Q1-Valuation Method
THEORIES
1. Which of the following items does not measure the variability of data?
A. standard deviation
B. variance
C. mean
D. none of the above
2. An underlying premise when using the capital asset pricing model (CAPM) to estimate a
firm's cost of equity capital is:
A. individual capital components must be weighted based on their contributions to the firm's
capital structure
B. dividends are expected to grow at a constant compound rate
C. investor attitudes toward risk will not change.
D. The required rate of return equals the riskless rate of interest plus a premium for risk.
3. Statement 1. The coefficient of variation is a better measure of risk than the standard
deviation if the expected returns of the securities being compared differ significantly.
Statement 2. Risk-averse investors require higher rates of return on investments whose returns
are highly uncertain, and most investors are risk averse.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
4. All of the following statements regarding the risk-and-return relationship are correct except:
A. Investors often face a trade-off between risk and reward when evaluating asset
investment alternatives.
B. An asset's rate of return, or the amount earned, depends on the risk associated with that
investment.
C. The investor is more likely to expect a lower return for a share in an unproven, start-up
company than from a share in a well-established multinational corporation.
D. When holding such an asset pose a greater risk, the investor requires a higher rate of
return to compensate for bearing the greater risk.
5. Only few economists believe the theory behind the strong form the efficient market hypothesis
because
A. inflation and interest rates have been a good predictor of future stock prices
B. the use of privileged information is illegal.
C. insider information has, at times, explained movements in stock market prices.
D. past stock prices have been a good predictor of future prices
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6. The weak form of efficient market hypothesis contradicts:
A. technical analysis, but does not say anything on the possibility of successful
fundamental analysis
B. fundamental analysis, but does not say anything on the possibility of successful
technical analysis
C. technical analysis, but supports technical analysis as valid
D. fundamental analysis, but supports technical analysis as valid
E. both fundamental analysis and technical analysis
7. Statement 1. While the portfolio return is a weighted average of realized security returns,
portfolio risk is not necessarily a weighted average of the standard deviations of the securities in
the portfolio. It is this aspect of portfolios that allows investors to combine stocks and actually
reduce the riskiness of a portfolio.
Statement 2. If we know for sure that the market will have a positive return over the next year,
to maximize my rate of return, I should increase the beta of my portfolio.
A. Both statements are false
B. Both statements are true
C. Statement 2 is true
D. Statement 1 is true
8. Statement 1. The tighter the probability distribution of its expected future returns, the greater
the risk of a given investment as measured by its standard deviation.
Statement 2. The coefficient of variation, calculated as the standard deviation of expected
returns divided by the expected return, is a standardized measure of the risk per unit of
expected return.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
9. For an all-equity financed firm, a project whose expected rate of return plots should be
rejected.
A. below the security market line
B. below the characteristic line
C. above the security market line
D. above the characteristic line
10. In calculating the costs of the individual components of a firm's financing, the corporate tax
rate is important to which of the following component cost formulas?.
A. common stock.
B. debt.
C. preferred stock.
D. none of the above
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11. In calculating the proportional amount of equity financing employed by a firm, we should use:
A. the total of common stock and preferred stock on the balance sheet.
B. the net book value of the firm.
C. The firm’s balance sheet’s common stock equity account.
D. the current market price per share of common stock times the number of shares outstanding.
12. Random stock price changes are evidence against the:
A. random stock price changes are evidence for all forms of the EMT, not against them.
B. semi-strong form of the EMT.
C. strong form of the EMT.
D. weak form of the EMT.
13. In the capital asset pricing model (CAPM), a security market line (SML):
A. indicates the degree to which two stock returns move together in a portfolio.
B. shows the effect of portfolio diversification on market risk.
C. provides a benchmark for evaluating the relative merits of different stocks or portfolios
D. represents the weighted average of the expected returns of all the investments
composing that portfolio.
14. Which one of the projects O, M, N, L should be selected? The expected return on the
market is 16% and the risk-free rate is 6%.
A. Project M, which has a beta of 2.50 and has an expected return of 29.4%.
B. Project O, which has a beta of 0.50 and has an expected return of 11.1%.
C. Project N, which has a beta of 1.25 and has an expected return of 18.3%.
D. Project L, which has a beta of 1.00 and has an expected return of 15.9%.
15. All else equal, the:
I. present value is always less than the future value when both the interest rate and the number
of years is positive.
II. present value increases as the discount rate increases.
III. present value increases the further away in time the future value is.
A. III only
B. II only
C. II and III only
D. I and III only
E. I only
16. Should we use _____ information to earn excessive returns consistently, then the market is
not _____ form efficient.
A. public, weak
B. private, weak
C. private, semi-strong
D. private, strong
17. The market (as a whole) has a beta coefficient of
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A. 1
B. Zero
C. – 1.
D. depends on the economic conditions
18. The expected rate of return for the share of Corn-pop Co. is 20%, with a standard deviation
of 14%. The expected rate of return for the share of Orange Associates is 10%, with a standard
deviation of 9%. The share that would be considered riskier is:
A. Cornpop because the standard deviation is higher.
B. Cornpop because the coefficient of variation is lower.
C. Orange because the coefficient of variation is higher.
D. Orange because the return is lower.
E. Orange because the standard deviation is higher.
19. The strong form of the efficient market hypothesis states that
A. that there is no information whatsoever that can be profitable for the investor.
B. relevant information contained in the past behavior of interest rates, inflation, and even
company performance is as irrelevant as past prices for forecasting future stock prices.
C. a well-informed investor will always outperform the average investor when selecting
which stocks to hold.
D. past stock prices contain no useful information for predicting the future course of prices
20. Which of the following is equal to the present value of all cash proceeds received by a stock
investor?
A. Discount rate.
B. Dividend payout ratio.
C. Retention ratio.
D. Value.
21. A finding that _______________would provide evidence AGAINST the semi-strong form of
the EMT.
A. Money managers do not outperform the market as a whole.
B. The price decline of large secondary offerings is permanent when outsiders are selling.
C. Investors do not earn abnormal profits after merger announcement.
D. Technical analysis is worthless in determining stock prices.
E. Earnings announcement reactions take considerable time.
22. Analysts commonly consider all of the following to be indicators that the market is
overvalued except:
A. high average price-to-book ratio.
B. high average P/E ratio.
C. high average ratio of stock prices to corporate sales.
D. high average dividend yield.
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23. Statement 1. Funds acquired by the firm through retaining earnings have no cost because
there are no dividend or interest payments associated with them, but capital raised by selling
new stock or bonds does have a cost.
Statement 2. The weighted average cost of capital increases if the total funds required call for
an amount of equity in excess of what can be obtained as retained earnings.
A. Statement 1 is true
B. Both statements are false
C. Both statements are true
D. Statement 2 is true
24. Which of the following is true?
A. If the market is indeed efficient, both passive and active management strategies are
relevant.
B. If the stock market is indeed inefficient, then both security analysis and portfolio analysis
are economically important.
C. The semi-strong form of the Efficient market hypothesis implies that all stocks are
correctly priced; therefore, you can select stocks at random.
D. If the semi-strong form of the Efficient market hypothesis holds, fundamental analysis is
economically worthless, but technical analysis is important.
25. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements
must be true about these securities? (Assume the market is in equilibrium.)
A. Stock B would be a more desirable addition to a portfolio than Stock A.
B. Stock A would be a more desirable addition to a portfolio than Stock B.
C. When held in isolation, Stock A has greater risk than Stock B.
D. The expected return on Stock A will be greater than that on Stock B.
E. The expected return on Stock B will be greater than that on Stock A.
26. The common stock of a company must provide a higher expected return than the debt of the
same company because
A. there is more systematic risk involved for the common stock.
B. there is less demand for stock than for bonds.
C. there is greater demand for stock than for bonds.
D. there is a market premium required for bonds.
27. Assuming that the intrinsic value of a stock is less than its market value, which of the
following is a correct conclusion?
A. The market is overvaluing the stock.
B. The stock has a low level of risk.
C. The stock offers a high dividend payout ratio.
D. The market is undervaluing the stock.
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PROBLEMS
Problem 01:
Weaver Chocolate Co. expects to EARN P3.50 per share during the current year, its expected
dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its
common stock currently sells for P32.50 per share. New stock can be sold to the public at the
current price, but a flotation cost of 5% would be incurred.
1. What would be the cost of equity from new common stock? ________________
Problem 02:
Tucker Corporation's manager believes that the economic environment during the next year can
be good, normal, or bad, and he thinks that a stock's returns will have the following probability
distribution shown below.
Good
.50
15%
Normal
.20
0%
Bad
.30
-5%
2. Calculate the coefficient of variations ____________
3. Calculate the standard deviation ___________
4. Calculate the variance ________
Problem 03:
Using CAPM, the required rate of return for a firm with a beta of 1.25 when the market risk
premium is 14% and the risk-free rate is 6% is:
5. How much is the required rate of return? SA=____________
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Problem 04:
Hannity Company's economic environment during the next year can be at its best, good,
normal, bad or worst, the manager believes that the following returns are expected to be earned
for each share of stock under each condition with their corresponding chance of occurrence:
Best
0.10
32%
Good
0.25
18%
Normal
0.30
9%
Bad
0.25
- 2%
Worse 0.10
-11%
6. Calculate the variance for Hannity Company. SA=____________
7. Calculate the coefficient of variation for Hannity Company. _____________
Problem 05:
Kelly Equipment Inc. is planning an expansion project estimated to cost P100 million. Kelly is
going to raise funds according to its optimal capital structure shown below.
Bonds = .30
Preferred Stocks = .24
Common Equity = .46
Kelly had profits available to common shareholders of P184 million last year, of which 75% was
distributed dividends. The company has a marginal tax rate of 40%. Flotation cost is at 15% of
the stock price. Additional data are given:
● The before-tax cost of debt is estimated to be 11%.
● The market yield of preferred stock is estimated to be 12%.
● The after-tax cost of retained earnings is estimated to be 16%.
8. What is Kelly's weighted average cost of capital (WACC)? ___________
Problem 06
Using CAPM, if the treasury bond rate is 7%, the beta of the firm's share is 1.1, and the
expected rate of return for the market is 12%, then the cost of equity capital is:
9. the cost of equity capital is:__________
Problem 07
You were hired as a consultant to Giambono Company, whose target capital structure is 40%
debt, 10% preferred, and 50% common equity. The after-tax cost of debt is 6.00%, the cost of
preferred is 7.50%, and the cost of retained earnings is 12.75%. The firm will not be issuing any
new stock.
10. What is its WACC?______
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Problem 8
MOT's stock has a beta of 1.2, its required return is 11.9%, and the risk-free rate is 4.1%.
11. What is the required rate of return on the market?______
Problem 9
Colony Corporation's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk
premium is 5.50%.
12. What is the equity’s required rate of return?______
Problem 10
Droz's Hiking Gear Inc. has found that its common equity capital shares have a beta equal to
1.5 while the risk-free return is 8 percent and the expected return on the market is 14 percent. It
has 7-year semiannual maturity bonds outstanding with a price of P767.03 that have a coupon
rate of 7 percent and a yield to maturity of 12 percent. The firm is financed with P120,000,000 of
common shares (market value) and P80,000,000 of debt (also market value).
13. What is the after-tax weighted average cost of capital for Droz's, if it is subject to a
25 percent marginal tax rate?_________
Problem 11
Mike Flannery holds the following portfolio:
Stock
Investment
Beta
A
P150,000
1.40
B
50,000
0.80
C
100,000
1.00
D
75,000
1.20
Total
P375,000
14. What is the portfolio's beta?_______
Problem 12
Using CAPM, determine the expected market risk premium from the following information.
● Beta of Investment G = 1.4
● Risk-free rate = 3.0%
● Expected return on Investment G = 7.4%
15. Determine the expected market risk premium _________
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Q1-Valuation Method (KEY TO CORRECTION)
THEORY
26
A
1 C
27
A
2 D
PROBLEMS
3 A
1
13.37%
4 C
2
1.53
5 C
3
9.17%
6 A
4
0.84%
7 D
5
23.5%
8 C
6
1.43
9 A
7
1.36
10 B
8
12.22%
11 D
9
12.5%
12 A
10
9.53%
13 C
11
10.6
14 B
12
11.95%
15 E
13
13.8
16 D (a=public, semi-strong)
14
1.17
17 A
15
3.14
18 C
19 A
20 D
21 E
22 D
23
D
24
B
25
D
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Q2-Valuation Method
THEORIES
1. What item is incorporated in the firm value but not in the enterprise value?
A. Property, Plant and Equipment
B. Excess cash in bank
C. Inventory
D. Accounts Receivable
2. Statement 1. Repayment of debt principal affects firm value.
Statement 2. Repayment of debt principal affects enterprise value.
A. Statement 2 is true
B. Both statements are false
C. Statement 1 is true
D. Both statements are true
3. Preferred stockholders' claims on the assets, as well as income of a firm come _______
those of creditors ______ those of common shareholders.
A. equal to; and equal to
B. before; and also before
C. after; and also after
D. after; but before
4. There are two stocks with a constant growth rate that are (1) in equilibrium, (2) have the same
price, and (3) have the same required rate of return. Which of the following statements is
CORRECT?
A. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
B. The two stocks must have the same dividend per share.
C. The two stocks must have the same dividend yield.
D. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
E. The two stocks must have the same dividend growth rate.
5. The common equity of a firm should provide a higher expected return than the debt of the
same firm because
A. there is more systematic risk involved for the common stock.
B. there is a market premium required for bonds.
C. there is greater demand for stock than for bonds.
D. there is less demand for stock than for bonds.
6. Which of the following statements is true?
A. Ceteris paribus, short-term bonds have less reinvestment risk than long-term bonds.
B. Ceteris paribus, long-term bonds have less reinvestment risk than short-term bonds.
C. Ceteris paribus, high-coupon bonds have less reinvestment risk than low-coupon bonds.
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D. Ceteris paribus, long-term bonds have less price risk than short-term bonds.
E. Ceteris paribus, low-coupon bonds have less price risk than high-coupon bonds.
7. A 7-year bond with a 9% annual coupon rate has a yield (r d) of 8%. Which of the following
statements is true?
A. If the yield to maturity remains constant, the bond’s price one year from now will be lower
than its current price.
B. If the yield to maturity remains constant, the bond’s price one year from now will be
higher than its current price.
C. The bond is selling below its par value.
D. The bond is selling at a discount.
E. The bond’s current yield is greater than 9%.
8. If the expected rate of return on a stock is lower than the required rate,
A. Dividends are not being declared.
B. The stock is a good buy.
C. The stock should be sold.
D. The firm is probably not trying to maximize price per share.
E. The stock is experiencing supernormal growth.
9. Which of the following statements is true?
A. To implement the corporate valuation model, we discount net operating profit after taxes
(NOPAT) at the weighted average cost of capital.
B. To implement the corporate valuation model, we discount projected net income at the
weighted average cost of capital.
C. None of the choices mentioned
D. To implement the corporate valuation model, we discount the appropriate projected free
cash flows at the weighted average cost of capital.
10. Statement 1. Preferred stock is a hybrid--a sort of cross between a common stock and a
bond--in the sense that it pays dividends that normally increase annually like a stock but its
payments are contractually guaranteed like interest on a bond.
Statement 2. From an investor's perspective, a firm's preferred stock is generally considered to
be less risky than its common stock but more risky than its bonds. However, from a corporate
issuer's standpoint, these risk relationships are reversed: bonds are the most risky for the firm,
preferred is next, and common is least risky.
A. Both statements are false
B. Both statements are true
C. Statement 1 is true
D. Statement 2 is true
11. Say that interest rates on 20-year Treasury and corporate bonds with different ratings, all of
which are noncallable, are as follows:
Treasury = 7.22%
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A
= 9.24%
AAA
= 8.32%
BB = 11.18%
The differences in rates among these issues were most probably caused primarily by:
A. Maturity risk differences.
B. Inflation differences.
C. Default and liquidity risk differences.
D. Tax effects.
E. Real risk-free rate differences.
12. The following statements are true for the cost of equity capital EXCEPT:
A. a return on the equity-financed portion of an investment that, at worst, leaves the market
price of the stock unchanged.
B. generally lower than the before-tax cost of debt.
C. by far the most difficult component cost to estimate.
D. the minimum rate that a firm should earn on the equity-financed part of an investment.
13. Assuming g will remain constant, the dividend yield is a good measure of the required return
on a common stock under which of the following circumstances?
A. Answers a and b are both correct.
B. g < 0
C. g = 0
D. g > 0
E. Under no circumstances.
14. In computing for the proportion of equity financing used by a company, we should use:
A. the book value of the firm.
B. the sum of common stock and preferred stock on the balance sheet.
C. the current market price per share of common stock times the number of shares
outstanding.
D. the common stock equity account on the firm's balance sheet.
15. Which of the following are not examples of non-operating assets?
A. Cash in excess of normal operating requirements
B. Unused patents
C. Finished goods inventories
D. Vacant land shown on the firm’s balance sheet
16. Which of the following statements is true?
A. The corporate valuation model requires the assumption of a constant growth rate in all
years.
B. To implement the corporate valuation model, we discount the appropriate projected free
cash flows at the cost of equity capital.
C. To implement the equity valuation model, we discount the appropriate projected free
cash flows at the cost of equity capital.
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D. None of the choices mentioned
17. The constant growth dividend valuation model assumes
A. that the discount rate must be greater than the dividend growth rate.
B. a constant annual dividend a constant dividend growth rate for no more than the first 10
years.
C. a constant annual dividend
D. a constant dividend growth rate for no more than the first 10 years.
18. Statement 1. An important step in applying the corporate valuation model is forecasting the
firm's free cash flows.
Statement 2. Free cash flows are assumed to grow at a constant rate beyond a specified date
in order to find the horizon, or continuing, value.
A. Both statements are false
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are true
19. The corporate valuation model can be used only when a company doesn't pay dividends.
20. Which of the following debt securities would have the greatest percentage increase in value
if all interest rates in the economy decrease by 2%?
A. 10-year, 10% coupon bond.
B. 10-year, 5% coupon bond.
C. 5-year, zero coupon bond.
D. 10-year, zero coupon bond.
E. 1-year, 10% coupon bond.
PROBLEMS
Problem 1
Esther Corporation issued perpetual preferred stock with an 8% annual dividend. The investor
requires a rate of 8% from this security. Its par value is P100.
1. What is the preferred stock's value (don’t include the centavos)?_______
Problem 2
Schubberg Corporation just paid a dividend of D 0 = P0.75 per share, and that dividend is
expected to grow at a constant rate of 6.50% per year in the future. The company's beta is
1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%.
2. What is the company's current stock price?______
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Problem 3
Goliath Motors bonds have 5 years remaining to maturity. Interest is paid annually, they have a
P1,000 par value, the coupon interest rate is 6%, and the yield to maturity is 5%.
3. What is the bond’s current market price (don’t include the centavos)?________
Problem 4
The free cash flow to the firm is reported as P405 million. The interest expense to the firm is
P76 million. If the tax rate is 35% and the net debt of the firm increased by P50 million,
4. What is the free cash flow to the equity holders of the firm?__________
Problem 5
MerryMart Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par
value of P1,000. The going interest rate (yield) is 6.20%, based on semiannual compounding.
5. What is the bond’s price?______
Problem 6
This year is the terminal year, the net working capital investment increased by P30,000, i.e. a
30% growth to P130,000 from last year’s P100,000. In the long-run it is expected that cash
flows will grow at a constant rate of 4%.
6. What increase in net working capital are we going to assume for next year’s
(Terminal year + 1) cash flow calculation?_______
Problem 7
The company expects the following cash flows from a project. Since the project is risky, certainty
equivalent coefficients for the cash flows in their respective years are also given.
Year
Cash flow
CE Coeff.
1
P10,000
0.80
2
P15,000
0.70
3
P20,000
0.50
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Currently, the risk-free rate of return is 5%.
7. Calculate the value of this project (don’t include the centavos)________
Problem 8
David Auto bonds have 5 years remaining to maturity. Interest is paid semi-annually, they have
a P1,000 par value, the coupon interest rate is 6%, and the yield to maturity is 4%.
8. What is the bond’s current market price?______
Problem 9
NickleAsia Inc. 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%.
9. What is the current price of the bonds, given that they now have 19 years to
maturity?_______
Problem 10
Suppose Buyson Corporation’s projected free cash flow for next year is FCF 1 = P150,000, and
FCF is expected to grow at a constant rate of 6.5%. If the company’s weighted average cost of
capital is 11.5%,
10. what is the firm’s total corporate value?______
Problem 11
A share of perpetual preferred stock pays an annual dividend of P6 per share. If investors
require a 12 percent rate of return,
11. what should be the price of this preferred stock?______
Problem 12
The free cash flow to the firm is reported as P205 million. The interest expense to the firm is
P22 million. If the tax rate is 35% and the net debt of the firm increased by P25 million, what is
the approximate market value of the firm if the FCFE grows at 2% and the cost of equity is 11%?
12. what is the approximate market value of the firm?_______
Problem 13
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The EBIT of a firm is P300, the tax rate is 35%, the depreciation is P20, capital expenditures are
P60, and the increase in net working capital is P30.
13. What is the free cash flow to the firm?_______
Problem 14
Goodheart Corp's stock has a required rate of return of 11.50% on its equity, and it sells for
P25.00 per share. Goode's dividend is expected to grow at a constant rate of 7.00%.
14. What was the last dividend, D0?______
Problem 15
Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is P900
million. Its balance sheet shows 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,
15. what is the best estimate of its stock price per share?________
Problem 16
Daniel Inc. is a fast-growing supplier of office products. Analysts project the following dividends
during the next three years, after which it will grow at a constant rate of 5%. Daniel’s r s is 13%.
Year
0
1
2
3
Dividends
P2
P3
P4
16. What is the stock price today assuming it is at equilibrium (don’t include the
centavos)?______
Problem 17
Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of
P7.50 per share. If the required return on this preferred stock is 6.6667%,
17. at what price should the stock sell?_______
Problem 18
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The free cash flow to the firm is P300 million in perpetuity, the cost of equity equals 14%, and
the WACC is 10%. If the market value of the debt is P1 billion,
18. what is the value of the equity using the free cash flow valuation approach?_____
Problem 19
DieNacht Industrial Inc. just paid a dividend of D 0 = P1.32. Analysts expect the firm's dividend
to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and
thereafter. The required return on this low-beta stock is 9.00%.
19. What is the best estimate of the stock’s current market value?______
Problem 20
We are considering a purchase of the common stock of Cowboy Corp. The stock is expected to
pay a dividend of P2 per share at the end of the year (i.e., D 1 = P2.00). The stock has a beta
equal to 1.2. The risk-free rate is 6 percent. The market risk premium is 5 percent. The stock's
dividend is expected to grow at some constant rage, g. The stock currently sells for P40 a
share.
20. Assuming the market is in equilibrium, what does the market believe the stock
price will be at the end of three years? (In other words, what is P 3?) ________
Q2-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 B
13 C
1
100
13
P125
2 C
14 C
2
P14.52
14
P1.05
3 D
15 C
3
1043
15
P27.20
4 D
16 C
4
P405.6 million
16
43
5 A
17 A
5
P1,102
17
P112.50
6 B
18 D
6
5200
18
P2 billion
7 A
19 FALSE
7
25781
19
P44.87
8 C
20 D
8
1090
20
P49.00
9 D
9
P1,232
10 D
10
P3,000,000
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11 C
11
P50
12 B
12
P2,445 billion
PRELIMINARY EXAM-Valuation Method
THEORIES
1.. Statement 1: The net asset value or book value approach utilizes the total shareholders’
equity portion of the financial statements.
Statement 2: The Discounted Dividend Model takes into consideration the expected cash flows
of investment in stocks which are dividends and stock price upon sale
A. True; True
B. True; Fasle
C. False; True
D. False; False
2. Statement 1: Enterprise value is the value of a company's core business operations that is
available to shareholder's while equity value is the total value of a company that is available to
equity investors.
Statement 2: The market value of a company, also known as market capitalization, is its value
as reflected in the stock exchange. It is calculated by multiplying a company’s outstanding share
by its current market price.
A. True; True
B. True; False
C. False;True
D. False;False
3. If a firm can shift its capital structure so as to change its weighted average cost of capital
(WACC), which of the following results would be preferred?
A. The firm should try to decrease the WACC because such an action will increase the
value of the firm.
B. The firm should try to increase the WACC because such an action will increase the
value of the firm.
C. The firm should try to decrease the WACC because such an action will decrease the
value of the firm.
D. The firm should try to increase the WACC because such an action will decrease the
value of the firm.
4. Statement 1:Corporate Valuation model computes a company’s market value based on the
present value of the company’s free cash flows.
Statement 2: Enterprise value, also called the firm value, is an economic measure that reflects
the market value of the business.
A. True; True
B. True;False
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C. False; True
D. False; False
5. In an equilibrium condition and during a constant growth phase, the stock’s growth rate
should equal the
A. dividend yield
B. capital gains yield
C. required return
D. corrected closing stock price
6. If an individual stock’s beta is greater than 1.0 , that stock is:
A. Exactly as risky as the market
B. Less risky than the market
C. Riskier than the market
D. None of the above
7. Statement 1: Constant growth is a situation where a stock and its dividends grow at a
different rate at the earlier part of its life until reaching its terminal date.
Statement 2: The multiplier models determine the value of a company by analyzing and
comparing the company’s financial ratios such as price-earnings ratio or EBITA or Unlevered
free cash flow.
A. True; True
B. True; False
C. False; True
D. False; False
8. A 10-year corporate bond has an annual coupon payment of 9 percent. The bond is currently
selling at par (P1,000). Which of the following statements is correct?
A. The bond’s yield to maturity is 9 percent.
B. The bond’s current yield is 9 percent.
C. If the bond’s yield to maturity remains constant, the bond’s price will remain at par.
D. All of the statements above are correct.
9. Statement 1: The market is efficient if all the necessary information are provided to the
investors.
Statement 2: If the perceived value is greater than the intrinsic value of an asset, it is
undervalued.
A. True; True
B. True; False
C. False; True
D. False; Fasle
10. When a stock is undervalued,
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i. An analyst might advise a “buy” order on the stock.
ii. The stock’s intrinsic value exceeds that of its market value.
iii. The stock’s market value exceeds that of its intrinsic value.
iv. An analyst might issue a “sell” order on the stock.
A. Statement i
B. Statement i and iii
C. Statement i and ii
D. Statement iii and iv
11. A model based on the proposition that any stock’s required rate of return is equal to the
risk-free rate of return plus a risk premium that reflects only the risk remaining after
diversification.
A. Gordon Growth Model
B. Markowitz Portfolio Theory
C. Capital Asset Pricing Model
D. Black-Scholes Option Pricing Model
12. Statement 1. A stock's total return is realized from two principal sources, its dividend yield
and any gain from the increase in its selling price over the original purchase price of the stock.
Statement 2. The dividend yield is the annual dividend at the end of the period divided by the
current stock's price.
A. True, True
B. True, False
C. False, True
D. False, False
13. Statement 1:The before-tax cost of debt, rd, is the same as the average yield to maturity
(YTM) associated with the firm's bonds.
Statement 2. Flotation costs associated with issuing new equity cause the cost of external
equity to be lower than the cost of retained earnings.
A. True; True
B. True; False
C. False; True
D. False; False
14. The terminal value of a non-constant growth stock should be discounted using which of the
following periods?
A. The last period (year) of the constant growth phase.
B. The first period (year) of the non-constant growth phase.
C. The midpoint period (year) of the non-constant growth phase.
D. The last period (year) of the non-constant growth phase.
15. It is the rate of return earned on a bond when the issuer redeemed the bond prior to its
maturity date
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A. Yield to Maturity
B. Current Yield
C. Yield to Call
D. Capital Gains Yield
16. Statement 1: The beta coefficient measures the riskiness of an investment, thus, beta
greater than 1 is aggressive.
Statement 2: One should invest if the expected rate of return is greater than the required rate of
return.
A. True; True
B. True; False
C. False;True
D. False;False
17. If the Yield to Maturity (YTM) is greater than the Coupon / Stated interest rate:
A. The bond is valued at Premium.
B. The bond is valued at Discount.
C. The bond price will not change as it reaches its maturity.
D. The bond price will decrease as it reaches its maturity.
18. Statement 1: The higher the expected risk the lower the actual return
Statement 2: The true value of the stock is known as perceived value while the market value of
the stock is the so called intrinsic value.
A. True; True
B. True; False
C. False; True
D. False; False
19. Which of the following is not considered a capital component for the purpose of calculating
the weighted average cost of capital as it applies to capital budgeting?
A. Long-term debt
B. Short-term debt
C. Common stock
D. Preferred stock
20. You are considering investing in ABC, Inc.'s stock which is selling at P45.95. Similar stocks
return 16%. ABC's last dividend ABC was P4.50 and a 6% constant growth rate is anticipated.
Should you purchase ABC, Inc.?
A. No, because the stock is overpriced by P1.75
B. No, because the stock is overpriced by P3.85
C. Yes, because the stock is underpriced by P1.75
D. Yes, because the stock is underpriced by P3.85
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PROBLEMS
Problem: The Jackson Company has just paid a dividend of P3.00 per share on its common
stock, and it expects this dividend to grow by 10 percent per year, indefinitely. The firm has a
beta of 1.50; the risk-free rate is 10 percent; and the expected return on the market is 14
percent. The firm's investment bankers believe that new issues of common stock would have a
flotation cost equal to 5 percent of the current market price.
1. How much should an investor be willing to pay for this stock today?___________
Problem: Your company’s stock sells for P50 per share, its last dividend was P2.00, its growth
rate is a constant 5 percent, and the company will incur a flotation cost of 20 percent if it sells
new common stock.
2. What is the firm’s cost of new equity, kn?________
Problem: Veryeasy Company’s fund manager has a P20,000,000 portfolio with a beta of 1.5.
The risk-free rate is 4.5% and the market risk premium is 5.5%. The manager expects to receive
an additional P5,000,000, which she plans to invest in a number of stocks. After investing the
additional funds, she wants the fund’s required return to be 13%.
3. What is the required rate of return for the P 20 million investments in stocks?____
4. What should be the required rate of return of the additional P5,000,000
investment?______
Problem: Meter-bank’s stock is currently trading at P25 per share. The stock’s dividend is
projected to increase at a constant rate of 7 percent per year. The required rate of return on the
stock is 10 percent.
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5. What is the expected stock price four years from today?_________
Problem: You are appointed as the financial manager of a P4,000,000 investment fund named
Ucandoit Corporation. The fund consists of four stocks with the following investment and betas:
Stock
Investment
Beta
A
P 400,000
1.50
B
P 600,000
(0.50)
C
P1,000,000
1.25
D
P2,000,000
0.75
The market’s required rate of return is 14% and the risk-free rate is 6%.
6. What is the required rate of return of the portfolio?________
7. What is the portfolio beta?________
Problem: Imelda Corp. has bonds outstanding with P1,000 face value and 10 years left until
maturity. The bonds may be called starting year 3 at 110% of the par value. They have 12%
coupon interest rates and their current price is P1,165
8. What is the estimated Yield to Maturity (YTM) on the Investment in Imelda Corp.
Bonds?________
Problem: BeePeeEye, Inc. is growing at a constant rate of 6 percent per year. It has both
common stock and non-participating preferred stock outstanding. The cost of preferred stock is
8 percent. The par value of the preferred stock is P120 and the stock has a stated dividend of
10% of par.
9. What is the market value of the preferred stock?_________
Problem: InsaniTea Industries has bonds outstanding with a P1,000 face value and 10 years
left until maturity. They have a 12% annual coupon payment, and the current bond price is P
1,185. The bond may be called in 5 years at 108% of the face value.
10. What is the Yield to Call if the bond is called in year 4?_______
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Problem: Myra G. Company is estimating its WACC.The company has collected the following information:
➢ Its capital structure consists of 50 percent debt and 50 percent common equity.
➢ The company has 10-year bonds outstanding with a 9 percent annual coupon that are
trading at par.
➢ The company’s tax rate is 40 percent.
➢ The risk-free rate is 6 percent.
➢ The market risk premium is 5 percent.
➢ The stock’s beta is 1.4.
11. What is the company’s WACC?_______
Problem: Your boss, Jamylca, is interested in acquiring No Fail Inc. (NFI) shares of stock. He
asks you to provide certain information with regards to NFI’s riskiness. You have gathered the
probability distribution for NFI and is presented below:
Performance
Of NFI
Weak
Below Average
Average
Above Average
Strong
Probability of
this occurring
Rate of return
if this demand occurs
10%
20%
40%
20%
10%
-40%
-2%
15%
20%
50%
12. What is the expected rate of return for NFI?______
Problem: What is the present value of a 10 year P1,000-bond with 10% yield to maturity and
8% coupon interest rate?
13. What is the present value?______
Problem: The last dividend paid by Insecurity Bank (IB) was P1.00. IB’s growth rate is expected
to be constant for 5% for 2 years, after which dividends are expected to grow at a rate of 10%
forever. SB’s required rate of return is 12%.
14. What is the current price of IB’s common stock?________
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Problem: The Stinky Corporation is expected have EBIT of P1.2M this year. Stingy Corporation
is in the 30% tax bracket, will report P133,000 in depreciation, will make P176,000 in capital
expenditures, and have a P24,000 increase in net working capital this year.
15. What is Stinky’s free cash ows to the rm in the period?__________
PRELIMINARY EXAMINATION-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 A
1
P55
2 A
2
10.25%
3 A
3
12.75 percent
4 A
4
14 percent
5 B
5
P32.77
6 C
6
12.1 percent
7 C
7
0.7625
8 D
8
9.42 percent
9 B
9
P150
10 C
10
8.20 percent
11 C
11
9.2%
12 A
12
10.6 percent
13 B
13
P877.10
14 D
14
P50.16
15 C
15
16 A
16
17 B
17
18 D
18
19 B
19
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20 C
20
Q3-Valuation Method
THEORIES
1. Statement 1. A common basis for classifying a company as a growth company is the
industry sector though this reasoning is questionable.
Statement 2. A common basis for classifying a company as a growth company is the
earnings growth though this reasoning is questionable.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
2. Statement 1: Firms pass through a life cycle, starting as young idea companies, and
working their way to high growth, maturity, and eventual decline.
Statement 2:Valuing young growth companies is a little easier than valuing start-up or
idea companies.
A. True; True
B. Fasle; True
C. True; False
D. False; False
3. Statement 1. Among growth companies in the same industry, the growth rates vary
significantly.
Statement 2. As such, no adjustments should be made if mature companies are used as
comparables.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
4. Under Relative valuation on common multiples, this is calculated by taking the
company's market capitaliztion adding total debt (including long-term and short-term
debt), and subtracting all cash and cash equivalents.
A. Price earning ratio
B. Expected value
C. Enterprise Value
D. Operating margin
5. Statement 1. Trailing P/E is based on the earnings per share for the last 12 months.
Statement 2. Forward P/E is based on the earnings per share forecasted to be earned
in the next 12 months.
A. Both statements are true
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B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
6.
There are four basic multiples that we can use when using relative valuation, and there
are many different variations on those themes. The four main multiples are?
A. Earnings multiple, Book Value, Revenue Multiples and Sector Specific multiples
B. Earnings multiples, Market Value, Revenue Multiples and Sector Generic
multiples
C. Earnings multiples, Book Value, Revenue Multiples, Sector Generic multiples
D. Earnings multiples, Market value, Revenue Multiples, Sector Specific multiples
7. Statement 1: Valuing declining companies requires making judgments about the assets
that will be divested over time and the profitability of the assets that will be left in the firm.
Statement 2:Mature firms usually are targeted in hostile acquisitions and leveraged
buyouts, where the buyer believes that changing how the firm is run can result in
significant increases in value.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false
8. Statement 1: Growth firms get a significant portion of their value from growth
assets—investments they expect to make in the future.
Statement 2: Young company has already reached its peak and the growth rate shall
remain constant.
A. True; True
B. False; True
C. True; False
D. False; False
9.
Statement 1: In the mature stage, businesses are expected to be able to fund their
working capital and capital expenditures through their ongoing cash flows, and still have
excess cash to be able to service debt and make dividend payments or distributions to
their shareholders or owners.
Statement 2: Some of the tell-tale signs of a company operating in the declining stage
include falling or stagnant revenues, shrinking margins or losses, asset divestitures, big
dividend payouts or stock buybacks, and an inability to repay debt.
A. True; True
B. True; False
C. False; True
D. False; False
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10. This model is a business valuation method that compares a company's value to that of
its competitors or industry peers to assess the firm's financial worth.
A. Book Value valuation model
B. Chicago bulls method
C. Relative valuation model
D. Life cycle valuation model
11. These companies include businesses that have reached the growth ceiling with their
current product or service offerings and have stabilized revenue growth and profit
margins.
A. Young company
B. Growth Company
C. Mature Company
D. Declining Company
12. This is the phase when most firms reach a point in their life cycle where their existing
markets are shrinking and becoming less profitable, and the forecast for the future is
more of the same
A. Early stage as Young Company
B. Growth Phase
C. Maturity Phase
D. Winding Down Phase
13. This is sometimes referred to as “the Stage Development Method or the Development
Stage Valuation Approach" in Valuation of Young Company.
A. Cost-to-Duplicate Approach
B. Berkus Approach
C. Future Valuation Multiple Approach
D. None of the above
14. This is the phase in the life cycle of the company where the markets for products and
services are more clearly established, and the current financial statements provide some
clues to future profitability
A. Early stage or phase like a Young Company
B. Growth Phase as a Growing Company
C. Maturity phase like a Mature Company
D. Winding down phase like Declining Company
15. Statement 1: Growth companies have a volatile trend in revenues and earnings and
grow at a faster pace than the overall economy.
Statement 2: Access to capital is difficult and cash flow shortages are common for many
early-stage companies as they try to keep up with operating and capital cash flow
requirements.
A. True; True
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B. True; False
C. Fasle; True
D. False; False
16. Ceteris paribus, analysts commonly consider all of the following to be indicators that the
market is overvalued except:
A. None of the choices
B. high average price-to-book ratio.
C. high average P/E ratio.
D. high average dividend yield.
17. Under the Dividend discount model, the intrinsic value of the stock is computed by?
A. dividing the growth rate by the expected dividend
B. dividing the expected dividend by the summation of the rate of return and growth
rate
C. dividing the expected dividend by the difference of required rate of return and
growth rate
D. multiplying the growth rate by the the expected dividend adjusted by the required
rate of return
18. Statement 1. A growth company's revenue grows initially at a faster rate, eventually it
will converge with the typical growth rate of mature companies in the same industry.
Statement 2. Studies have shown that it takes around five years from IPO before the
growth rate normalizes to the typical growth rate in the industry.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
19. Statement 1. Idea companies have growing revenues.
Statement 2. Second-stage companies are those moving towards profits.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
20. In growth company valuation, corporate valuation method can be applied, hence the firm
value is computed by:
A. Dividing the EBITDA by the summation of WACC and growth rate
B. Dividing the EBITDA by the difference betwen WACC and growth rate
C. Multiplying the EBITDA by the summation of WACC and growth rate
D. multiplying the WACC by the summation of EBITDA and Growth rate
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21. This method focuses on projecting the startup’s future cash flow movements. A rate of
return on investment, called the “discount rate,” is then estimated based on which it is
determined how much the projected cash flow is worth.
A. Risk Factor Summation Approach
B. Market Multiple Approach
C. Discounted Cash Flow Approach
D. Future Valuation Multiple Approach
22. This method categorize companies as growth companies or mature companies based on
the sector they operate in.Thus, technology companies are treated as growth
companies, whereas steel companies are considered mature.
A. Sector based measure
B. growth history approach
C. Market based measure
D. Intrinsic value measure
23. Broadly, businesses can be classified to be operating in the following stages of their life
cycles in what particular order?
A. Early growth stage to Mature stage to Declining stage to growth stage
B. Growth stage to declining stage to early growth stage to maturity stage
C. early growth stage to growth stage to maturity stage to declining stage
D. early growth stage to maturity stage to gwowth stage to declining stage
24. The best way to value high-growth companies (those whose organic revenue growth
exceeds 15 percent annually) is with?
A. Berkus Model
B. Discounted Cash flow model
C. Non-Discounted Cash flow model
D. Eric Gordon Model
25. _________ is equal to (common shareholders' equity/common shares outstanding).
A. Book value per share
B. Liquidation value per share
C. Market value per share
D. Tobin's Q
26. Statement 1: The multiples approach to valuation is a theory based on the concept that
similar assets should sell for similar prices.
Statement 2: A company with a high P/E ratio is trading at a higher price per peso of
earnings than its peers is considered undervalued under relative valuation method.
A. True; True
B. True; False
C. False; True
D. False; False
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27. Statement 1. A common basis for classifying a company as a growth company is the
industry sector though this reasoning is questionable.
Statement 2. A common basis for classifying a company as a growth company is the
earnings growth though this reasoning is questionable.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
28. This is a youngcompany valuation method which involves taking into account all costs
and expenses associated with the startup and the development of its product, including
the purchase of its physical assets
A. Cost-to-Duplicate Approach
B. Multiples approach
C. Berkus approach
D. Future valuation method approach
29. Statement 1. A multiple is a ratio that is calculated by dividing the market or estimated
value of an asset by a specific item on the financial statements
Statement 2. Examples of multiples are the price-to-earnings ratio and price-to-book
ratio
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
30. Statement 1:While some approaches like discounted cash flows can be used to value
both start-ups and established firms, other metrics like cost-to-duplicate and stage
valuation are unique to new ventures.
Statement 2:It is extremely easy to determine the accurate value of a company while it
is in its infancy stages as its success or failure remains uncertain.
A. True; true
B. True; false
C. False; True
D. False; Fasle
31. Statement 1. A challenge in selecting comparables for a young company is that very few
young companies are publicly listed.
Statement 2. Another challenge in valuing young companies is selecting the variable to
be scaled to.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
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D. Both statements are false
32. Statement 1. We need to project at least four scenarios in using the First Chicago
method.
Statement 2. Each scenario, in using the First Chicago method, must be assumed the
same probability of happening.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
33. Statement 1: For early-growth stage companies, the current revenue stream may be
small or non-existent, even though the revenue growth potential can be very high.
Statement 2: Growth companies include new businesses that have survived the first few
years in the early growth stage, as well as established companies that have still not
reached their market share potential within their existing industry.
A. True; True
B. False; True
C. True; False
D. False; False
34. Statement 1. The distribution for P/Es of companies are skewed towards the left.
Statement 2. The distribution for P/Es of companies are skewed because the lowest
possible P/E is zero.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
35. Statement 1: A relative valuation model differs from an absolute valuation model which
makes no reference to any other company or industry average.
Statement 2: One of the most popular relative valuation multiples is the
price-to-earnings (P/E) ratio.
A. Both statement are incorrect
B. Only statement one is correct
C. Both statements are correct
D. Only statement 2 is correct
36. This Approach solely focuses on estimating the return on investment that the investors
can expect in the near future, say five to ten years.
A. Market Multiple Approach
B. Risk Factor Summation Approach
C. Future Valuation Multiple Approach
D. Discounted Cash Flow Approach
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37. Statement 1. Knowing the target market share is essential in the valuation of a young
company.
Statement 2. Young companies have a rich history of its financial performance and
position.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
38. Statement 1: In Maturity Phase the bulk of a firm's value comes from existing
investments, and financial statements become more informative.
Statement 2: In Winding down Phase revenue growth is steady, and profit margins have
settled into a pattern, making it easier to forecast earnings and cash flows
A. True; True
B. True; False
C. False; True
D. False; False
39. This Model is widely used to determine the intrinsic value of a stock based on a future
series of dividends that grow at a constant rate. It is a popular and straightforward
variant of a dividend discount model (DDM).
A. David Gordon Model
B. David Beckham Model
C. Eric Gordon Model
D. Dick Gordon Model
40. The following are the most common in relative valuation except?
A. Price earning (P/E)
B. Price to book (P/B)
C. Enterprise Value to EBITDA
D. Expected Value to EBIT
41. Statement 1. In using relative valuation, we basically assume that the company will
survive until maturity.
Statement 2. To control the issue in statement 1, we may control for survivability, say by
deducting a discount from the value initially calculated.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
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PROBLEMS
Problem: A CabAir, a young airline company is expected to mature by year 5. By this time, it is
expected to generate P4,000,000,000 in revenues. CabAir is unlevered (i.e. there is no debt).
Currently, the cash balance is immaterial. There are 100,000,000 shares outstanding.
Other relevant data includes:
●
●
●
Airline Industry EV/Revenues (mature companies) 4x
Average EV/Revenues for all publicly listed companies 3x
A certain “3-year-old” airline’s EV/Revenues 10x
Appropriate discount rate for this 10%
Because this CabAir is new, risks of liquidity and survivability will make it appropriate for us to
slash the value we would arrive by half (50%).
1. Determine the estimated stock value after such adjustments (rounded to the
nearest peso, no centavos, no peso sign). _______
Problem: Zubaru Investment Bank is working with the management of Bodega, Inc., a
supermarket chain, in order to take the company public in an initial public offering. Selected
financial information for Bodega, Inc. is as follows.
● Long-term debt (8% interest rate) P 10,000,000
● Common equity:
● Par value (P1 per share) 3,000,000
● Additional paid-in-capital 24,000,000
● Retained earnings 6,000,000
● Total assets 55,000,000
● Net income 3,750,000
● Dividend (annual) 1,500,000
If public companies in the business of groceries are trading at a market to book ratio of 2; those
in the airline industry are trading at a market to book ratio of 4, those in banking are trading at a
market to book ratio of 3,
2. What is the estimated value per share of Bodega, Inc.?_______
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Problem: The following projected results pertain to SHOW YOURSELF, a start tech project,
under three different scenarios. Firms in the same industry are typically valued at 6x EBITDA
Best case scenario
Base case scenario
Worst case scenario
Year 1 CF
Year 2 CF
Year 3 CF
Y3 EBITDA
Probability
P3M
P2M
P2M
P15M
P10M
P3M
P50M
P30M
-P1M
P20M
P10M
-P2M
25%
50%
25%
The founders desire a return of 20% annually from this project before disposing it in three years.
SHOW YOURSELF has no debt and an immaterial cash balance. There are 1,000,000 shares
outstanding (rounded to the nearest peso, no centavos, no peso sign).
3. No question
Problem: Consider the following projections for the Can Corn Corp. for the coming year:
● Operating income P55 million
● Interest expense P15 million
● Preferred stock dividends P13 million
● Common stock dividend-payout ratio 45%
● Common shares outstanding 2,500,000
● Effective corporate income tax rate 30%
4. The common share of stock of Can Corn Corp. is expected to trade at a
Price-to-Earnings Ratio of 9x, the share’s value (rounded to the nearest peso, no
centavos, no peso sign) would be:
Problem: Suppose that the average P/E multiple in the mining industry is 20. Dominus mining
company is expected to have an EPS of P4.00 in the coming year.
5. The value of Dominus mining’s share should be ____? (no centavos, no peso
sign)_______
Problem: The following figures were forecasted form Growee Company, a growth company
Y1
Y2
Y3
Y4
Y5
Y6 onwards
Free Cash Flows
20M
40M
60M
75M
80M
?
Discount rate
15%
14%
13%
12%
11%
11%
After year 5, cash flows are expected to grow by 5% annually.
6. Calculate the enterprise value of Growee Company today (rounded to the nearest
thousand pesos, the hundreds place must be zero (000), wit comma, no peso sign
as well). _________
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Q3-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 A
26. B
1
50
2 A
27.
A
2
22
3 B
28.
A
3
59
4 C
29. A
4
54
5 A
30. B
5
80
6 A
31
6
1,015,725,000
7 C
32 D
8 C
33
A
9 A
34
C
10 C
35
C
11 C
36. C
12 D
37. B
13 B
38. B
14 B
39. A
15 A
40. D
16 D
41. A
17 C
18 A
19 C
20 B
21 C
22 A
23
C
24
B
25
A
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A
Quiz 04-Valuation Method
THEORIES
1. This method categorize companies as growth companies or mature companies based on
the sector they operate in.Thus, technology companies are treated as growth
companies, whereas steel companies are considered mature.
A. Sector based measure
B. growth history approach
C. Market based measure
D. Intrinsic value measure
2. Declining firms derive little from growth assets, and the valuation of these assets should
therefore have a significant impact on value
3. With stagnant and declining earnings from existing assets and little potential for earnings
growth, many declining firms face debt burdens.
4. A Mature company tend to have supernormal growth rate than a young and growing
company which has stable constant growth rate.
5. Statement 1: In the mature stage, businesses are expected to be able to fund their
working capital and capital expenditures through their ongoing cash flows, and still have
excess cash to be able to service debt and make dividend payments or distributions to
their shareholders or owners.
Statement 2: Some of the tell-tale signs of a company operating in the declining stage
include falling or stagnant revenues, shrinking margins or losses, asset divestitures, big
dividend payouts or stock buybacks, and an inability to repay debt.
A. True; True
B. True; False
C. False; True
D. False; False
6. In call option, which is the right or privilege to buy the stock, bond or foreign currency,
the investor shall exercise the said right if the market price is _____ strike or exercise price.
A. equal to
B. higher than
C. lower than
D. indifferent
7. Investing in stocks of a young and Growing company has more earnings potential than
investing in mature company.
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8. One of the signs of a company in decline is the inability to increase revenues over
extended periods, even when times are good.
9. The terminal date is the date when the constant growth of the company begins and the
non-constant growth of the company end.
10. In Mature Company Rather than Young Company, Revenues are small or non-existent
for idea companies and the expenses often are associated with getting the business
established, rather than generating revenues.
11. A young company, like Dito Telecom, generally has large share in the market than a
mature or stable company like PLDT or Globe.
12. In option valuation using the binomial option price models, the assumptions are that
there are two possible outcomes — hence, the binomial part of the model.
13. Statement 1: Growth firms get a significant portion of their value from growth
assets—investments they expect to make in the future.
Statement 2: Young company has already reached its peak and the growth rate shall
remain constant.
A. True; True
B. False; True
C. True; False
D. False; False
14. This is the phase in the life cycle of the company where the markets for products and
services are more clearly established, and the current financial statements provide some
clues to future profitability.
A. Early stage or phase like a Young Company
B. Growth Phase as a Growing Company
C. Maturity phase like a Mature Company
D. Winding down phase like Declining Company
15. Statement 1: For early-growth stage companies, the current revenue stream may be
small or non-existent, even though the revenue growth potential can be very high.
Statement 2: Growth companies include new businesses that have survived the first few
years in the early growth stage, as well as established companies that have still not
reached their market share potential within their existing industry.
A. True; True
B. False; True
C. True; False
D. False; False
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16. This is the phase when most firms reach a point in their life cycle where their existing
markets are shrinking and becoming less profitable, and the forecast for the future is
more of the same.
A. Early stage as Young Company
B. Growth Phase
C. Maturity Phase
D. Winding Down Phase
17. Statement 1: The inputs for the Black-Scholes equation are volatility, the price of the
underlying asset, the strike price of the option, the time until expiration of the option, and
the risk-free interest rate.
Statement 2: The Black-Scholes model is also known as Black-sholes Merton Model.
A. True; True
B. True; False
C. False;True
D. False;False
18. The Firm Value or Market Value can be computed by discounting the Free Cash Flow
the firm whether the said firm has supernormal or constant growth.
19. Statement 1: In Maturity Phase the bulk of a firm's value comes from existing
investments, and financial statements become more informative.
Statement 2: In Winding down Phase revenue growth is steady, and profit margins have
settled into a pattern, making it easier to forecast earnings and cash flows.
A. True; True
B. True; False
C. False; True
D. False; False
20. The growth rate normally increases as the market share of the company declines and
vice versa
21. Declining company normally has higher market value than a mature comapny because
its revenue declines and more assets are being divested.
22. Statement 1: Growth companies have a volatile trend in revenues and earnings and
grow at a faster pace than the overall economy.
Statement 2: Access to capital is difficult and cash flow shortages are common for many
early-stage companies as they try to keep up with operating and capital cash flow
requirements.
A. True; True
B. True; False
C. Fasle; True
D. False; False
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23. This is sometimes referred to as “the Stage Development Method or the Development
Stage Valuation Approach" in Valuation of Young Company.
A. Cost-to-Duplicate Approach
B. Berkus Approach
C. Future Valuation Multiple Approach
D. None of the above
24. One of the charateristics of a declining company or in distress is the asset divestitures
because of high existing obligation to settle.
25. statement 1: A Call option gives you the right to sell an underlying asset at a fixed price
(called a strike or an exercise price).
statement 2: The Black-Scholes model applies when the limiting distribution is the
normal distribution , and explicitly assumes that the price process is continuous and that
there are no jumps in asset prices
A. True; True
B. True; False
C. False; True
D. False; False
26. Under the Black-shole Model, it is assumed that no dividend is paid during the life of the
option and that the market is inefficient.
27. It is regarded as one of the best ways of determining the fair price of options?
A. Black Panther Pricing Model
B. Black Soul Model
C. Black Sholes Model
D. Black Mamba Model
28. Statement 1: An option provides the holder with the right to buy or sell a specified
quantity of an underlying asset at a fixed price (called a strike price or an exercise price)
at or before the expiration date of the option.
Statement 2: A Put option gives you the right to buy an underlying asset at a fixed price
(called a strike or an exercise price).
A. True; True
B. True; False
C. False; True
D. False; False
29. Since equity investments in young firms tend to be privately held and in
non-standardized units, they are also much more illiquid than investments in their
publicly traded counterparts.
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30. If the market value of a growth company is higher than its intrinsic value, the valuation is
considered as undervalued.
31. This is a young company valuation method which involves taking into account all costs
and expenses associated with the startup and the development of its product, including
the purchase of its physical assets
A. Cost-to-Duplicate Approach
B. Multiples approach
C. Berkus approach
D. Future valuation method approach
32. When valuing declining firms, we have to go against the grain and estimate cash flows
for the future that may be lower than cash flows today.
33. The mature company's concern is to maintain its market share since the revenue
generated is stable as opposed to young company that concerns more on ventures that
would generate high revenues and portion of the market share.
34. The large dividends pay-out and share buybacks normally characterizes declining firms
with little or no debt.
35. Statement 1: Valuing declining companies requires making judgments about the assets
that will be divested over time and the profitability of the assets that will be left in the firm.
Statement 2: Mature firms usually are targeted in hostile acquisitions and leveraged
buyouts, where the buyer believes that changing how the firm is run can result in
significant increases in value.
A. Only statement 1 is true
B. Only statement 2 is true
C. Both statements are true
D. Both statements are false
PROBLEMS
Problem The following figures were forecasted form Growee Company, a growth company
Y1
Y2
Y3
Y4
Y5
Y6 onwards
Free Cash Flows
20M
40M
60M
75M
80M
?
Discount rate
15%
14%
13%
12%
11%
11%
After year 5, cash flows are expected to grow by 6% annually.
1. Calculate the enterprise value of Growee Company today. _________
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Problem Greenergy stock that is priced at P100 per share. In one month, the price of this stock
will go up by P5 or go down by P5, creating this situation:
● Stock price = P100
● Stock price in one month (up state) = P105
● Stock price in one month (down state) = P95
If there is a call option available on this stock that expires in one month and has a strike price of
P100.
2. In downstate what is the worth of the call option?______
Problem VDO Investment Bank is working with the management of Savemart Inc., a
supermarket chain, in order to take the company public in an initial public offering. Selected
financial information for Bodega, Inc. is as follows.
● Long-term debt (8% interest rate) P 20,000,000
● Common equity:
● Par value (P1 per share) 4,000,000
● Additional paid-in-capital 40,000,000
● Retained earnings 6,000,000
● Total assets 80,000,000
● Net income 5,750,000
● Dividend (annual) 2,500,000
If public companies in the business of groceries are trading at a market to book ratio of 2; those
in the airline industry are trading at a market to book ratio of 4, those in banking are trading at a
market to book ratio of 5, what is the estimated value per share of Bodega, Inc.? (rounded to the
nearest peso, no centavos, no peso sign)
3. what is the estimated value per share of Bodega, Inc.? _______
Problem Meralko stock is priced at P200 per share and that there is a call option available on
this stock that expires in one month and has a strike price of $200. In one month the tock can go
up to P220 or go down to P180. applying the binomial option pricing,
4. In the up state, this call option is worth?_________
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Problem Bitcoin Company, a mature comany, has P20 million in short-term liabilities on the
books and P30 million in long-term liabilities. It has P125 million worth of assets, and 10% of
those assets are reported as cash. There are 17.5 million shares of the company's common
stock outstanding, and the current price per share of the stock is $17.50. The company reported
P85 million in revenue last year. The Enterprise Value per Revenue of Bitcoin Company is 2.5
5. Using this scenario, the market value per share of the company is:_________
Problem Growee company has a constant growth rate of 4 percent and that the required rate of
return on stock investment under CAPM is 10 percent. if the expected dividend to be declared
amounted to P 6 per common share,
6. How much is the value of the stock of Growee Company?_______
Problem Consider the following projections for the Growee Company for the coming year:
● Earnings Before Interest and Tax P120 million
● Interest expense P20 million
● Preferred stock dividends P25 million
● Common stock dividend-payout ratio 55%
● Common shares outstanding 10,000,000
● Effective corporate income tax rate 25%
7. The common share of stock of Can Corn Corp. is expected to trade at a
Price-to-Earnings Ratio of 5x, the share’s value (rounded to the nearest peso, no
centavos, no peso sign) would be:________
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Problem The Young Company has a supernormal growth rate of 25% for the first 2 years after
which the growth rate will be stable at 5%. The free cash flow today is P10,000,000 (FCF0) and
the Discount rate is 10%.
8. What is the market/enterprise value of the Young Company? (Do not use Comma.
Round-off final answer to whole number)_____________
Problem Suppose that the average P/E multiple in the Technology industry is 15. PLDTee
Smartee company is expected to have an EPS of P3.00 in the coming year.
9. The value of PLDTee Smartee's share should be ____? (no centavos, no peso
sign)_____
Problem On December 1, 2017, Fullhouse Company paid P3,000 to purchase a 90-day call
option for 500,000 Thailand baht. The option’s purpose is to protect an exposed liability of
500,000 baht relating to a purchase of merchandise received on December 1, 2017 and to be
paid on March 1, 2018.
Relevant rates and market values at different dates are as follows:
12/01/2017
12/31/2017
03/01/2018
Spot rate (market price)
P1.20
P1.28
P1.27
Strike price (exercise price)
1.20
1.20
1.20
Fair value of call option
P3,000
P42,000
P35,000
10. How much is the value of the option on December 31, 2017?________
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Q4-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 A
26. FALSE
1
1,191,386,430
2 FALSE
27
C
2
0
3 TRUE
28
B
3
25
4 FALSE
29 TRUE
4
20
5 A
30 FALSE
5
10
6 B
31
A
6
10
7 TRUE
32
TRUE
7
25
8 TRUE
33
TRUE
8
295,454,545
9 TRUE
34
TRUE
9
45
10 FALSE
35
C
10
42,000
11 FALSE
36
11
12 TRUE
12
13 C
13
14 B
14
15 A
15
16 D
16
17 A
17
18 TRUE
18
19 B
19
20 FALSE
20
21 FALSE
21
22 A
22
23
B
23
24
TRUE
24
25
C
25
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Q1- (extra from 1stSem-AY 2020-2021)-Valuation Method
THEORIES
1. Assuming that the intrinsic value of a stock is greater than its market value, which of the
following is a correct conclusion?
A. The stock has a low level of risk.
B. The market is overvaluing the stock.
C. The stock offers a high dividend payout ratio.
D. The market is undervaluing the stock.
PROBLEMS
Problems: Ley-Fung, Co.'s P100 par value preferred stock just paid its P10 per share annual
dividend. The preferred stock has a current market price of P96 a share. The firm's marginal tax
rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital
structure relationship into the future.
1. The component cost of preferred stock to Ley-Fung, Co. would be closest to:____
Problems: Puerto Princesa Inc's stock has an expected return on equity of 12.25%, a beta
coefficient of 1.25, and is in equilibrium. If the risk-free rate is 5.00%,
2. What is the market risk premium? _______
Problems: Tucker Corporation's manager believes that the economic environment during the
next year can be good, normal, or bad, and he thinks that a stock's returns will have the
following probability distribution shown below.
Good
.50
15%
Normal
.20
0%
Bad
.30
-5%
3. Calculate the expected rate of return:______
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Problems: Assume that you are an advisor to Brough Inc., and you have been provided with
the following data: Dividend next year, P0.67; Stock price, P27.50; and growth rate, 8.00%
(constant).
4. What is the cost of equity from retained earnings based on the DCF approach?
Q1- (extra from 1stSem-AY 2020-2021)-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 D
1
10.4%
2
2
5.80%
3
3
6.00%
4
4
10.44%
Quiz 2 (extra from 1stSem-AY 2020-2021)-Valuation Method = NONE
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PRELIM EXAM (extra from 1stSem-AY 2020-2021)-Valuation Method
THEORIES
1. The standard deviation is the weighted average of all the deviations from the expected
value, and it indicates how far above or below the expected value the actual value is
expected to be.
2. Which of the following is not a test of semi-strong form efficiency?
A. Stock splits
B. Dividend announcements
C. Insider transactions
D. Accounting changes
3. Risk of fall in income due to fall in interest rates in future is classified as:
A. investment risk
B. income risk
C. reinvestment risk
D. price risk
4. Which of the following is true regarding the measurement and interpretation of beta of a
security?
A. Not all securities are equally affected by fluctuations in the market.
B. The sensitivity of a stock to market movements is known as alpha.
C. Stocks with a beta less than 1.0 are particularly sensitive to market fluctuations.
Those with a beta greater than 1.0 are not so sensitive to such movements.
D. The average beta of all stocks is 0.
E. None of the above
5. Statement 1. Equity cash flow is the cash flow remaining for paying dividends to
common equity investors, buying back stock, or reinvesting in the rm after satisfying all
of the firm's obligations.
Statement 2. In applying discounted cash flow methods, enterprise cash flow is
discounted by the firm's cost of equity.
A. Statement 2 is true
B. Both statements are false
C. Statement 1 is true
D. Both statements are true
6. A way to test the semi-strong EMH include:
A. Correlation analysis that compares the security returns to the overall market returns.
B. Queueing line theory tests.
C. Tests of the speed of adjustment of stock prices to firm’s announcements.
D. Simple regression analysis.
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7. The participating feature for a preferred share means that preferred shareholders have
the opportunity to:
A. convert preferred stock into a specified amount of common stock.
B. increase their dividends when common shareholders dividends reach a certain
amount
C. sell all or part of the shares back to the issuer at a pre-specified call price.
D. be granted special voting privileges if the corporation is unable to pay the xed
dividend.
8. Stock X has a beta = 0.8, while Stock Y has a beta = 1.6. Which of the following
statements is TRUE?
A. If the marginal investor becomes more risk averse, the required return on Stock X
will increase by more than the required return on Stock Y.
B. An equally weighted portfolio of Stocks X and Y will have a beta lower than 1.2.
C. If the risk-free rate increases but the market risk premium remains constant, the
required return on Stock X will increase by more than that on Stock Y.
D. Stock Y's required return is double that of Stock X's. d.
E. If the marginal investor becomes more risk averse, the required return on Stock Y
will increase by more than the required return on Stock X.
9. Statement 1. In a perfectly efficient market, investors are not able to use available
information to earn abnormal returns.
Statement 2. Under the weak form of the EMH, technical analysis that relies on past
history of price information is of no value.
A. Both statements are true
B. Statement 2 is true
C. Statement 1 is true
D. Both statements are false
10. Which of the following is not included in calculating a firm's cost of equity using the
Capital Asset Pricing Model?
A. The firm's beta
B. Book value of assets
C. Return on all stocks
D. Risk free rate of return
11. Which of the following statements is most correct?
A. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must
also exceed its coupon rate.
B. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be
less than its maturity value.
C. If two bonds have the same maturity, the same yield to maturity, and the same
level of risk, the bonds should sell for the same price regardless of the bond's
coupon rate.
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D. Answers b and c are both correct.
E. None of the above answers are correct.
12. What is the effect of the extensive usage of the internet with regards to efficient
markets?
A. Information becomes cheaper and more accessible thus making markets more
efficient.
B. New regulation comes in, marking markets less efficient.
C. Competition among brokers increases, thus making markets more efficient
D. Volatility of security prices increases, thus making markets less efficient.
13. If the lender may have to sell a bond prior to maturity and interest rates have risen since
the bond was purchased, the lender is exposed to
A. Interest rate risk.
B. Reinvestment risk.
C. Perpetuity risk.
D. Indefinite maturity risk.
14. The investment risk that investor would face if she or he holds only one asset is called?
A. Portfolio risk
B. Diversiable risk
C. Stand-alone risk
D. Systematic risk
15. The additional return we should expect to receive for being exposed to risk?
A. Par risk
B. Risk free rate of return
C. Risk discount
D. Risk premium
16. Statement 1. Variance is a measure of the variability of returns, and since it involves
squaring the deviation of each actual return from the expected return, it is always larger
than its square root, the standard deviation.
Statement 2. Because of differences in the expected returns on different investments,
the standard deviation is not always an adequate measure of risk. However, the
coefficient of variation adjusts for differences in expected returns and thus allows
investors to make better comparisons of investments' stand-alone risk
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are true
D. Both statements are false
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17. Which of the following statements is not true about preferred stock?
A. Preferred stockholders have limited voting privileges relative to common-stock
owners.
B. Preferred dividends are tax deductible just like the interest on bonds.
C. Preferred dividend payments are paid by the issuer with after-tax pesos.
D. Preferred stocks are generally viewed as perpetuities because they have no fixed
maturity
18. The Gordon growth model (read all choices before answering)
A. Is a generalization of the perpetuity formula to cover the case of a growing
perpetuity and is valid only when g is less than rs
B. Is valid only when rs is less than g
C. Is a generalization of the perpetuity formula to cover the case of a growing
perpetuity
D. Is valid only when g is less than rs
E. Is a generalization of the perpetuity formula to cover the case of a growing
perpetuity and is valid only when rs is less than g
19. Why are preferred shares sometimes treated like debt?
A. Preferred shareholders receive a residual value and not a stated value.
B. Legally speaking, preferred shares are debt securities.
C. Preferred dividends are deductible from taxable income just like interest
payments on bonds.
D. Preferred dividend payments are similar to bond interest payments and are xed
in nature regardless of whether the rm has excess earnings.
PROBLEMS
Problem. Assume that you are considering the purchase of a 20-year, noncallable bond with an
annual coupon rate of 9.5%. The bond has a face value of P1,000, and it makes semiannual
interest payments. If you require an 8.4% nominal yield to maturity on this investment,
1. what is the maximum price you should be willing to pay for the bond? _________
Problem. Ronin Company's bonds mature in 8 years, have a par value of P1,000, and make an
annual coupon interest payment of P65. The market requires an interest rate of 8.2% on these
bonds.
2. What is the bond's price?___________
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Problem. Given the following information:
PROBABILITY
RETURN
0.2
2.0%
0.3
12.0%
0.5
5.0%
3. compute the coefficient of variation for Sarsi Cola, Inc.:_________
Problem. A preferred stock will pay a dividend of P2.75 in the upcoming year, and every year
thereafter, i.e., dividends are not expected to grow. You require a return of 10% on this stock.
4. Use the constant growth DDM to calculate the intrinsic value of this preferred
stock.___________
Problem. Assume that today is 31 December 2019, and that the following information applies to
the Cheesy Company (apply normalization adjustments when applicable:)
2020
2021
2022
Operating Income (EBIT)
P20M
P30M
P45M
Tax Rate
30%
30%
30%
Depreciation (deducted in arriving at EBIT)
P5M
P8M
P9M
Capital Expenditures
P3M
P1M
P4M
Increase in inventory and receivables
P6M
P3M
P4M
Increase in payables
P2M
P1M
P1M
At 31 December 2019, the non-cash net working capital is P5,000,000. After the year 2022, the
cash ows are expected to grow annually at a constant rate of 3%. The WACC of the rm is 13%.
5. Calculate the stock’s value if there is P100 million of debt and 20 million stocks
outstanding. (two decimal places, example if it is P1.006, type 1.01). __________
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Problem. A portfolio comprises two stocks and the expected return on each of them are
12% and 16% respectively.
6. Determine the expected return of the portfolio if first stock constitutes 40% of the
portfolio. _________
Problem. You have been assigned the task of using the corporate, or free cash flow, model to
estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free
cash flow (FCF1) is expected to be P75.0 million, the FCFs are expected to grow at a constant
rate of 5.00% a year in the future, the company has P200 million of long-term debt and
preferred stock, and it has 30 million shares of common stock outstanding.
7. What is the firm's estimated intrinsic value per share of common stock?_________
Problem. Carter's preferred stock pays a dividend of P1.00 per quarter. If the price of the stock
is P45.00,
8. what is its simple annual rate of return? _________
Problem. The Stinky Corporation is expected have EBIT of P1.2M this year. Stingy Corporation
is in the 30% tax bracket, will report P133,000 in depreciation, will make P176,000 in capital
expenditures, and have a P24,000 increase in net working capital this year.
9. What is Stinky’s free cash ows to the rm in the period?________
Problem. Calculate the standard deviation of the expected peso returns for Ditto Center, given
the following distribution of returns:
PROBABILITY
RETURN
0.20
P50
0.50
P20
0.30
-P15
10. Calculate the standard deviation. ________
Problem. Midwest Airline is expected to pay a dividend of P7 in the coming year. Dividends
are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the
expected return on the market portfolio is 14%. The stock of Midwest Airline has a beta of 3.00.
11. The return you should require on the stock is (2 decimal places, example if it is
20%, type 20.00) _________
Problem. Medtronic Company has an expected ROE of 16%. The dividend growth rate will be
________ if the firm follows a policy of paying 70% of earnings in the form of dividends.
12. Compute the dividend growth rate. _________
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Problem. Rhino Inc. recently issued noncallable bonds that mature in 15 years. They have a
par value of P1,000 and an annual coupon of 5.7%.
13. If the current market interest rate is 7.0%, at what price should the bonds
sell?_______
Problem. The mining company’s stockholders expect the following cash ows to be available to
them. Since the company’s operations and financing structures are risky, certainty equivalent
coefficients for the cash ows in their respective years are also given.
Year
Free Cash Flow to Equity
CE Coe.
1
P10,000,000
0.80
2
P15,000,000
0.70
3
P20,000,000
0.50
The risk-free rate of return is 5%. The company ceases operations after year 3. Currently, the
company is financed with P15 million worth of debt and 10 million common shares outstanding.
14. Calculate the intrinsic value of the stock (two decimal places, example if it is
P1.006, type 1.01). ______
Problem. Ron Enterprises forecasts the free cash ows (in millions) shown below. The weighted
average cost of capital is 13.0%, and the FCFs are expected to continue growing at a 5.0% rate
after Year 3.
Year
1
2
3
FCF -P15.0
P10.0
P40.0
15. What is the firm's total corporate value, in millions? ______
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Problem. Miley Flannery holds the following portfolio:
STOCK
INVESTMENT
BETA
A
P150,000
2.80
B
50,000
1.60
C
100,000
2.00
D
75,000
2.40
TOTAL
P375,000
16. The portfolio’s beta is closest to: ________
Problem. MelonChip Inc. has an outstanding issue of perpetual preferred stock with an annual
dividend of P6.50 per share. If the required return on this preferred stock is 7.5%,
17. at what price should the stock sell (remove the decimal places for this item, i.e.
NO CENTAVOS here)?________
Problem. Surelaloo Tool Company is expected to pay a dividend of P2 in the upcoming year.
The risk-free rate of return is 4% and the expected return on the market portfolio is 14%.
Analysts expect the price of Sure Tool Company shares to be P22 a year from now. The beta of
Sure Tool Company's stock is 1.25.
18. The market's required rate of return on Surelaloo's stock is ____.
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PRELIM EXAM (extra from 1stSem-AY 2020-2021)-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 TRUE
1
P1,105.69
2 C
2
P903.04
3 C
3
0.58
4 A
4
P27.50
5 C
5
8.81
6 C
6
14.4%
7 B
7
P43.33
8 E
8
8.89%
9 A
9
773,000
10 B
10
P23.0
11 B
11
30.0
12 A
12
4.8%
13 A
13
P881.60
14 C
14
2.58
15 D
15
P386.13
16 C
16
2.35
17 B
17
87
18 A
18
16.5%
19 D
19
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Quiz 3 (extra from 1stSem-AY 2020-2021)-Valuation Method
THEORIES
1. Statement 1. The operating margins of a growth company maybe, initially, too high and is
expected to decrease as it matures.
Statement 2. The operating margins of a growth company maybe, initially, too low and is
expected to increase as it matures.
A. Both statements are false
B. Both statements are true
C. Statement 2 is true
D. Statement 1 is true
2. Statement 1. Growth companies have dynamic financials, example, profits may fluctuate
from positive to negative in a short period.
Statement 2. Growth companies have a lot of debt since they need funding for their capital
acquisitions.
A. Both statements are false
B. Statement 2 is true
C. Both statements are true
D. Statement 1 is true
3. Statement 1. Most of the shareholders of a young company are well diversified
Statement 2. Because of this, the capital asset pricing model will be a good tool in arriving at a
discount rate for a young company.
A. Both statements are false
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are true
4. In controlling for differences in multiples, the following can be made except:
A. Modify the multiple
B. None as all of them are used in controlling differences
C. Use statistical techniques
D. Make a subjective adjustment
5. Statement 1. Techniques to control varying growth rates such as the use of a PEG ratio may
be helpful
Statement 2. Techniques to control varying growth rates such as the use of statistical
techniques may be helpful.
A. Both statements are false
B. Statement 2 is true
C. Statement 1 is true
D. Both statements are true
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6. Which is not an issue in the discounted cash flow technique of a growth company?
A. Changing risk across time will make it sensible to use different discount rates each
period.
B. Operating margin ratios need to be adjusted as the company matures.
C. Revenues based multiples should be used with caution.
D. A growth company's revenue grows initially at a faster pace, then converges with the
typical growth rate of mature companies
7. Statement 1. Ceteris paribus, Price-to-Earnings (P/E) ratios are higher for firms with high
growth prospects. At the same time, P/E's are lower for riskier firms, ceteris paribus.
Statement 2. These two factors, growth prospects and riskiness, may either be offsetting or
reinforcing as P/E determinants.
A. Statement 2 is true
B. Both statements are false
C. Both statements are true
D. Statement 1 is true
8. Which of the following is not one of the four keys in using multiples?
A. Analytical test
B. Definitional test
C. Descriptive test
D. Application test
E. Fundamental test
9. Statement 1. The First Chicago method is used for start-ups and growth companies.
Statement 2. The First Chicago method is a hybrid of DCF techniques and relative valuation.
A. Statement 2 is true
B. Statement 1 is true
C. Both statements are true
D. Both statements are false
10. Statement 1. Generally speaking, the lowest possible multiple is zero, while there is no limit
as to how high it can get.
Statement 2. Because of statement 1, the mean is the best measure of central tendency for multiples.
A. Both statements are false
B. Both statements are true
C. Statement 1 is true
D. Statement 2 is true
11. Which of the following is not a stage in company's life cycle?
A. a. Decline
B. Young
C. Adolescence
D. Growth
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12. Statement 1. Some would argue that higher annual growth in earnings indicate the
company is in the growth stage.
Statement 2. Statement 1 however ignores the fact that mature companies may have high
growth rates in earnings due to cost savings, rather than organic growth.
A. Both statements are true
B. Statement 2 is true
C. Statement 1 is true
D. Both statements are false
13. Statement 1. A lot of young companies are already publicly listed.
Statement 2. Young companies have the capacity to generate the most revenues.
A. Both statements are false
B. b. Both statements are true
C. c Statement 2 is true
D. d. Statement 1 is true
14. Statement 1. The PEG ratio is a modified P/E ratio adjusted for growth.
Statement 2. To calculate the PEG ratio, we shall multiply P/E by the growth rate
A. Both statements are true
B. Statement 2 is true
C. Both statements are false
D. Statement 1 is true
15. Statement 1. In controlling for survivability in valuing young companies, we can project two
sets of cash flows, one under the assumption that the company will survive, and the other,
assuming it will be unsuccessful.
Statement 2. Take the weighted average of these two values using an expected value approach
using the probability of occurrence as the weights.
A. Both statements are false
B. Both statements are true
C. Statement 2 is true
D. Statement 1 is true
16. Statement 1. The P/E ratio is the ratio of the company's stock price to its earnings per share
Statement 2. The P/E ratio is the ratio of the company's market capitalization to its net income
available to common stockholders
a. Both statements are false
b. Statement 1 is true
c. Statement 2 is true
d. Both statements are true
17. Statement 1. Young companies have highly sustainable revenues.
Statement 2. It is very easy and helpful to calculate the beta for young companies
A. Both statements are false
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B. Both statements are true
C. Statement 1 is true
D. Statement 2 is true
18. Statement 1. Young companies' shares of stocks are very liquid.
Statement 2. Young companies have high mortality rate
A. Both statements are true
B. Both statements are false
C. Statement 2 is true
D. Statement 1 is true
19. Statement 1. In young companies, lack of liquidity can increase the company's value
Statement 2. In young companies, the issue of survivability can increase the company's value.
A. Both statements are false
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are true
20. High P/E ratios tend to indicate that a company will _______, other things equal.
A. grow quickly
B. grow at the same speed as the average company
C. grow slowly
D. not grow
E. None of these is correct
21. Statement 1. Relative valuation requires the use of other companies in the same industry,
these companies are called comparable companies.
Statement 2. It is always straightforward to determine the comparable companies of the
company you are trying to value.
A. Both statements are true
B. Statement 1 is true
C. Both statements are false
D. Statement 2 is true
22. Statement 1. Generally, a growth company's risk level changes more than mature
companies across time.
Statement 2. It is advisable to use different discount rates every year in the non constant
growth period in valuing growth companies
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are true
D. Both statements are false
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23. Statement 1. The terminal value represents most of the value of a young company.
Statement 2. In selecting the terminal date, we must be comfortable that the company will
mature by then.
A. Both statements are false
B. Statement 1 is true
C. Both statements are true
D. Statement 2 is true
24. Statement 1. In relative valuation, the objective is to find the value of an asset, given its
cash flow, growth and risk characteristics.
Statement 2. In discounted cash flow valuation, the objective is to value an asset, based upon
how similar assets are currently priced by the market.
A. Both statements are true
B. Statement 2 is true
C. Both statements are false
D. Statement 1 is true
25. Which of the following common ratios used in relative valuation has a numerator
inconsistent to its denominator?
A. EBITDA-to-Enterprise Value
B. Price-to-Enterprise Value
C. Price-to-Book
D. Price-to-Sales
E. Price-to-Earnings
26. Statement 1. For growth companies, the use of forward earnings (that by the time the
company becomes mature) is preferable than current earnings.
Statement 2. If Statement 1 is performed, use other newly listed growth companies as
comparables.
A. Both statements are true
B. Statement 2 is true
C. Both statements are false
D. Statement 1 is true
27. Statement 1. Enterprise value multiples and equity multiples are the two categories of
valuation multiples (for consistency, observe apples-to-apples rule).
Statement 2. Comparable companies for multiples are always easy to determine.
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are false
D. Both statements are true
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28. Statement 1. The best definition of a growth company is one that gets a significant portion
of its value from assets that are yet to be invested in rather than from those already existing
currently.
Statement 2. We expect terminal values of growth companies to be larger than those of mature
companies in relative terms.
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are false
D. Both statements are true
Quiz 3 (extra from 1stSem-AY 2020-2021)-Valuation Method (KEY TO CORRECTION)
THEORY
1 B
20 A
2 D
21 B
3 A
22 C
4 B
23
C
5 D
24
C
6 C
25
D
7 C
26. D
8 E
27
A
9 C
28
D
10 C
11 C
12 A
13 A
14 A
15 B
16 D
17 A
18 C
19 A
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Quiz 4 (extra from 1stSem-AY 2020-2021)-Valuation Method
THEORIES
1. Statement 1. It is unrealistic for analysts to use negative growth rate in the constant
growth phase value calculation.
Statement 2. The reason why it is unrealistic is that companies cannot decrease in size
indefinitely
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are false
D. Both statements are true
2. Statement 1. The Black Scholes Merton model would work better under the condition
that the stock pays dividends.
Statement 2. The Black Scholes Merton model would work better under the condition
that the stock does not pay dividends.
A. Statement 2 is true
B. Neither assumptions are valid
C. Both assumptions are valid
D. Statement 1 is true
3. Statement 1. Mature companies’ revenue growth rates are converging with the growth
rate of the country’s (where it operates) GDP.
Statement 2. Mature companies’ profit margins are more established and consistent
compared to those of growth companies.
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are false
D. Both statements are true
4. Statement 1. Decline companies derive a very large portion of their value from assets
that are expected to be made (yet to be invested in).
Statement 2. Mature companies derive a very large portion of their value from assets
that are already in place (invested in).
A. Statement 2 is true
B. Both statements are false
C. Both statements are true
D. Statement 1 is true
5. Statement 1. The cost of capital, as a company enters in its declining phase, usually
increases, especially when there is a large amount of debt as a financing source.
Statement 2. This happens because the probability of distress increases.
A. Both statements are false
B. Both statements are true
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C. Statement 1 is true
D. Statement 2 is true
6. Statement 1. For declining companies, all declines lead to distress.
Statement 2. For declining companies, all declines are irreversible.
A. Statement 2 is true
B. Both statements are true
C. Statement 1 is true
D. Both statements are false
7. Statement 1. Growth companies derive a very large portion of their value from assets
that are already in place (invested in)
Statement 2. Decline companies derive a very large portion of their value from assets
that are expected to be made (yet to be invested in).
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are false
D. Both statements are true
8. Statement 1. In the valuation of a mature company, one concern is that the current way
of management is not the best way.
Statement 2. As a result of statement 1, another investor might decide to acquire a
controlling interest and change the management.
A. Both statements are true
B. Statement 1 is true
C. Both statements are false
D. Statement 2 is true
9. Statement 1. A growth company’s revenue grows initially at a faster pace, then
converges with the typical growth rate for a mature company in approximately 5 years.
Statement 2. For growth companies, operating margins are initially stable and
predictable, then gets more volatile as it matures.
A. Both statements are false
B. Both statements are true
C. Statement 1 is true
D. Statement 2 is true
10. Statement 1. Asset divestments are common for declining companies.
Statement 2. Large dividends and stock repurchases are common for declining
companies
A. Statement 2 is true
B. Statement 1 is true
C. Both statements are false
D. Both statements are true
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11. A riskless hedge can best be defined as:
A. Simultaneously buying and selling a call option with the same exercise price.
B. A hedge in which an investor buys a stock and simultaneously sells a call option
on that stock and ends up with a riskless position.
C. Standardized contracts that are traded on exchanges and are “marked to market”
daily, but where physical delivery of the underlying asset is virtually never taken.
D. A situation in which aggregate risk can be reduced by derivatives transactions
between two parties.
E. Two parties agree to exchange obligations to make specied payment streams.
12. Statement 1. The results of the calculations made under the BSM model would be more
accurate for American options.
Statement 2. The results of the calculations made under the BSM model would be more
accurate for European options.
A. It will be accurate for both
B. Statement 1 is true
C. It doesn’t apply to both.
D. Statement 2 is true
13. Statement 1. The term, “Young” companies include idea companies, most of these idea
companies are still in the research and development phase.
Statement 2. The term, “Young” companies include “second-stage companies”, they are
approaching portability.
A. Statement 1 is true
B. Both statements are false
C. Statement 2 is true
D. Both statements are true
14. Statement 1. Companies in a decline are always characterized by having a cost of
capital being lower than earnings.
Statement 2. Companies in a decline may see its value being destroyed rather than
being created in the future.
A. Statement 2 is true
B. Both statements are true
C. Statement 1 is true
D. Both statements are false
15. An option that gives the holder the right to buy a stock at a specified price at some time
in the future is called a(n)
A.
B.
C.
D.
E.
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Covered option.
Naked option.
Out-of-the-money option.
Put option.
Call option.
16. Statement 1. First Chicago method and Capital asset pricing model are compatible with
each other.
Statement 2. First Chicago method uses a deterministic approach, assuming there is
only one stream of projected cash ows that is certain to happen.
A. Both statements are true
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are false
17. Statement 1. Growth companies experience changing risks across time, this would have
valuation implications.
Statement 2. It is appropriate to use the same discount rate from the rst year until the
terminal year in valuing growth companies.
A. Both statements are true
B. Both statements are false
C. Statement 1 is true
D. Statement 2 is true
18. Statement 1. The First Chicago method is a valuation approach that utilizes techniques
from relative valuation, none from discounted cash flow valuation
Statement 2. The First Chicago method is a valuation approach that utilizes techniques
from discounted cash ow valuation, none from relative valuation
A. Both statements are true
B. Statement 2 is true
C. Statement 1 is true
D. Both statements are false
19. Statement 1. Declining companies have revenues that are either at or falling.
Statement 2. As a result of Statement 1, margins are likely to shrink.
A. Statement 2 is true
B. Statement 1 is true
C. Both statements are false
D. Both statements are true
20. Which of the following events is likely to decrease the value of call options on the
common stock of GCQ Company?
A. GCQ's stock price becomes more risky (higher variance).
B. An increase in the amount of time until the option expires.
C. An increase in the risk-free rate.
D. An increase in GCQ's stock price.
E. An increase in the exercise price of the option.
21. Statement 1. Companies do not experience high earnings growth rate in the mature
stage at all.
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Statement 2. This is because when the earnings growth rate is high for at least three
years, it is definitely a growth company.
A. Statement 2 is true
B. Both statements are true
C. Statement 1 is true
D. Both statements are false
22. Statement 1. Compared to mature companies, it is easier to find comparables for young
companies.
Statement 2. Because of the ease in nding young comparables, the use of “trailing
twelve months” P/E or any multiple for that matter is best practice.
A. Both statements are true
B. Both statements are false
C. Statement 1 is true
D. Statement 2 is true
23. Statement 1. It is easier for a mature company to borrow funds than a declining
company.
Statement 2. It is easier for a mature company to borrow funds than a growth company.
A. Both statements are false
B. Statement 1 is true
C. Statement 2 is true
D. Both statements are true
24. Statement 1. For mature companies, there are a lot of options to choose from when it
comes to determining what multiples to use.
Statement 2. Performing relative valuation ignores the quality of management a
company has.
A. Statement 2 is true
B. Both statements are false
C. Both statements are true
D. Statement 1 is true
25. Statement 1. Because they are likely to operate at losses, average analysts are inclined
to use revenue-based multiples to value declining companies.
Statement 2. The act in Statement 1 is not necessarily a good move as those revenues
would only matter if that would translate to profits in the future.
A. Both statements are false
B. Statement 2 is true
C. Both statements are true
D. Statement 1 is true
26. Statement 1. For young companies, prior period revenues are usually used as the basis
for projecting future cash ows.
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Statement 2. For young companies, determining the market for its products and
estimating its would-be market share is a good starting point for projecting future cash
flows.
A. Statement 2 is true
B. Both statements are true
C. Both statements are false
D. Statement 1 is true
27. Statement 1. The Binomial model assumes that you can buy a fraction of a share.
Statement 2. The Black-Scholes-Merton model assumes that you can buy a fraction of a
share.
A. Statement 1 is true
B. Both statements are false
C. Statement 2 is true
D. Both statements are true
28. Statement 1. It is easy to determine the beta for the stock of a young company.
Statement 2. The beta is unquestionably an appropriate measure of risk in valuing a
young company.
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are false
D. Both statements are true
29. Statement 1. Young companies are less likely to survive in the long haul compared to
mature companies.
Statement 2. Young companies’ stocks are less liquid compared to those of mature
companies.
A. Both statements are false
B. Both statements are true
C. Statement 2 is true
D. Statement 1 is true
30. Statement 1. In relative valuation of growth companies, we can adjust for differing
expected growth rates through adjusting multiples for growth, like using the PEG ratio.
Statement 2. In relative valuation of growth companies, we can adjust for differing
expected growth rates through the use of statistical tools.
A. Statement 2 is true
B. Statement 1 is true
C. Both statements are true
D. Both statements are false
31. Statement 1. The Binomial model assumes two possible outcomes at the expiry date.
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Statement 2. The Black-Scholes-Merton model assumes a distribution of outcomes at
the expiry date.
A. Statement 2 is true
B. Both statements are false
C. Both statements are true
D. Statement 1 is true
32. Statement 1. Growth companies, ceteris paribus, trade at a high P/E ratio.
Statement 2. Growth companies, ceteris paribus, trade at a high EV/EBITDA ratio.
A. Statement 2 is true
B. Both statements are true
C. Both statements are false
D. Statement 1 is true
33. Statement 1. In the valuation of a mature company, one concern is that the way it is
growing is likely to be inorganic (through acquisitions).
Statement 2. As a result of statement 1, it is more complex to determine what growth
rate to assume.
A. Statement 1 is true
B. Statement 2 is true
C. Both statements are true
D. Both statements are false
34. Statement 1. Young companies have a long and rich history, which we can use as a
basis for the valuation.
Statement 2. Young companies have zero or little revenues and are funded by private
equity, posing a challenge in valuation.
A. Both statements are true
B. Statement 1 is true
C. Both statements are false
D. Statement 2 is true
35. Statement 1. Growth companies’ income statement items grow more steadily and
predictably than mature companies, thus they are called growth companies.
Statement 2. Growth companies accrue a lot of debt, this is because lenders are eager
to lend them funds since their future is promising.
A. Statement 1 is true
B. Both statements are false
C. Statement 2 is true
D. Both statements are true
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PROBLEMS
Problem: The common stocks of DEF Inc. currently sell for P43. There is a call option on this
stock with an exercise (strike) price of P40. At the end of year 1, there is a 50% chance that the
price will be P35, and another 50% chance that it will be P55. The risk-free rate of return is 5%.
1. What is the value of the riskless hedge portfolio today? (nearest peso, no
centavos, no peso sign) ________
Problem: Liza Co.'s stock price is currently P30.25. A 6-month call option on Lissa's stock has
a strike price of P25 and has an expected volatility of 40% (i.e., expected standard deviation =
40%). The risk-free rate is 6%.
2. According to BSM option pricing model, what is the value of the option? (nearest
peso, no centavos, no peso sign)________
Problem: The following data are available for HST Company assuming (1) that it will be run as
it is, and (2) that it will be taken over by the best management team for that company.
Dividend
next year
Constant
growth
Cost of
equity
WACC
Probability
…as it is
P2.04
3%
15%
10%
60%
…taken over
P2.10
4%
12%
9%
40%
3. What is the addition to stock value if there will be a change of management? (rounded
to the nearest centavo, no peso sign, example, 10.10, 45.60). ___________
4. What is the true value of the stock based on these data? Don’t round off in the process,
only the final answer. (rounded to the nearest centavo, no peso sign, example, 10.10,
45.60). ______
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Problem: TYU Inc. is considering liquidating the business.
Expected FCF to Firm next year
P5,000,000
Constant growth rate
-4%
Cost of capital
16%
Assets, book value
P24,000,000
Assets, market value
P28,000,000
5. Given the facts below, calculate the appropriate rm value. ________
Problem: A CabAir, a newly formed airline company is expected to mature by year 5. By this
time, it is expected to earn an EBITDA of P4,000,000,000. CabAir is unlevered (i.e. there is no
debt). Currently, the cash balance is immaterial. There are 100,000,000 shares outstanding.
Other relevant data includes:
Airline Industry EV/EBITDA (mature companies)
4x
Average EV/EBITDA for all publicly listed companies
3x
A certain “2-years-to-maturity” airline’s EV/EBITDA
12x
Appropriate discount rate for this
10%
Despite the fact CabAir is young, risks relating to liquidity and survivability is immaterial.
6. Determine the estimated stock value after such adjustments (rounded to the
nearest peso, no centavos, no peso sign). ______
Problem: The following projected results pertain to SHOW YOURSELF, a start tech project,
under three different scenarios. Firms in the same industry are typically valued at 6x EBITDA
Year 1 CF
Year 2 CF
Year 3 CF
Y3 EBITDA
Probability
Best case scenario
P3M
P15M
P50M
P20M
25%
Base case scenario
P2M
P10M
P30M
P10M
50%
Worst case scenario
P2M
P3M
-P1M
-P2M
25%
The founders desire a return of 17% annually from this project before disposing it in
three years. SHOW YOURSELF has no debt and an immaterial cash balance. There are
1,000,000 shares outstanding.
7. Determine the estimated stock value (rounded to the nearest peso, no centavos,
no peso sign).
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Problem: The common stocks of DEF Inc. currently sell for P43. There is a call option on this
stock with an exercise (strike) price of P40. At the end of year 1, there is a 50% chance that the
price will be P35, and another 50% chance that it will be P55. The risk-free rate of return is 5%.
8. What is the value of the option? (rounded to the nearest centavo, no peso sign,
example, 10.10, 45.60). ______
Problem: A CarOil, a distressed rening company has the chance to pivot back to viability 3
years from now. By that time, it is expected to earn an EBITDA of P5,000,000,000 should
success happen. CarOil is unlevered (i.e. there is no debt). Currently, the cash balance is
immaterial. There are 100,000,000 shares outstanding. Other relevant data includes:
Oil refining Industry EV/EBITDA (mature companies)
5x
Average EV/EBITDA for all publicly listed companies
8x
A certain distressed oil refinery EV/EBITDA (at a far worst shape than that of CarOil)
1x
Probability of turning around the business back to normal 15%
Appropriate discount rate for oil refining companies
10%
For this case, in the event of liquidation, the shareholders are not expected to receive anything.
9. Remember as per law, should the company be liquidated, the shareholders will
NOT be liable to pay for any unsatisfied outstanding debts of the company.
(rounded to the nearest peso, no centavos, no peso sign). ______
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Quiz 4 (extra from 1stSem-AY 2020-2021)-Valuation Method (KEY TO CORRECTION)
THEORY
PROBLEMS
1 C
26.
A
1
25
2 A
27
D
2
7
3 D
28
C
3
9.25
4 A
29
B
4
20.70
5 B
30
C
5
28,000,000
6 D
31
C
6
99
7 C
32
B
7
63
8 A
33
C
8
7.25
9 C
34
D
9
28
10 D
35
B
10
11 B
36
11
12 D
12
13 D
13
14 A
14
15 E
15
16 D
16
17 C
17
18 D
18
19 D
19
20 E
20
21 D
21
22 B
22
23
D
23
24
C
24
25
C
25
r8e10_27
TEMPLATE (KEY TO CORRECTION)
THEORY
PROBLEMS
1
26.
1
2
27
2
3
28
3
4
29
4
5
30
5
6
31
6
7
32
7
8
33
8
9
34
9
10
35
10
11
36
11
12
12
13
13
14
14
15
15
16
16
17
17
18
18
19
19
20
20
21
21
22
22
23
23
24
24
25
25
r8e10_27
r8e10_27