TRUE OR FALSE?

SET A.

1. To find the post-tax cost of redeemable debentures, it is necessary to find the discount rate (IRR) which will give the future post-tax cash flows a present value. 2. A limitation of P/E ratios is that the ratio depends on the expected future growth of the firm so that it is difficult to compare two companies even if they are similar in some respects. 3. Higher inventory & higher receivables mean more cash tied up in the short term which may lead to illiquidity. 4. A counterparty company can borrow now at 1.5% above base rate. It will receives 0.5% net cash flow as a result of a 3-9 forward rate agreement offered at 5% in the event that the base rate in 3 months time is 5.0% . Current LIBOR rate is 4.751. ABC Co. has a contribution margin of 40% and fixed costs of P300,000. If the company generates revenues of P900.000, it has a margin of safety of P60,000. 2. ABC Co. in a competitive market should produce and sell goods until marginal cost of the product is equal to its marginal revenue. 3. To stimulate the economy, the government could decide to sell Treasury securities. 4. In the short run costs are fixed and variable, but in the long run all costs are variable.1. If a product has a price elasticity coefficient of 1.5. the demand for the product is elastic. 2. ABC Co. is considering the purchase of equipment for P65.000. This investment will generate annual cash inflows of P10.000 per year for 10 years. The present value of an ordinary annuity of P1 over ten years at a 9% rate of return is 6.42. The present value of an ordinary annuity of P1 over ten years at a 10% rate of return is 6.14. This investment is expected to generate an internal rate of return of less than 9%. 3. An oligopolistic market is characterized by low barriers to entry. 4. If the price of a product increases, demand for goods that are substitutes for the product will decrease.1. Starts under the BCG Growth matrix means products that generate high income but requires low cash requirement. A star becomes a cash cow of a market leader when the market's overall growth rate declines. 2. A 50% increase in units sold will increase the cash flow available to owners by more than 50% given a degree of total leverage of 1. 3. An Investment that provides the same expected return as another, but with a higher standard deviation should be rejected as it is riskier. 4. ABC Company must maintain a minimum cash balance of P8,000, the std deviation in daily cash flow is P2.000). Trading cost is is P50 & the daily interest rate is 0.025 %, the maximum amount of cash needed is P33.300.1. According to the MM theory of capital structure . leverage should be kept company cash flow is fluctuating and if the tax benefit is more than cost of bankruptcy. 2. When investing in projects with different business risk a marginal cost of capital using the WACC should be used. 3. Discounted cash flow techniques can be used to value irredeemable debt. redeemable debt, convertible debt and preference shares. 4. Under the Weak form of market efficiency Share prices reflect all historical information including past share price movements hence profits cannot be made using technical analysis