Model:

(Expected Dividends / Current Price)
+ Growth Rate
Example:
Avie Corporation is considering a project for the coming year that will require
an investment cost of P10M. The company plans to finance the project by a
combination of debt and equity, as follows:
*Issue P2M of 10-year bonds at a price of 102, with ar interest rate of 10%,
and flotation cost of 3% of par.
*Issue 10,000 5%, preferred stock. The issuance price is P100 per share.
*Use P7M of funds generated from earnings retained in the business.
The expected market rate of return is 14%. The current rate of Treasury Bills
is 8%. The beta coefficient for Aye Corporation is 1.2. The corporate income
tax rate is 30%.
Required: Determine the WACC or the weighted average cost of capital.
Working Capital Management

Management of Accounts Receivable - formulation and administration of
plans and policies related to sales on account and ensuring the maintenance
of receivables at a predetermined level and their collectability as planned.
Objective: To have both the optimal amount of receivables outstanding

and the optimal amount of bad debts.
Trade-off:
1. More credit sales (benefits)
2. Cost of accounts receivable (in terms of collection, interest and bad
debts).
To assess policies and plans, consider these factors:

1. Credit Standards – Criteria that determines which customer will be
granted credit and by how much.
2. Credit terms – such as credit period, discounts for prompt payment
offered and the discount period.
Example:
May Corporation's average annual sales is P6,400,000, 10% of which is cash

sales. The variable cost ratio is 60%. Starting next year, May Corporation will
relax its credit standards. The relaxation in credit standards is expected to
cause the following changes:
 Total credit sales will increase by 20%
 The collection period will increase to 60 days from 45 days.
The variable cost ratio, even for the incremental sales, will be the same as in
the past. The cost of borrowing is estimated at 25% per year. The company
uses 360 days in a year in all its computations.
Required: Recommend whether or not May should relax its credit policy with
supporting calculations.
Management of Inventory - formulation and administration of plans and

policies to efficiently and satisfactorily meet production and merchandising
requirements and minimize costs relative to inventories.
Objective: to maintain inventory at a level that best balances the

estimates of actual savings, the cost of carrying additional inventory,
and the efficiency of inventory control.
Example:
UrbanStyles Apparel estimates that 120,000 buttons will be needed in the
manufacture of their popular clothing line for the upcoming year. Their
supplier has quoted a price of P0.40 per button. UrbanStyles initially planned
to purchase 10,000 units per month, but the supplier cannot guarantee this
delivery schedule. To ensure a steady supply of buttons, UrbanStyles is
contemplating buying all 120,000 units on January 1. UrbanStyles can invest
their cash at an annual rate of 10%.
Required: Recommend the best course of action for UrbanStyles.

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Comprehensive Examination Reviewer

Time Value of Money

Determining Future Value

Determining the Present Value

Financial Statement and Financial Statement Analysis

Financial Statement Analysis - involves careful selection of data from

Objective: The primary purpose of FS analysis is to evaluate and forecast the

The company presented the following data for analysis:

Industry Financial Ratios

Current Ratio 2.7x

Requirements: Construct the financial statements and perform ratio analysis

Year Annual Net-Cash Inflow

Requirement: Recommend whether the corporation should buy the

Cost of Capital and Weighted Average Cost of Capital

Source Capital Cost of Capital

Dividend Growth Model:

Retained Earnings CAPM:

Dividend Growth Model:

Required: Determine the WACC or the weighted average cost of capital.

Working Capital Management

Objective: To have both the optimal amount of receivables outstanding

To assess policies and plans, consider these factors:

May Corporation's average annual sales is P6,400,000, 10% of which is cash

Management of Inventory - formulation and administration of plans and

Objective: to maintain inventory at a level that best balances the

Required: Recommend the best course of action for UrbanStyles.

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