Inter-Collegiate Finance Competition

The most likely cause for a shift in the supply curve for coffee is a change in the:

• Price of coffee

• Wages of coffee harvesters

• Price of tea

• Price of cream

Answer explanation

The supply curve shifts in response to a change in the cost of inputs, such as the wages for coffee harvesters. A change in the price of the product is movement along the supply curve, not a shift in the curve. A change in the price of a substitute would more likely influence the demand curve, not the supply curve.

When modeling consumer decision making, indifference curves:

• represent the set of affordable consumption bundles.

• reflect an increasing marginal rate of substitution.

• represent consumption bundles that have equal total utility to the consumer.

• represent consumption bundles that have greater total utility to the

  customer.

Answer explanation

Indifference curves reflect consumption bundles that have the same total utility to the consumer, whether or not they are affordable. Indifference curves reflect a diminishing marginal rate of substitution.

Reyes Motors signs a contract to sell a P100,000 luxury Sedan to be delivered

next month, and receives a P20,000 cash down payment from the buyer. How will

the transaction most likely affect Reyes Motors' assets and liabilities respectively?

• Unchanged, Unchanged

• Increase, Increase

• Increase, Unchanged

• Decrease, Decrease

Answer explanation

The down payment will increase cash (an asset) and unearned revenue (a liability). Revenues (and thus retained earnings and owner's equity) will not increase because the car has not been delivered.

The probability of a boom economy is 40 percent. The probability of Yacht Co.

having a 50 percent return given a boom economy is 80 percent. Find the joint

probability of a boom economy and a 50 percent return for Yacht Co.

• 0.20

• 0.40

• 0.32

• 050

Answer explanation

The joint probability of a boom economy and an 80 percent return for Yacht Co. is 0.40 * 0.80 = 0.32.

Which of the following is/are true?

I. A project's sunk costs are irrelevant to the decision of accepting or rejecting

I. A project's incremental cash flows are not affected by interest expenses.

Ill. Project rankings using incremental net income and incremental net cash

flows can be different.

• Ill only

• I, II & Ill

• I & II

• I only

Answer explanation

Incremental cash flows of a project are the cash flows that occur if and only if the project is undertaken. Since the effects of debt financing are taken into account through the discount rate used to discount the project cash flows, interest payments are ignored while estimating the project's cash flows. Therefore, project's incremental cash flows are not affected by interest expenses.

When a mature firm raises the dividend, signaling theory implies that its stock price ________.

When a growth firm cuts the dividend, signaling theory implies that its stock price ________.

• will rise; may rise or fall

• will fall; will rise

• will fall: may rise or fall

• will rise; will fall

Answer explanation

The signaling theory is properly applicable only to mature firms that have had stable dividend policies because in its pure form, the theory regards dividend changes as signals of management's forecasts of future earnings. Such an assumption is not fully justifiable for young, growth firms, which may cut dividends simply to supply retained earnings capital for expansion projects, without any signaling about the firm's future earnings prospects. Indeed, many growth firms pay no dividend at all for quite some time without an adverse effect on their stock prices.

Hence, the increase in the dividend of a mature firm is taken as a signal by investors -under the signaling hypothesis - that the management's forecasts of future earnings are quite favorable, leading to a rise in the stock price. On the other hand, for a growth firm, such a signaling conclusion does not necessarily hold.

The divisor for the Dow Jones Industrial Average (DJIA) is most likely to

decrease when a stock in the DJIA:

• is removed and replaced.

• pays a cash dividend.

• has a reverse split.

• has a stock split.

In the calculation of the arithmetic mean for grouped data, which value is used

to represent all the values in a particular class?

• The lower limit of the class

• The cumulative frequency of the preceding class

• The midpoint of the class

• The frequency of the class

Answer explanation

The value that you would use is the midpoint of a particular class. This will be the average of the upper and lower limits of the class.

Arellano Corp.'s financial accounts for the year ended December 31 included the following information:

Net Income: P122,000

Preferred Stock Dividends Paid: P35,000

Common Stock Dividends Paid: P42,000

Common Shares outstanding at January 1: 50,000

10% preferred P100 par value shares outstanding at January 1: 3,500

No stock transactions occurred during the year and all preferred stock dividends were paid. Basic earnings per share is closest to:

• P0.90

• P1.50

• P2.44

• P1.74

Answer explanation

Arellano Coro.'s basic EPS ((net income - preferred dividends) / weighted average number of common shares outstanding) was ((P122,000 - P35,000) / P50,000) = P1.74

Which of the following statements is FALSE?

• Sunk costs are developmental costs that should be considered in the capital budgeting decision.

• Shipping and installation costs are part of the depreciable basis of a project.

• Externalities refer to the cannibalization of sales that occurs when a new project is initiated.

• Opportunity costs are cash flows that a firm passes up by taking a project.

Answer explanation

Sunk costs are not considered.