FIN 072 | Financial Markets

Module #17 Student Activity Sheet

Name: _________________________________________________________________ Class number: ______

Section: ____________ Schedule: _______________________________________ Date: _______________

Lesson Title: Second Period Exam Materials:

Learning Targets: Calculator, reviewer notebook,
At the end of this module, I should have: textbook
1. Assessed the learnings on the topics covered
References:
Timbang, F. (2016). Financial
Management Part 2. Quezon City:
C & E Publishing, Inc.

Brigham, E. F., Houston, J. F.,

Hsu, J.-M., Kong, Y. K., & Bany-
Ariffin, A. (2018). Essentials of
Financial Management. Pasig City:
Cengage Learning Asia Pte. Ltd.

Productivity Tip:
Take a few deep breaths when you get stuck
If you come across a question that you are not sure how to answer in the exam, stop for a moment and take
a few deep breathes (in for the count of 3 and out for the count of 3). If you are not sure how to answer it
there and then, move on to another question.

Direction: Choose the best answer. Shade your final answer on the separate answer sheet provided.
Erasures on the answer sheet are strictly prohibited.

1. The Philippine Stock Exchange is primarily

a. A secondary market.
b. A physical location auction market.
c. Statements a and b are incorrect.
d. Statements a and b are correct.
2. Which of the following statements is most correct?
a. If an investor sells 100 shares of Microsoft to his brother-in-law, this is a primary market
transaction.
b. Private securities are generally less liquid than publicly traded securities.
c. Money markets are where short-term, liquid securities are traded, whereas capital markets
represent the markets for long-term debt and common stock.
d. Statements b and c are correct.
3. Money markets are markets for
a. Consumer automobile loans.
b. Corporate stocks.
c. Long-term bonds.

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d. Short-term debt securities.

4. Which of the following investments will have the highest future value at the end of 5 years? Assume
that the effective annual rate for all investments is the same.
a. Aaron pays P50 at the beginning of every 6-month period for the next 5 years (a total of 10
payments).
b. Bryan pays P500 at the end of 5 years (a total of one payment).
c. Carlo pays P100 at the end of every year for the next 5 years (a total of 5 payments).
d. Dina pays P100 at the beginning of every year for the next 5 years (a total of 5 payments).
5. Frank Lewis has a 30-year, P100,000 mortgage with a nominal interest rate of 10 percent and monthly
compounding. Which of the following statements regarding his mortgage is most correct?
a. The monthly payments will decline over time.
b. The proportion of the monthly payment that represents interest will be lower for the last payment
than for the first payment on the loan.
c. The total peso amount of principal being paid off each month gets larger as the loan approaches
maturity.
d. Statements b and c are correct.
6. The capital asset pricing model (CAPM) states that:
a. The expected risk premium on an investment is proportional to its beta.
b. The expected rate of return on an investment is proportional to its beta.
c. The expected rate of return on an investment depends on the risk-free rate and the market rate
of return.
d. The expected rate of return on an investment is dependent on the risk-free rate.
7. The component of the risk-adjusted discount rate that is derived from the risk of Treasury securities is:
a. risk premium
b. call premium
c. cost of capital
d. risk-free rate
8. The market risk premium is:
a. The difference between the rate of return on an asset and the risk-free rate.
b. The difference between the rate of return on the market portfolio and the risk-free rate.
c. The risk-free rate.
d. The market rate of return.
9. Financial risk refers to the:
a. risk of owning equity securities
b. risk faced by equity holders when debt is used
c. general business risk of the firm
d. possibility that interest rates will increase
10. The extent to which fixed costs are used in a firm’s operations is called its:
a. financial leverage.
b. financial leverage.
c. operating leverage.
d. foreign risk exposure.
11. The discount rate that makes the present value of a bond's payments equal to its price is termed the:
a. rate of return

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 FIN 072 | Financial Markets
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b. current yield
c. yield to maturity
d. coupon rate
12. What is the rate of return for an investor who pays P1,054.47 for a three-year bond with a 7% coupon
and sells the bond one year later for P1,037.19?
a. 5.00%
b. 6.46%
c. 5.33%
d. 7.00%
13. The price of a stock is:
a. the future value of all expected future dividends discounted at the dividend growth rate.
b. the present value of all expected future dividends discounted at the dividend growth rate.
c. the future value of all expected future dividends discounted at the investor’s required return.
d. the present value of all expected future dividends discounted at the investor’s required return.
14. In calculating the cost of common stock equity, the model having the stronger theoretical foundation is:
a. the constant growth model.
b. the variable growth model.
c. the Gordon model.
d. the capital asset pricing model.
15. The major benefit of diversification is to:
a. increase the expected return.
b. remove negative risk assets from the portfolio.
c. reduce the portfolio's systematic risk.
d. reduce the expected risk
16. Stocks that have high financial rewards are generally accompanied by:
a. high dividend payments
b. low dividend payments because of internally generated growth
c. high risk
d. All the above
17. What will be the price of a bond in which the YTM is higher than the coupon rate?
a. Below face value
b. At face value
c. Above face value
d. Cannot be determined
18. Which of the following statements is correct?
a. Bond prices and interest rates move in the same direction, i.e., if interest rates rise, so will bond
prices.
b. The market price of a discount bond will approach the bond's par value as the maturity date
approaches. Barring changes in the probability of default, the value of the bond cannot fail to
increase each year as the time to maturity approaches.
c. The "current yield" on a noncallable discount bond will normally exceed the bond's yield to
maturity.
d. The "current yield" on a noncallable discount bond will normally exceed the bond's coupon
interest rate.

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 FIN 072 | Financial Markets
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19. You are considering the purchase of a bond with a 13% coupon rate paid and compounded
semiannually. The bond will mature in 8 years, and has a P1,000 face value. The bond currently sells
for P867. Calculate the annual yield to maturity for this bond. (Round to nearest percentage.)
a. 8 percent
b. 13 percent
c. 9 percent
d. 16 percent
20. The dividend growth model, when used, assumes that the total return on a share of common stock is
comprised of a:
a. capital gains yield and a dividend growth rate.
b. capital gains growth rate and a dividend growth rate.
c. dividend yield and the expected price next year.
d. dividend yield and a capital gains yield.
21. You are planning to invest in common stock of Eagle, Inc. Lately, the firm paid a dividend of P7.80. You
have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want an annual
return of 24.0%, what is the most you should pay for the stock now?
a. P52.00
b. P32.50
c. P56.68
d. P35.43
22. The Wind Company’s last dividend was P3.00; its growth rate is 6 percent and the stock now sell for
P36. New stock can be sold to net the firm P32.40 per share. What is Wind Company’s cost of new
common stock?
a. 14.83 percent
b. 15.26 percent
c. 15.81 percent
d. 9.69 percent
23. OPQ Company is considering buying common shares in Oceanic Company. OPQ has projected that
the next dividend the company will pay will equal P4.00 and that dividends will grow at a rate of 7.0%
per year thereafter. The firm's beta is 1.75, the risk-free rate is 7.5%, and the market return is 11.3%.
What is the most you should pay for the stock now?
a. P30.25
b. P55.94
c. P59.86
d. P89.12
24. The overall weighted average cost of capital is used instead of costs for specific sources of funds
because
a. use of the cost for specific sources of capital would make investment decisions inconsistent.
b. a project with the highest return would always be accepted under the specific cost criteria.
c. investment funded by equity or debt is not relevant to this question
d. None of the above.
25. The most expensive source of financing for a firm is:
a. Debt
b. retained earnings

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c. preferred stock
d. new common stock
26. Which of the following are acceptable criteria for determining the weights in the weighted average cost
of capital?
a. Market value of the capital structure and historical costs of financing.
b. Market value of capital structure and the target mix of debt and equity.
c. Using the after-tax cost of debt and the market value of the capital structure.
d. Using book values of the capital structure and the prior level of debt and equity.
27. Heidi Company plans to issue some P100 preferred stock with an 11 percent dividend. The stock is
selling on the market for P97, and Heidi must pay flotation costs of 5 percent of the market price. The
company is under the 40 percent corporate tax rate. The cost of preferred stock for Heidi Company is
a. 7.16 percent
b. 6.80 percent
c. 11.34 percent
d. 11.94 percent
28. The earnings, dividends, and stock price of Sum Company are expected to grow at 7 percent per year
after this year. Sum Company’s common stock sells for P23 per share, its last dividend was P2.00 and
the company pay P2.14 at the end of the current year. Sum Company should pay P2.50 flotation cost.
Using the dividend growth model, what is the expected cost of retained earnings for Sum Company?
a. 10.44 percent
b. 9.30 percent
c. 16.30 percent
d. 17.44 percent
29. The earnings, dividends, and stock price of Equity, Inc. are expected to grow at 7 percent per year after
this year. Equity’s common stock sells for P23 per share, its last dividend was P2.00 and will pay
P2.14 at the end of the current year. Equity should pay P2.50 flotation cost. If the firm’s beta is 1.75,
the risk-free rate is 8 percent, and the average return on the market is 12 percent, what will be the
firm’s cost of equity using the CAPM approach?
a. 16.05 percent
b. 14.27 percent
c. 15.00 percent
d. 14.00 percent

For the next six items. The Solar Laboratories, Inc., a multinational company, is expanding its research and
production capacity to introduce a new line of products. Current plans call for the expenditure of P100 million
on four projects of equal size (P25 million each), but different returns. Project A is in blood clotting proteins and
has an expected return of 18 percent. Project B relates to a hepatitis vaccine and carries a potential return of
14 percent. Project C, dealing with a cardiovascular compound, is expected to earn 11.8 percent and Project
D, an investment in orthopedic implants, is expected to show a 10.9 percent return.
The firm has P15 million in retained earnings. After a capital structure with P15 million in retained
earnings is reached (in which retained earnings represent 60 percent of the financing), all additional equity
financing must come in the form of new common stock.

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Common stock is selling for P25 per share and underwriting costs are estimated at P3 if new shares
are issued. Dividends for the next year will be P.90 per share (D1), and earnings and dividends have grown
consistently at 11 percent.
The yield on comparative bonds has been hovering at 11 percent. The investment banker feels that the
first P20 million of bonds could be sold to yield 11 percent while additional debt might require a 2 percent
premium and be sold to yield 13 percent. The corporate tax rate is 30 percent. Debt represents 40 percent of
the capital structure.
30. The expected returns on common equity are:
A. B. C. D.
Retained earnings 14.6% 15.0% 15.1% 15.5%
Common shares 15.1% 15.5% 14.6% 15.0%
31. What is the initial weighted average cost of capita?
a. 13.2%
b. 11.8%
c. 12.1%
d. 9.2%
32. At what size of the capital structure would there be a change in the cost of equity component?
a. P15 million
b. P25 million
c. P20 million
d. P50 million
33. What is the marginal cost of capital of capital at retained earnings breakpoint?
a. 11.84%
b. 12.38%
c. 9.42%
d. 12.14%
34. At what size of capital structure will there be a change in the cost of debt?
a. P20 million
b. P50 million
c. P25 million
d. P75 million
35. The selection of the project is based on ranking of profitability. What is the marginal cost of capital
What is the expected marginal cost of capital of financing Project C?
a. 12.9%
b. 12.7%
c. 12.4%
d. 10.2%
36. Which of the four projects will be accepted by the company?
a. Project A only.
b. Project A, B, and C.
c. Project A and B only.
d. All of them.

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For the next five items. The following information on Yu Du Nut Corporation’s capital structure us available
from the latest financial statement:
Source Amount
6% Bank Loan P300,000
5% Preference Shares 100,000
Ordinary Shares 200,000
Retained Earnings 400,000

Additional Data:
Current market price per share
Preference Shares P62.50
Ordinary Shares P40
Dividend per share
Preference Shares P5
Ordinary Shares P2
Dividend Growth Rate 4%
Corporate Tax Rate 32%
37. What is the cost of debt?
a. 4%
b. 4.08%
c. 6%
d. 1.92%
38. What is the cost of preference shares?
a. 5%
b. 9%
c. 8%
d. 12%
39. What is the cost of ordinary shares?
a. 5%
b. 9%
c. 8%
d. 12%
40. What is the cost of retained earnings?
a. 5%
b. 9%
c. 8%
d. 12%
41. What is weighted average cost of capital?
a. 30.08%
b. 8%
c. 7.4%
d. 7.1%

42. Working capital management involves investment and financing decisions related to:

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a. plant and equipment and current liabilities.

b. current assets and capital structure.
c. current assets and current liabilities.
d. sales and credit.
43. Which of the following would increase risk?
a. Raise the level of working capital.
b. Decrease the amount of inventory by formulating an effective inventory policy.
c. Increase the amount of short-term borrowing.
d. Increase the amount of equity financing.
44. 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 average daily
purchases are P50,000. What is the length of the company’s cash conversion period?
a. 50 days
b. 30 days
c. 20 days
d. 40 days
45. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% compensating
balance? Assume 360 days per year.
a. 20.0%
b. 17.4%
c. 15.0%
d. 22.2%
46. The economic order quantity is the order quantity that results in
a. the minimum total annual inventory costs.
b. no inventory shortages.
c. the maximum total annual inventory costs.
d. minimum ordering costs.
47. Under just-in-time processing
a. raw materials are received just in time for use in production
b. subassembly parts are completed just in time for use in assembling finished goods
c. finished goods are completed just in time to be sold
d. all the above
48. Which of the following alternatives could potentially result in a net increase in a company’s cash flow for
the current year?
a. Reduce the days sales outstanding ratio.
b. Increase the number of years over which fixed assets are depreciated.
c. Decrease the accounts payable balance.
d. Statements a and b are correct.
49. Stennett Corp.’s CFO has proposed that the company issue new debt and use the proceeds to buy
back common stock. Which of the following are likely to occur if this proposal is adopted? (Assume
that the proposal would have no effect on the company’s operating income.)
a. Return on assets (ROA) will decline.
b. The times interest earned ratio (TIE) will increase.
c. Taxes paid will decline.

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d. Statements a and c are correct.

50. Which of the following statements is most correct?
a. A company that has positive net income must also have positive EVA.
b. If a company’s ROE is greater than its cost of equity, its EVA is positive.
c. If a company increases its EVA, its ROE must also increase.
d. Statements a and b are correct.
51. Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of
1.20. You are in the process of buying 1,000 shares of Alpha Corp at P10 a share and adding it to your
portfolio. Alpha has an expected return of 13.0% and a beta of 1.50. The total value of your current
portfolio is P90,000. What will the expected return and beta on the portfolio be after the purchase of the
Alpha stock?
a. 10.64%; 1.17
b. 11.20%; 1.23
c. 11.76%; 1.29
d. 12.35%; 1.36
52. . Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of
inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market risk premium is 5.0%, (4) the firm
has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years.
a. 10.29%
b. 10.83%
c. 11.40%
d. 12.00%
53. Porter Inc's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free
rate is 5.00%, what is the market risk premium?
a. 5.80%
b. 5.95%
c. 6.09%
d. 6.25%
54. Company A has a beta of 0.70, while Company B's beta is 1.20. The required return on the stock
market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required
rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
a. 2.75%
b. 2.89%
c. 3.21%
d. 3.38%
55. Kollo Enterprises has a beta of 1.10, the real risk-free rate is 2.00%, investors expect a 3.00% future
inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return?
a. 9.43%
b. 9.67%
c. 9.92%
d. 10.17%
56. Moon Software Inc. is planning to issue two types of 25-year, noncallable bonds to raise a total of P6
million, P3 million from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be
sold at their P1,000 par value to raise P3,000,000. These are called "par" bonds. Second, Original

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Issue Discount (OID) bonds, also with a 25-year maturity and a P1,000 par value, will be sold, but these
bonds will have a semiannual coupon of only 6.25%. The OID bonds must be offered at below par in
order to provide investors with the same effective yield as the par bonds. How many OID bonds must
the firm issue to raise P3,000,000? Disregard flotation costs, and round your final answer up to a whole
number of bonds.
a. 4,228
b. 4,337
c. 4,448
d. 4,562
57. Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.75% coupon paid semiannually
(4.375% each 6 months), and those bonds sell at their P1,000 par value. The firm's Class Ann bonds
have the same risk, maturity, nominal interest rate, and par value, but these bonds pay interest
annually. Neither bond is callable. At what price should the annual payment bond sell?
a. P 937.56
b. P 961.60
c. P 986.25
d. P1,010.91
58. Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon,
semiannual payments, and a P1,000 par value. The bond has a 6.50% nominal yield to maturity, but it
can be called in 6 years at a price of P1,120. What is the bond's nominal yield to call?
a. 6.20%
b. 6.53%
c. 6.85%
d. 7.20%
59. Taussig Corp.'s bonds currently sell for P1,150. They have a 6.35% annual coupon rate and a 20-year
maturity, but they can be called in 5 years at P1,067.50. Assume that no costs other than the call
premium would be incurred to call and refund the bonds, and also assume that the yield curve is
horizontal, with rates expected to remain at current levels on into the future. Under these conditions,
what rate of return should an investor expect to earn if he or she purchases these bonds?
a. 3.42%
b. 3.60%
c. 3.79%
d. 4.20%
60. Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of
P1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price
of the bonds, given that they now have 19 years to maturity?
a. P1,113.48
b. P1,171.32
c. P1,201.35
d. P1,232.15
61. Huang Company's last dividend was P1.25. The dividend growth rate is expected to be constant at
15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's
required return (rs) is 11%, what is its current stock price?
a. P30.57

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b. P31.52
c. P32.49
d. P33.50
62. Ackert Company's last dividend was P1.55. The dividend growth rate is expected to be constant at
1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's
required return (rs) is 12.0%. What is the best estimate of the current stock price?
a. P37.05
b. P38.16
c. P39.30
d. P40.48
63. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new
product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years,
after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g =
0. The company's last dividend, D0, was P1.25, its beta is 1.20, the market risk premium is 5.50%, and
the risk-free rate is 3.00%. What is the current price of the common stock?
a. P26.77
b. P27.89
c. P29.05
d. P30.21
64. Based on the corporate valuation model, Wang Inc.'s total corporate value is P750 million. Its balance
sheet shows P100 million notes payable, P200 million of long-term debt, P40 million of common stock
(par plus paid-in-capital), and P160 million of retained earnings. What is the best estimate for the firm's
value of equity, in millions?
a. P386
b. P406
c. P428
d. P450
65. Misra Inc. forecasts a free cash flow of P35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at
a constant rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the
cost of equity is 15.0%, what is the horizon, or continuing, value in millions at t = 3?
a. P821
b. P862
c. P905
d. P950
66. Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the
following information. (1) The firm's noncallable bonds mature in 20 years, have an 8.00% annual
coupon, a par value of P1,000, and a market price of P1,050.00. (2) The company's tax rate is 40%. (3)
The risk-free rate is 4.50%, the market risk premium is 5.50%, and the stock's beta is 1.20. (4) The
target capital structure consists of 35% debt and the balance is common equity. The firm uses the
CAPM to estimate the cost of equity, and it does not expect to issue any new common stock. What is
its WACC?
a. 7.16%
b. 7.54%
c. 7.93%

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d. 8.79%
67. Bolster Foods' (BF) balance sheet shows a total of P25 million long-term debt with a coupon rate of
8.50%. The yield to maturity on this debt is 8.00%, and the debt has a total current market value of P27
million. The balance sheet also shows that the company has 10 million shares of stock, and the stock
has a book value per share of P5.00. The current stock price is P20.00 per share, and stockholders'
required rate of return, rs, is 12.25%. The company recently decided that its target capital structure
should have 35% debt, with the balance being common equity. The tax rate is 40%. Calculate WACCs
based on book, market, and target capital structures, and then find the sum of these three WACCs.
a. 28.36%
b. 29.54%
c. 30.77%
d. 32.00%
68. Eakins Inc.'s common stock currently sells for P45.00 per share, the company expects to earn P2.75
per share during the current year, its expected payout ratio is 70%, and its expected constant growth
rate is 6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would
be incurred. By how much would the cost of new stock exceed the cost of retained earnings?
a. 0.09%
b. 0.19%
c. 0.37%
d. 0.56%
69. The CFO of Lenox Industries hired you as a consultant to help estimate its cost of capital. You have
obtained the following data: (1) rd = yield on the firm's bonds = 7.00% and the risk premium over its
own debt cost = 4.00%. (2) rRF = 5.00%, RPM = 6.00%, and b = 1.25. (3) D1 = P1.20, P0 = P35.00,
and g = 8.00% (constant). You were asked to estimate the cost of equity based on the three most
commonly used methods and then to indicate the difference between the highest and lowest of these
estimates. What is that difference?
a. 1.13%
b. 1.50%
c. 1.88%
d. 2.34%
70. S. Bouchard and Company hired you as a consultant to help estimate its cost of capital. You have
obtained the following data: D0 = P0.85; P0 = P22.00; and g = 6.00% (constant). The CEO thinks,
however, that the stock price is temporarily depressed, and that it will soon rise to P40.00. Based on
the DCF approach, by how much would the cost of equity from retained earnings change if the stock
price changes as the CEO expects?
a. −1.49%
b. −1.66%
c. −1.84%
d. −2.03%

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