Exercise 1 – True or False

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Write T if the answer is True and F if the answer is False on the space provided for each
number.
_________ 1 Equity financing is commonly used for longer-term investment projects such as investments
in property, plant, and equipment.
Answer: True

_________ 2. In the valuation of common stock, the price/earnings multiple approaches are considered
superior
to the use of book or liquidation values since it considers expected earnings.
Answer: True

_________ 3. The Philippine Stock Index comprises 25 companies representing the different industries
in the country.
Answer: False

_________ 4. In common stock valuation, any action taken by the financial manager that increases risk
contributes toward an increase in value.
Answer: False

_________ 5. In the Gordon model, the value of the common stock is the present value of a constant,
growing dividend stream.
Answer: True

_________ 6 All public offerings are regulated by the Securities and Exchange Commission (SEC).

Answer: True

_________ 7. An underwriting agreement is a contract in which the investment banker agrees to

underwrite
or do its best to sell securities to investors at the highest price it can; the investment banker assumes no
risk for the possibility that it may fail to issue all authorized shares.

Answer: False

_________ 8. A syndicate is a group of several investment banking firms that participate in the
underwriting
and distributing a security issue.
Answer: True

_________ 9. At the beginning of the supernormal growth, the capital gains yield is lower than the
dividend yield.
Answer: False
_________ 10. The market value of a common stock is primarily based on the firm's future earnings.
Answer: True

_________ 11. The Philippine Stock Exchange, Inc. (PSEi) is an example of a primary market.
Answer: False
_________ 12. The Philippine stock market starts the continuous trading at 9:30 AM.
Answer: True

_________ 13. The returns investors receive from holding common stocks may be in two forms - cash
dividend payments and capital gains.
Answer: True
_________ 14. If competition in an industry increases, the future growth potential should increase.
Answer: False

_________ 15. Rights offering provides existing stockholders the opportunity to purchase shares
of new issues to maintain their proportional ownership in the corporation.
Answer: True

_________ 16. Projected free cash flows should be discounted at the firm's weighted average cost of
capital to find the value of its operations.
Answer: True

_________ 17. A stockbroker is compensated for his services in executing orders on the Exchange
through commission charges, which are paid by the buyer to their respective brokers.
Answer: False

_________ 18. If the stock is sold at a price lower than its purchase price, the investor will receive a
capital gain.
Answer: False

_________ 19. The constant growth model takes into consideration the capital gains earned on a stock.
Answer: True

_________ 20. Dividends received by domestic and resident foreign corporations are not subject to tax.
Answer: True

_________ 21. It is not appropriate to use the constant growth model to estimate stock value if the growth
rate never becomes constant.
Answer: True

_________ 22. Sales of equities listed and traded on the Exchange are subject to a stock transaction tax of
1% (100 basis points) of the value of the transaction charged to the seller, instead of the capital gains tax.
Answer: False

_________ 23. A stock exchange is an organized market intended for trading shares, where the investors
may buy shares in a wide range of companies
Answer: False
_________ 24. A limit order is an order to buy shares stock at a specified price or better.

Answer: True

_________ 25. A firm that plans to go for an IPO will have to choose an insurance company that will
underwrite the issuance of the stocks. Answer: False
Exercise 2– Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. Common stocks typically have which of the following that bonds do not have?

I. Pre-emptive right
II. Dividends
III. Maturity date

a. I and II only
b. I and III only
c. II and III only
d. All of them

2. Which of the following statements is/are true about preemptive rights?

I. It allows managers to preempt a stock offering if they do not like the terms of the
deal.
II. It allows existing shareholders the right to sell their existing shares before the new
offer.
III. It allows existing shareholders to buy shares of the new offering if they desire.

a. I and II only
b. I and III only
c. II and III only
d. None of these choices are correct

3. Which of the following is correct about preferred shareholders?

a. Typically have the same voting rights as common shareholders.
b. Do not share the ownership of the firm with common shareholders.
c. The same right as common stockholder upon corporate liquidation.
d. It may not receive a dividend every year.

4. What will happen to the price of the stock if many investors quickly sell an IPO stock in the
secondary market?
 a. downward pressure
b. upward pressure
c. no additional pressure
d. None of these are correct.

5. An investor would likely attempt to sell shares from a secondary offering at

a. far below the prevailing market price.
b. far above the prevailing market price.
c. at the prevailing market price.
d. at the offer price of the IPO.

6. One of the limitations of the dividend discount model is more pronounced when valuing
stocks
a. that have constant earnings growth
b. that pay most of their earnings as dividends.
c. that retain most of their earnings.
d. that have a long history of dividends.

7. Which of the following is commonly used as a proxy for the risk-free rate in the capital asset
pricing model?
a. Coupon rate
b. Treasury bond rate
c. Labor rate
d. Answer not given

8. Which of the following is/are the common disadvantage/s of an IPO?

I. Dilution of ownership by the original stockholders.

II. It helps the company’s sales and profits to increase.
III. Price movement of the stocks may become a distraction.

a. I and II only
b. I and III only
c. II and III only
d. All of them

9. Which of the following indices is not included in the PSE?

a. Property index
b. Foreign currency index
c. Mining and oil index
d. Services index

10. It sells stock without undergoing the process of underwriting due to the attractiveness of the
business.
a. Direct listing
b. Dutch action
 c. Auction
d. Answer not given

Exercise 3– Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. A syndicate is a:
a. firm that assists in specialist transactions
b. an organization of market makers
c. the largest group of members on the PSE
d. none of the above

2. Aklan Corporation is a publicly listed corporation. If Jose wants to invest in Aklan Corporation, he
can buy this in
a. Commodity market
b. Stock market
c. Bond market
d. Derivatives market

3. The lead investment banker:

a. is elected by members of the syndicate
b. is appointed by the SEC
c. originates and handles a flotation
d. none of the above

4. Commission brokers:
a. act as agents to execute customers’ orders for securities purchases and sales
b. assist specialists in executing orders
c. trade for their accounts
d. all the above

5. Maria bought an IPO (Initial Public Offering) stock. If she wants to sell the stock, she will go to the
a. account officer of the bank.
b. stockbroker.
c. foreign exchange dealer.
d. mutual fund agent.

6. Newly created securities are sold in the:

 a. primary market
b. secondary market
c. third market
d. fourth market

7. Which of the following underwrites securities of another person or enterprise, including

securities of government and private companies?
a. investment companies
b. investment bank
c. commercial bank
d. rural bank

8. Which of the following investment securities does not have a maturity?

a. Corporate bonds
b. Time deposit
c. Common stock
d. Commercial paper

9. An agreement whereby an investment banker tries to sell securities of an issuing corporation but
assumes no risk if the flotation is unsuccessful is called a:
a. due diligence agreement
b. best-effort agreement
c. firm commitment price agreement
d. shelf registration agreement

10. An over-the-counter market trade occurs in the:

a. primary market
b. secondary market
c. third market
d. fourth market
 Exercise 4 – Multiple Choice Concepts

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. All of the following are equity, except
a. paid-in capital
b. retained earnings
c. preferred stock
d. debentures

2. All dividends declared are taken from

a. stock
b. interest
c. retained earnings
d. liabilities

3. Which of the following statements is incorrect?

I. A stock represents partial ownership in a corporation.

II. Like debt securities, common stock is issued by firms to obtain funds.
III. Stocks are issued by corporations to raise short-term funds.

a. I only
b. II only
c. III only
d. All are incorrect

4. In general, the stock price of IPO’s tend to _________ over a year or longer.
a. increase
b. decrease
c. move sideways
d. answer not given

5. The secondary market of stocks in the Philippines is _________.

a. PSE
b. FTSE 100
 c. Nasdaq
d. Nikkei 225

6. What is the general belief of the investors regarding the firm’s stock price when there is favorable
news about the performance of a firm?
a. undervalued
b. overvalued
c. indifferent
d. answer not given

7. Which of the following statement/s is/are correct when a stock is listed in a foreign stock exchange?

I. It may increase the stock's liquidity.

II. It may enhance the firm's global image.
III. It may increase the pool of potential investors, making it easier to place an entire issue of
stock.
IV. All of these are correct.

a. I and II are correct

b. I and III are correct
c. II and III are correct
d. All of them are correct

8. It refers to buying some of the shares that it had previously issued by the listed company in the stock
market.
a. stock repurchase
b. stock right
c. leveraged buyout
d. investing

9. All of the following statements concerning initial public offering (IPO) are correct, except,
a. It is a first-time offering by the issuing company to the public.
b. A firm issuing the IPO normally seeks the services of an investment banker.
c. IPOs are issued for any of the following expansion, payoff of long-term obligations, purchase of a
capital asset, or increase of product lines.
d. Investors who bought an IPO have a prescribed period before they can sell in the secondary
market.

10. About IPO, a prospectus must be filed with which government agency?
a. Philippine Stock Exchange
b. Securities and Exchange Commission.
c. Bureau of Internal Revenue
d. Bangko Sentral ng Pilipinas
 Exercise 5 – Multiple Choice Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. Lapus owns 500,000 shares of ABC Corporation’s common stock with 40 million total shares
outstanding. ABC Corporation announces a plan to sell an additional 5 million shares through a rights
offering. The market value of the stock is P50 before the rights offering and the new shares are being
offered to existing shareholders at a P10 discount. If ABC Corporation exercises the preemptive
rights, how many of the new shares can it purchase?
a. 32,500 shares
b. 50,000 shares
c. 62,500 shares
d. 100,000 shares

Answer: C
Current ownership is 500,000/40,000,000 = 0.0125 or 1.25%
Shares that can be purchased under pre-emptive tights 0.0125 × 5,000,000 = 62,500 shares at P40
each.

2. HPI just paid a P1.57 dividend and investors expect that dividend to grow by 7.40% each year
forever. If the required return on the stock investment is 14%, what should be the price of the stock
today.
a. P11.21
b. P18.32
c. P17.44
d. P25.55

Answer
P0 = D1
rs - g
= 1.57(1.074)
(0.14 - 0.074)
= P25.55
3. Rose just paid a P1.57 dividend and investors expect that dividend to grow by 5% each year forever.
If the required return on the stock investment is 14%, what should be the price of the stock in 5 years?
a. P17.44
b. P18.32
c. P22.26
d. P23.38

Answer
D1 = P1.57(1.05) = P1.6485
D2 = 1.6485(1.05) = 1.7390
D3 = 1.7390(1.05) =1.8175
D4 = 1.8175(1.05) =1.9084
D5 = 1.9084(1.05) = 2.004

P5 = 2.004(1.05)/(0.14 - 0.05) = 23.38

4. Prutas, Inc. just paid a P3 dividend. The company is expected to pay a P3.50 dividend next year and a
P4 dividend in two years. After that, dividends are expected to grow at 5% forever. If investors
require a return of 12% on the investment, what should Prutas, Inc. stock sell for today?
a. P49.63
b. P54.15
c. P57.15
d. P60.00

Answer
P2 = 4(1.05)
(0.12 - 0.05)
= P60

P0 = 3.5(1.12)-1 + (4 + 60)(1.12)-2
= 54.15

5. RRichard Keith, Inc. traditionally retains 35% of its earnings for future investments. Last year
Richard’s return on equity was 15%. What is Richard’s growth rate?
a. 5.25%
b. 9.75%
c. 15.00%
d. 18.38%

Answer
g = ROE(1 – DPO)
= 0.15(0.35)
= 0.0525

6. Julius Juice just paid a P3.14 dividend. If the required return on the stock investment is 14%, and the
stock currently sells for P68.74, what is the implied dividend growth rate for Julius Juice?
a. 6.39%
b. 9.02%
c. 9.43%
d. 12.68%
 Answer: A

P0 = D0(1 + g)
rs – g
68.74= 3.14( 1 + g)
0.14 - g
g = 0.0902

7. Zeta approached you about purchasing a share of common stock in a company that will go out of
business exactly 2 years from today. Zeta is anticipated to pay a P10 dividend one year from now and
a P15 dividend two years from now). What price are you willing to pay for the stock if the required
rate of return on the stock is 5%?
a. P22.68
b. P23.13
c. P23.81
d. P25.00

Answer
P0 = 10(1.05)-1 + 15(1.05)-2 = 23.13

8. You were asked by the stockholders of Zenith Corporation to predict what the firm’s stock price will
be exactly 4 years from today. If Zenith Corporation is expected to grow at 3% indefinitely and the
cost of capital is 10% while the expected annual dividend one year from today is P10, then what
should be the price of Zenith Corporation’s stock 4 years from today?
a. P112.55
b. P142.86
c. P156.10
d. P160.79

Answer
P4 = D1(1+g)4
(r - g)

P4 = 10(1.03)4
(0.10 - 0.03)
= 160.79

9. Rose estimated D1=P0.72, D2=P0.76, D3=P0.84, and D4=P0.88 for a stock. You also estimate that
beginning at year 4, dividends will grow continually at a rate of 2% per year. If the required return to
hold the stock is 14.6%, what is the stock’s current price?
a. P6.20
b. P6.25
c. P6.30
d. P6.40

Answer D
P4 = P0.88(1.02)
0.146 – 0.02
 = P7.12

P0 = P0.72(1.146)-1 + P0.76(1.146)-2 + P.84(1.146)-3 + (P7.12 + 0.88)(1.146)-4

= P6.40

10. What is the current market price per share of the common stock of MMPC Corporation if you
know the current dividend yield is 6.14%, the PE is 16, and the annual dividend is P1.35?
a. P8.29
b. P21.60
c. P21.99
d. P98.24

Answer: Market price per share = Dividend paid

Current yield

= P1.35
0.0614

= P21.99
 Exercise 6 – Multiple Choice Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Encircle the letter that corresponds to your answer.

1. The Kape Bean is a relatively small, privately-owned firm. Last year the company had an after-tax
income of P30,000, and 20,000 shares were outstanding. The owners were trying to determine the
market value for the stock, before taking the company public. A similar firm that is publicly traded
had a price/earnings ratio of 10. Using only the information given, estimate the market value of one
share of Kape Bean's stock.
a. P5.00
b. P10.00
c. P15.00
d. P20.00

Answer
EPS = P30,000/20,000 = P1.50.
P/E = 10.0 = P/P1.50.
P = P7.50

2. Song Corp's stock price at the end of last year was P23.50 and its earnings per share for the year were
P1.30. What was its P/E ratio?
a. 17.17
b. 18.08
c. 18.98
d. 19.93

Answer
Stock price P23.50
EPS P1.30
P/E = Stock price/EPS 18.08

3. Yesterday Brand Mart Supplies paid its common stockholders a dividend equal to P3 per share. Brand
Mart expects to p3ay a P5 per share one year from today. After the P5 dividend is paid, the company
 expects its growth rate will remain constant at 4 percent per year forever. If Brand Mart's investors
demand a 12 percent rate of return, what should be the current market price of the company's stock?
a. P62.50
b. P65.00
c. P62.27
d. P37.50

4. A firm expects to pay dividends at the end of each of the next four years of P2.00, P1.50, P2.50, and
P3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of
return, how much should you be willing to pay for this stock?
a. P67.81
b. P22.49
c. P58.15
d. P43.97

Answer
P4 = P3.50(1.08)
0.14 – 0.06
= P63.00

P0 = P(1.14)-1 + P1.50(1.14)-2 + P2.50(1.14)-3 + (1.14)-4 + P63(1.14)-4

= P43.97

5. Margaret owns 200 shares of Beowulf Metal and the shares are trading at P20 each. The company
announces a rights issue in the ratio of 2 for 5. The company announces a discounted price of P12 per
share. What is the price of the stock after the rights issue?
a. P10.57
b. P12.00
c. P20.00
d. Answer not given

Answer
Shares Price Total
Existing shares 200 P10 P2,000
Shares to be received under the rights 80 12 960
Total 280 P2,960

Price of the stock after the rights issue = P2,960/280 shares

= P10.57 per share

6. ABC Corporation is currently listed in the Philippine stock market. It has a total of 1,000,000
outstanding shares. Other pertinent information about the stock are as follows:

Par value P10.00

Book value per share 12.50
Closing price in the stock market 15.00

What is the market capitalization of ABC Corporation?

a. P10,000,000
 b. P12,500,000
c. P15,000,000
d. Answer not given

Answer
Market capitalization = outstanding shares x current market price
= 1,000,000 x P15
= P15,000,000

7. Async, Incorporated .is expected to grow at an annual rate of 6% indefinitely. The return on similar
stocks is currently 12%. Async’s board of directors declared a dividend of P1.85 yesterday. What
should a share of Async, Incorporated sell for?
a. P15.42
b. P16.34
c. P30.83
d. P32.68

Answer:
P0 = D0(1+g)
(rs - g)
= 1.85(1.06)
(0.12 - 0.06)
= P32.68

8. Farmally Company is expanding to the Mindanao area. Management expects the new market to fuel
the growth of 22% for three years. After that normal growth of 6% will resume. Farmally’s most
recent annual dividend was P1.25. Other fruit companies have been returning about 12% lately. How
much should a share of Farmally be worth?
a. P33.05
b. P38.00
c. P40.17
d. P68.32

Answer a
D1 =1.25(1.22) =1.525
D2 =1.525(1.22) =1.8605
D3 =1.8605(1.22) = 2.2698

P3 = P2.2698(1.06)
(0.12 - 0.06)
= P40.17

P0 = P1.525(1.12)-1 + P1.8605(1.12)-2 + P2.2698(1.12)-3 + P40.17(1.12)-3

= P33.05

9. What is the current value of a share of Reia Corporation if its current dividend is P1.50 and dividends
are expected to grow at an annual rate of 20 percent for the next 5 years? Assume the investor has a
required rate of return of 15 percent and expects to sell the security in 5 years for P72.
a. P35.78
b. P39.63
 c. P44.31
d. P72.00

Answer:
Year
1 P1.50(1.20) = 1.80(0.87) = P 1.57
2 P1.80(1.20) = 2.16(0.756) = 1.63
3 P2.16(1.20) = 2.59(0.658) = 1.70
4 P2.59(1.20) = 3.11(0.572) = 1.78
5 P3.11(1.20) = 3.73(0.497) = 1.85
P5= P72(0.497) = 35.78
P0 = P44.31

10. The earnings and dividends of Kanna Co Computer Co. are expected to grow at an annual rate of 15
percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Kanna
currently pays a dividend of P0.50 per share. What is the value of Kanna stock to an investor who
requires a 14 percent rate of return?
a. P2.04
b. P9.31
c. P11.35
d. P15.73

Answer:

Year
1 P0.50(1.15) = 0.575(.877) = P0.504
2 P0.575(1.15) = 0.661(.769)= 0.509
3 P0.661(1.15) = 0.760(.675)= 0.513
4 P0.760(1.15) = 0.874(.592)= 0.518
= P2.04
P4 = P0.944/(0.14 - 0.08) = P15.73(0.592) = 9.31
Total = P11.35
 Exercise 7 – Straight Problems

Name: ___________________________________________ Score: ________

Section: ________________________________

Instruction: Show your solutions in the space provided after each problem.
1.The Bradshaw Company's most recent dividend was P6.75. The historical dividend payment by the
company shows a constant growth rate of 5 percent per year. What is the maximum you would be
willing to pay for a share of its common stock if your required rate of return is 8 percent? 11

Answer
D1 = 6.75 (1 + 0.05) = P7.09
P = D1 / (rs - g) = 7.09 / (0.08 - 0.05) = P236.33

2.The Central Heating Company has been very successful in the past four years. Over these years, it paid a
common stock dividend of 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?

Answer
FVIFg,3 = 4.63 / 4.00 = 1.158 g = 5%

P = D5/(rs - g) = 4.63 (1+0.05) / (0.12 0.05) = P69.46

3.Due to the growing demand for computer software, the Letter Perfect Company has had a very successful
year and expects its earnings per share to grow by 25 percent to reach P5.50 for this year. Estimate the
price of the company's common stock assuming the industry's price/earnings ratio is 12. 23

Answer
P = (P/E)(E) = 12 x 5.50 = P66

4.Suppose Mello’s expected stock price 3 years from now is P90. You estimate the dividends in the next 3
years will be P2, P3, and P4. The appropriate discount rate is 13%.

Required:
a. What is Mello’s stock price 2 years from now?

Answer
 P3 = D4/(rs – g)

90 = 4(1 + g)
0.13 – g

11.7 – 90g = 4+g

94g = 7.7

g = 0.0819

P2 = D3/(rs – g)

= 4/(0.13 – 0.0819)

= 83.16

b. What is Mello’s current stock price?

Answer
D1 = 2 (1.13)-1 1.7699
D2 = 3 (1.13)-2 2.3494
D3 = 4 (1.13)-3 2.7722
Po = 90 (1.13)-3 62.3745
69.266

5.Thanos currently pays a dividend of P1.50 per share. This represents a growth rate of 12%, a rate that you
believe will hold over the next 3 years. Thereafter, the growth rate will be 6% a year. The discount rate
is 10%.

Required:
a. What is the present value of Thanos’ dividends over the next 3 years?

Answer P4.66
1.50 (1.12)1 (1.10)-1 = 1.5273
1.50(1.12)2 (1.10)-2 = 1.5550
1.50(1.12)3 (1.10)-3 = 1.5833
4.6656

b. What is Thanos’ stock price at the end of Year 3?

Answer
P3 = 1.50(1.12)3(1.06)
0.10 – 0.06

= 55.8459
6.Based on the corporate valuation model, Morgan Inc.’s value of operations is P300 million. The balance
sheet shows P90 million of notes payable, P30 million of long-term debt, P40 million of preferred
stock, and P100 million of common equity. The company has 10 million shares of stock outstanding.
What is the best estimate of the stock’s price per share?

Answer
Assuming that the book value of debt is close to its market value, the total market value of the
company is:

Value of operations P300

Notes payable -P90
Long-term debt -P30
Preferred stock -P40
P140
Shares outstanding 10

Stock price = Value of equity/Shares outstanding = P14.00

The book value of equity figures are irrelevant for this problem

7.ABS Service Agency has reported the dividends listed below. What return could be expected? The price
of the stock is P18. (Round the growth rate to the nearest whole percent)

Years Dividends
2016 P1.12
2017 P1.15
2018 P1.18
2019 P1.21
2020 P1.24

Answer
Finding the growth rate by calculator:
N= 4
PV = -1.12
FV = 1.24
Solve for I = 2.57 Rounded to 3%

Find the next dividend D1:

1.24(1.03) = 1.28
1.28 + 3 = 10.11%
18

8.The firm’s D0 = P2.0, g = 5.0%, and P0= P30.00, what is the stock’s expected total return for the coming
year?

Answer: Er = 2(1.05) + (30 x 1.05) - 30 = 12%

30
9. Aquamarine was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all
of its earnings to support growth and thus has never paid a dividend. Management has indicated that it
plans to pay a P0.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years,
and then to increase it at a constant rate of 10.00% thereafter. Management's forecast of the future
dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return
of 12.00%, what is your estimate of the stock's current value?

Year Growth rate Dividends

0 - P 0
1 - 0
2 - 0
3 - 0.500
4 65.00% 0.825
5 32.50% 1.0931
6 10.00% 1.2024
Answer:
P0 = D1(1.12)-1 + D2(1.12)-2 + D3(1.12)-3 + D4(1.12)-4 + D5(1.12)-5 + D6/(0.12 0.10)

= 0 + 0 + 0.500(1.12)-3 + 0.825(1.12)-4 + 1.0931(1.12)-5 + (1.2024/(0.12- 0.10)) (1.12)-5

= 0 + 0 + 0.3559 + 0.5243 + 0.6203 + 34.1137

= P35.6142

10. CPU Company currently (t = 0) pays a dividend of P2.50 per share on its common stock. Dividends are
expected to increase at the rate of P.25 per share for the next several years. Determine the current value
of CPU's common stock to an investor who expects to be able to sell the stock for P35 per share after 3
years, given that the investor requires a 14 percent rate of return on this security.

Answer:
P0 = P2.75(0.877) + P3.00(0.769) + P3.25(0.675) + P35(0.675) = P30.54

11. Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a
new project. The increase in shares will bring to 25 million the number of shares outstanding. Nahanni's
long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent. The firm just
paid a P1.00 dividend and the stock sells for P16.06 in the market. On the announcement of the new
equity issue, the firm's stock price dropped. Nahanni estimates that the company's growth rate will
increase to 6.5 percent with the new project, but since the project is riskier than average, the firm's cost
of capital will increase to 13.5 percent. Using the DDM constant growth model, what is the change in
stock price?

Answer
Calculate new equilibrium price and determine change:

P0,old = (D0 (1.06))/(0.126-0.06)=P1(1.06)/0.066=P16.06

P0,new = (D0 (1+ gnew ))/(0.135-0.065)=P1(1.065)/0.07=P15.21

Change in price = P16.06 - P15.21 = P0.85

12. MVP would like to buy PLDT stocks. The stock code for PLDT is TEL. If MVP would like to buy
1,000 shares at P1,020 of TEL, how much money does he need to pay for the entire purchase?

Answer

13. Micah Much has been holding 12,550 shares of NFI for 2 years. The current market price is P2.80.

Required:
a. How many shares can Micah sell?
b. How much can she sell of the stocks?

Answer:
a. Based on the board lot, the maximum number of shares that Micah can sell is 12,000 because
of the lot size of 1,000. The 550 shares can be sold only at the odd lot.

b.

14. May Top bought 30,000 shares of Voltron stock for P6.50 a share. The price of the stock declined to
P4.50 per share because of a decrease in net income for the past several years. Ms. May fears that the
price of Voltron will further go down because of the lack of catalyst about the company. Because of
this, Ms. May would like to cut the loss on the said stock. If she will sell the stock at its current
market price, how much will she receive?

Answer: