ACELEC 331 MIDTERM EXAM

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MC QUESTIONS
Choose the best possible answer. NO NEED to show solutions for the MC Problems.

[S1] The price of preferred stock may react strongly to a change in discount rate
because just like common stock, the preferred stock has no maturity date. [S2] The
dividend valuation model stresses the relationship of dividends to market prices and
earnings per share.
both are true
both are false
S1 is true
S2 is true

Armand acquired AMB Co.'s ordinary shares at its intrinsic value ₱15,625 using his
required return of 11.50%. AMB Co.’s ordinary dividend is expected to grow at a
constant rate of 7%. The dividend per share paid by AMB Co. before Armand invested
to the company, is nearest to

15,625 = Di/ (11.50%-7%)

= 703.125
₱875
₱793.75
₱725
₱657.13
₱593.75

Valuation can be done in several approaches. Which of the following is FALSE?

Information traders believe that the value of financial instruments will increase if there is new information
that is in favor of the issuing entity.
Fundamental analyst believe that the value of an investment is dependent on the cash flows of an asset,
adjusted for any risk and timing considerations.
Chartist believe that the buy looking at stock price graphs, one can determine the buying and selling
pressures by investors, and timing a transaction based on those will beneficial.
Proponents of the strong form of the Efficient Market Theory believe that there is a strong need to look for
over and under valuation due to missing information.

[S1] the value of the firm will always be greater or equal to the value of the equity. [S2]
The more leveraged an entity is, the lower the equity ratio is.
Only S1 is true.
Only S2 is true.
Both S1 and S2 are true.
Both S1 and S2 are false.

If net operating profit before tax is P500,000, there is no non-cash expense, and no
increase in non-cash working capital, then which of following statements is FALSE?
Further assuming that there is no capital expenditures, then P500,000 will also be the free cash flows to the
firm.
Further assuming that there is no capital expenditures and a net financing cash flow of zero, then P500,000
will also be the free cash flows to the equity.
If there is a finance cost of P100,000 and the entity is taxed at 30%, then this will result to a lower free
cash flow to the equity of P30,000 compared to the free cash flow to the firm.
If there is a P3,000,000 capital expenditure, both free cash flows to the firm and to the equity will be
reduced by that amount.

Which statement is true regarding complexity in valuation?

In absolute terms, more information provides a higher net benefit.
Complicated models always provide a better decision than a simple model.
Big assumptions must be clearly separated from small assumptions to be able to determine which
assumptions are critical to a decision and which are not.
Programs and application eliminate the need for human judgment in making decisions.

[S1] The return on an investment may be based on earnings or cash flows. [S2]
Management is required to meet the expected return of the creditors and the
investors, thus the return is commonly equated as the cost of capital.
Only S1 is true.
Only S2 is true.
Both S1 and S2 are true
Both S1 and S2 are false.

GOYO Co. has an odd dividend policy. The company has just paid a dividend of P7
per share and has announced that it will increase the dividend by P2 per share for
each of the next 5 years, and then never pay another dividend. The price at which an
investor who requires 15% ROI, will be willing to buy each share will be nearest to
P27.08
P34.15
P41.72
P43.33

If the intrinsic value of a bond is lesser than its current market value, the investor must
purchase the bond as investment
sell the bond that is currently held as investment
neither of the 1st nor the 2nd option
answer not given
A 7-year bond with face value of P1,000, 11% coupon rate and selling in the market at
P952 will provide a yield to maturity nearest to
10.5%
10.6%
11.5%
12.1%

According to the dividend growth model, which will not increase the current value of a
stock?
increase in the dividend amount
increase in number of future dividends, provided the current number is less than infinite
increase in the appropriate discount rate
increase in dividend growth rate
none of the above

ABC Company issued bonds with par value of ₱1,000 and annual coupon of 5.5%.
The bonds which mature in 10 years were sold at the current market interest rate is
7.0%. The selling price for 65 units of bonds would most probably be nearest to
₱59,606
₱58,152
₱56,698
₱55,281
₱53,899

BEAUTY Co.’s 15-year bond with a face value of P1,000,000 currently sells for
P1,150,000. Which statements is correct?
The bond’s current yield is equal its yield to maturity.
The bond’s yield to maturity is greater than its coupon rate.
The bond’s current yield is equal to its coupon rate.
all of the above
none of the above

LOVELY Co. just announced it is increasing its annual dividend to P1.18 next year
and establishing a policy whereby the dividend will increase by 3.25% annually
thereafter. How much will one share of this stock be worth 8 years from now if the
required rate of return is 9.5 %? = (1.18*(1+0.0325) ^8)/ (0.095-0.0325)
P24.38
P25.68
P26.51
P27.37
can’t be determined
A 10-year term bond has an annual coupon payment of 9%. The bond is currently
selling at par P1,000 and rate of return is equal to the coupon rate. Which statement is
most correct?
The bond’s yield to maturity is 9%.
The bond’s current yield is 9%.
If the bond’s selling price remains at par, the bond’s yield to maturity remains constant.
only the 2nd statement (option) is incorrect.
the first 3 statements (options) are correct.

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ACELEC 331 MIDTERM EXAM

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* Required

STRAIGHT PROBLEMS
INSTRUCTIONS:
1. Write your solutions on a clean sheet of paper with your complete name written on the upper left hand
corner of each page.
2. Attach in 1 file only a picture copy (or scanned copy) of your solutions.

POINT SYSTEM: 1 point (google form) 4 points (solution)

An annual coupon bond with a P1,000 face value matures in 10 years. The bond
currently sells for P903.7351 and has a 9% yield to maturity. What is the bond’s
annual coupon rate? (Express your answer as % with 2 decimal places. Example:
11.25%)
7.50%

Your answer

*
 116273249.48

Your answer

*
 81674953.18

Your answer

Venus Corporation just paid P5 dividends on its ordinary shares and such dividends
are projected to grow 5% annually for the coming years. The ordinary shares are
currently selling at P40 in the market. Its 10% preference shares with P100 par value
are currently selling in the market at P105. VENUS Corporation regularly pays
dividends at the end of each year. Ms. Deli Kado is deciding whether to buy or not
some preference shares of the corporation which she intends to sell after 5 years at a
projected price of P125. Ms. Kado asked your advice regarding the matter. If she
requires a 12% return on investment, should she acquire the preference shares or
not? Explain.
YES
NO

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