Acelec 331 Summative1 Set A

ACELEC 331 SUMMATIVE 1 SET A
MCQ THEORIES AND PROBLEMS
1. According to the efficient market theory,

a. Prices of actively traded stocks can be under or over-valued in an efficient market and bear
searching out.
b. Prices of actively traded stocks can only be under-valued in an efficient market.
c. Prices of actively traded stocks do not differ from their true values in an efficient market.
d. Prices of actively traded can only be over-valued in an efficient market.
2. Economically rational buyers and sellers use their assessment of an asset’s risk and return to determine its
value. Relative to this concept, which of the following is TRUE?
a. To a buyer the asset’s value represents the minimum price that he or she would pay to acquire it.
b. To a seller the asset’s value represents the maximum sale price.
c. To a buyer the asset’s value represents the maximum price that he or she would pay to
acquire it.
d. The interaction of buyers and sellers can result in a value that differs from the stock’s true value
3. In the Gordon growth model, the value of the common stock is the-
a. Net value of all assets which are liquidated for their exact accounting value.
b. Actual amount each common stockholder would expect to receive if the firm’s assets are sold,
creditors and preferred stockholders are repaid, and any remaining money is divided among the
common stockholders.
c. Present value of a non-growing dividend stream.
d. Present value of a constant, growing dividend stream.
4. Which of the following statements concerning bonds are CORRECT?
I. Bonds provide tax benefits to issuers. TRUE
II. The risk of a firm financially falling increases when the firm issues bonds. TRUE
III. Most long-term bonds issues are referred to as unfunded debt. FALSE
IV. All bonds are treated equally in a bankruptcy proceeding. FALSE
a. II and III only
b. I and II only
c. III and IV only
d. II and IV only
5. A 6 percent annual coupon bond is currently selling at a premium and matures in years. The bond was
originally issued 3 years ago at par. Which one of the following statements is accurate in respect to this
bond today?
a. The face value of the bond today is greater than it was when the bond was issued.
b. The bond is worth less today than when it was issued.
c. The yield-to-maturity is less than the coupon rate.
d. The coupon rate is greater than the current yield.
6. Which of the following are characteristics of a premium bond?
I. coupon rate < yield-to-maturity DISCOUNT
II. coupon rate > yield-to-maturity PREMIUM
III. coupon rate < current yield DISCOUNT
IV. coupon rate > current yield PREMIUM
a. II and III only
b. I and II only
c. IIII and IV only
d. II and IV only
7. Which one of the following is computed by dividing next year’s annual dividend by the current stock price?
a. Yield-to-maturity
b. Total yield
c. Dividend yield
d. Capital gains yield
8. Which of the following does NOT always increase a company’s market value?
a. Increasing the expected growth rate of sales.
b. Increasing the expected operating profitability (NOPAT/Sales).
c. Decreasing the capital requirements of capital.
d. Decreasing the weighted average cost of capital.
9. All else constant, a bond will sell at ________ when the coupon rate is _________ the yield to maturity.
a. A premium; less than
b. A premium; equal to
c. A discount; less than
d. A discount; higher than
10. Regarding the tax treatment of payments to securities holders, it is true that __________ while __________.
a. Interest and preferred stock dividends are not tax-deductible; common stock dividends are tax
deductible.
b. Interest and preferred stock dividends are tax deductible; common stock dividends are not tax-
deductible.
c. Common stock dividends and preferred stock dividends are tax deductible, interest is not tax-
deductible.
d. Common stock dividends and preferred stock dividends are tax not deductible, interest is
tax-deductible.
11. ABC properties offers a 9.5 percent coupon bonds with annual payments. The yield to maturity is 11.2
percent and the maturity date is 11 years from today. What is the market price of the bond if the face
value is 1, 000?
a. P895.43
b. 896.67
c. 941.20
d. 946.18
P= (0.095 x 1,000) 1-(1/ (1+ 0.112) ^11

+ 1, 000
= 895.43
0.112 (1+0.112) ^11
12. ABC bonds have a face value of P1, 000 and are currently quoted at 98.4. the bonds have a 5 percent
coupon rate. What is the current yield on these bonds?
a. 4.67 percent
b. 4.78 percent
c. 5.08 percent
d. 5.33 percent
Current Yield = 0.05 x 1, 000 = 5.08 percent

0.0984 x 1, 000
13. The ABC Company paid P2.25 common stock dividend last year. The company’s policy is to allow its
dividend to grow at 5 percent per year indefinitely. What is the value of the stock if the required rate pf
return id 8 percent?
a. P68. 67
b. P75.00
c. P78.67
d. P85.00
P = D1/(k-g) = 2.25(1+0.05)/ (0.08-0.05) = P78.67

14. The ABC Company has been very successful in the past four years. Over these years, it paid common stock
dividend pf P4 in the first year, P4.20 in the second year, P4.41 in the third year and its most recent dividend
was P4.63. the company wishes to continue this dividend growth indefinitely. What is the value of the
company’s stock if the required rate of return is 12 percent?
a. P38.58
b. P66.14
c. P69.45
d. P69.46
FVIFg, 3= 4.63/4.00 = 1.158 g = 5% ((4.20/4) -1)

P = D5/(k-g) = 4.63(1+0.05)/ (0.12-0.05) = 69.46
15. You purchased an investment which will pay you P8,000 in real dollars, a year for the next three years.
Each payment will be received at the end of the period with the first payment occurring one year from
today. The nominal discount rate in 7.5percent and the inflation rate is 2.9 percent. What is the present
value of these payments?
a. P21, 720
b. P22, 004
c. P22, 511
d. P23, 406
8, 000 8,000 8, 000 = 22, 004

PV = 1 + 0.04477^1
+ 1+ 0.0447^2
+ 1 + 0.0446^3
*r= (1+ 0.075 / 1+ 0.029) -1 = 0.0447
SET A: C C D B C D C A C D A C C C/D B
SET B: C C C D D B A C C D B A C/D C C
LONG PROBLEMS
1. ABC Company forecast the free cash flows shown below. If the weighted average cost of capital is 13%
and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to
Year 3, What is the Year 0 value of operations in millions?
Year 1 P -20 million
Year 2 P 42 million
Year 3 P 45 million
Round off your final answer in millions. E.g P 120 million
ANSWER: 617 MILLION
2. Based on the corporate valuation model, the value of a company’s operations is P900 million. Its balance
sheet shows P70 million in accounts receivable, P 50 million in inventory, P30 million in short-term
investments that are unrelated to operations, P20 million in accounts payable, P110 million in notes
payable, P90 million in long-term debt, P20 million in preferred stock, P140 million in retained earnings,
and P280 million in total common equity. If the company has 25 million shares of stock outstanding, what
is the best estimate of the stock’s price per share?
ANSWER: P28.40
3. A treasury bond is quoted at a price of 106: 23 with a 3.50 percent coupon. The bond pays interest
semiannually. What is the current yield on one of these bonds?
The current yield of a bonds is calculated by dividing the annual coupon payment by the bond’s current
market value.
ANSWER: 3.28%
4. ABC issued a 10-year P10,000,000 face value bonds two years ago. The bonds have a current market value
of P11,000,000 and pay interest of 5%. What is the current effective cost of the bonds using the
interpolation method? Use increments of 2%. Use all decimal places of the PV factor in your calculator.
Round off final answer to peso.
ANSWER: 3.57543611192 or 3.58
Principal (P10,000,000 x 0.78940923428) 7, 894, 092. 3428
Interest (P500,000 x 7.01969219066) 3, 509, 846. 09533
INTRINSIC VALUE 11, 403, 938. 4381
LR 3% 11, 403, 938. 4381 403, 938. 4381

EIR 2% 11, 000, 000
HR 5% 10, 000, 000 1, 403, 938. 4381
3% + (2% x (403 938.4381/1, 403, 938. 4381)
5% - (2% x (1, 000, 000/1, 403, 938. 4381)
*8 years
**multiply to 2

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ACELEC 331 SUMMATIVE 1 SET A

MCQ THEORIES AND PROBLEMS

1. According to the efficient market theory,

P= (0.095 x 1,000) 1-(1/ (1+ 0.112) ^11

Current Yield = 0.05 x 1, 000 = 5.08 percent

P = D1/(k-g) = 2.25(1+0.05)/ (0.08-0.05) = P78.67

FVIFg, 3= 4.63/4.00 = 1.158 g = 5% ((4.20/4) -1)

8, 000 8,000 8, 000 = 22, 004

LR 3% 11, 403, 938. 4381 403, 938. 4381

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