THEORIES

Question 1

It is highly dependent on the value of the assets as
declared in the audited financial statements, particularly the
balance sheet or the statement of financial position.

Answer 1

Book Value Method

Question 2

The value of
the individual assets shall be adjusted to reflect
the relative value or cost equivalent to replace that
asset.

Answer 2

Replacement Value Method

Question 3

No external information is available that can serve
as basis for replacement cost of assets that are highly specialized in
nature. In this case, _______ is used instead.

Answer 3

Reproduction Value Method

Question 4

Is an equity valuation approach that
considers the salvage value as the value of the asset.

Answer 4

Liquidation value method

Question 5

It is more commonly used by analysts and valuators since the asset is the best representation of what the
company currently has less the
non-equity claim against the
assets.

Answer 5

Asset-based valuation

Question 6

In some texts, it is also known as net asset value.

Answer 6

Liquidation Value

Question 7

Assets are sold strategically over an orderly period to attract and generate the most money for the assets.

Answer 7

Orderly liquidation

Question 8

Liquidation is done immediately especially if creditors have sued or a bankruptcy is filed. Assets are sold in the market at the soonest time possible which result in lower prices because of the rush sale. This ultimately drives down liquidation value.

Answer 8

Forced liquidation

Question 9

Introduced by Modigliani and Miller that supports the belief that the stock prices are not affected by dividends or the returns on the stock but more on the ability and sustainability of the asset or company.

Answer 9

dividend irrelevance

Question 10

Believes that dividend or capital gains has an impact on the price of the stock.

Answer 10

Bird-in-the hand theory

Question 11

is the additional value inputted in the calculation that would account for the increase in value of the firm due to other quantifiable attributes like potential growth, increase in prices, and even operating efficiencies

Answer 11

Earning accretion

Question 12

will reduce value if there
future circumstances that will affect the firm negatively.

Answer 12

earnings dilution

Question 13

is the amount that is added to the value of the firm in order to gain control of it.

Answer 13

Equity control premium

Question 14

is the excess of the company earnings after deducting
the cost of capital. The excess earnings shall be
accumulated for the firm.

Answer 14

Economic Value Added (EVA)

Question 15

This refers to the value of any asset based on the assumption that there is hypothetically
complete understanding of its investment characteristics.
A. Fair market Value
B. Intrinsic Value
C. Going concern Value
D. Liquidation Value

Answer 15

B. Intrinsic Value

Question 16

This refers to the possible range of values where the real firm values lies.
A. Risk of the Unknown
B. Uncertainty
C. Volatility
D. Solvency

Answer 16

B. Uncertainty

Question 17

This pertains to how much a particular object is worth a particular set of eyes.
A. Value
B. Cost
C. Price
D. Fundamentals

Answer 17

A. Value

Question 18

Valuation places great emphasis on the___________ that are associated in the exercise.
A. Due Diligence
B. Human reasoning
C. Professional Skepticism
D. Professional Judgement

Answer 18

D. Professional Judgement

Question 19

________ is particularly relevant for companies that are experiencing severe financial distress.
A. Going Concern Value
B. Intrinsic Value
C. Liquidation Value
D. Fair Market Value

Answer 19

C. Liquidation Value

Question 20

Value is determined under the going concern assumption.
A. Liquidation Value
B. Intrinsic Value
C. Going Concern Value
D. Fair Market Value

Answer 20

C. Going Concern Value

Question 21

The value of a business can be basically liked to three major factors, except:
A. Current Operations
B. Future Prospects
C. Embedded Risk
D. None of the above

Answer 21

D. None of the above

Question 22

The price expressed in terms of cash equivalents, at which property would change hands
between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting
at arm’s length in an open and unrestricted market. When neither is under compulsion to buy or
sell and when both have reasonable knowledge of the relevant facts.

A. Fair Market Value
B. Going Concern Value
C. Intrinsic Value
D. Liquidation Value

Answer 22

A. Fair Market Value

Question 23

Which key principles in valuation refers to general concepts for most valuation techniques put
emphasis on future cash flows except for some circumstances where value can be better derived
from asset liquidation?
A. The value of a business is defined only at a specific point in time
B. Market dictates the appropriate rate of return for investors
C. Firm value can be impacted by underlying net tangible assets
D. Value varies based on the ability of business to generate future cash flows

Answer 23

D. Value varies based on the ability of business to generate future cash flows

Question 24

Generally, the valuation process considers these steps, except:
A. Understanding the business
B. Forecasting financial performance
C. Preparing valuation model based on forecasts
D. None of the above

Answer 24

D. None of the above

Question 25

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time to maturity, the the change in price. A. longer; smaller. B. shorter; larger. C. longer; greater. D. shorter; no change in price.

Answer 25

C. longer; greater

Question 26

Which of the following statements is most correct? A. All else equal, if a bond’s yield to maturity increases, its price will fall. B. All else equal, if a bond’s yield to maturity increases, its current yield will fall. C. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a premium over par. D. All of the statements above are correct.

Answer 26

A. All else equal, if a bond’s yield to maturity increases, its price will fall.

Question 27

A 15-year bond with a face value of P1,000 currently sells for P850. Which of the following statements is most correct? A. The bond’s yield to maturity is greater than its coupon rate. B. If the yield to maturity stays constant until the bond matures, the bond’s price will remain at P850. C. The bond’s current yield is equal to the bond’s coupon rate. D. Statements b and c are correct.

Answer 27

A. The bond’s yield to maturity is greater than its coupon rate.

Question 28

Which of the following statements is most correct? A. The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B. B. If a bond is selling at a discount, the yield to call is a better measure of return than the yield to maturity. C. If a coupon bond is selling at par, its current yield equals its yield to maturity. D. Statements a and b are correct.

Answer 28

C. If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 29

Which of the following statements is most correct? A. If a bond is selling for a premium, this implies that the bond’s yield to maturity exceeds its coupon rate. B. If a coupon bond is selling at par, its current yield equals its yield to maturity. C. If rates fall after its issue, a zero coupon bond could trade for an amount above its par value. D. Statements b and c are correct

Answer 29

B. If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 30

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. D. Statements b and c are correct.

Answer 30

B. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.

Question 31

Which of the following statements is most correct? A. The constant growth model takes into consideration the capital gains earned on a stock. B. It is appropriate to use the constant growth model to estimate stock value even if the growth rate never becomes constant. C. Two firms with the same dividend and growth rate must also have the same stock price. D. All of the statements above are correct

Answer 31

A. The constant growth model takes into consideration the capital gains earned on a stock.

Question 32

Which of the following statements is most correct? A. The stock valuation model, P0 = D1/(ks - g), can be used for firms which have negative growth rates. B. If a stock has a required rate of return ks = 12%, and its dividend grows at a constant rate of 5%, this implies that the stock’s dividend yield is 5%. C. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. D. Statements a and c are correct

Answer 32

A. The stock valuation model, P0 = D1/(ks - g), can be used for firms which have negative growth rates.

Question 33

If two constant growth stocks have the same required rate of return and the same price, which of the following statements is most correct? A. The two stocks have the same per-share dividend. B. The two stocks have the same dividend yield. C. The two stocks have the same dividend growth rate. D. The stock with the higher dividend yield will have a lower dividend growth rate

Answer 33

D. The stock with the higher dividend yield will have a lower dividend growth rate

Question 34

A 12-year bond has a 9% annual coupon, a yield to maturity of 8%, and a face value of P1,000. What is the price of the bond? A. P1,469 B. P1,000 C. P 928 D. P1,075

Answer 34

D. P1,075

Question 35

You intend to purchase a 10-year, P1,000 face value bond that pays interest of P60 every 6 months. If your nominal annual required rate of return is 10% with semiannual compounding, how much should you be willing to pay for this bond? A. P 826.31 B. P1,086.15 C. P 957.50 D. P1,124.62

Answer 35

D. P1,124.62

Question 36

A bond that matures in 12 years has a 9% semiannual coupon (i.e., the bond pays a P45 coupon every six months) and a face value of P1,000. The bond has a nominal yield to maturity of 8%. What is the price of the bond today? A. P 927.52 B. P 928.39 C. P1,073.99 D. P1,076.23

Answer 36

D. P1,076.23

Question 37

A P1,000 par value bond pays interest of P35 each quarter and will mature in 10 years. If your nominal annual required rate of return is 12% with quarterly compounding, how much should you be willing to pay for this bond? A. P 941.36 B. P1,051.25 C. P1,115.57 D. P1,391.00

Answer 37

C. P1,115.57

Question 38

The Company has outstanding bonds with an annual 8% coupon. The bonds have a par value of P1,000 and a price of P865. The bonds will mature in 11 years. What is the yield to maturity on the bonds? A. 10.09% B. 11.13% C. 9.25% D. 8.00%

Answer 38

A. 10.09%

Question 39

A corporate bond has a face value of P1,000, and pays a P50 coupon every six months (that is, the bond has a 10 % semiannual coupon). The bond matures in 12 years and sells at a price of P1,080. What is the bond’s nominal yield to maturity? A. 8.28% B. 8.65% C. 8.90% D. 9.31%

Answer 39

C. 8.90%

Question 40

The Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of P5 per share and a par value of P30. If the required return on this stock is currently 20%, what should be the stock’s market value? A. P150 B. P100 C. P 50 D. P 25

Answer 40

P 25

Question 41

The Corporation is growing at a constant rate of 6% per year. It has both common stock and nonparticipating preferred stock outstanding. The cost of preferred stock (kp) is 8%. The par value of the preferred stock is P120, and the stock has a stated dividend of 10 % of par. What is the market value of the preferred stock? A. P125 B. P120 C. P175 D. P150

Answer 41

D. P150

Question 42

. A share of preferred stock pays a quarterly dividend of P2.50. If the price of this preferred stock is currently P50, what is the nominal annual rate of return? A. 12% B. 18% C. 20% D. 23%

Answer 42

C. 20%

Question 43

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of P9.25 at the end of Year 2. In addition, you expect to sell the stock for P150 at the end of Year 2. If your expected rate of return is 16 %, how much should you be willing to pay for this stock today? A. P164.19 B. P 75.29 C. P107.53 D. P118.35

Answer 43

D. P118.35

Question 44

The Company stock is expected to pay a year-end dividend, D1, of P4.00. The dividend is expected to grow at a constant rate of 8% per year, and the stock’s required rate of return is 12 %. Given this information, what is the expected price of the stock, eight years from now? A. P200.00 B. P185.09 C. P171.38 D. P247.60

Answer 44

B. P185.09