RIVERA, RYAN JOSEPH G.

1365 – FMPMC10

Derivative Models and Corporate Finance Theories Quiz

1. RET stock is currently at ₱100 and it is expected to either go up or down by 10%. A call option was
written with an exercise price of ₱105. The risk free rate is 4.5%. The intrinsic value of the stock would
be?
S+ = ₱100 (1+10%) = 110 (1+4.50%)-
S- = ₱100 (1-10%) = 90 π = 1.10 = 0.7250
C+ = Max (0, ₱110 - 105) = 5 0.9-1.10
C- = Max (0, ₱90 - 105) = 0 0.7250(5)
U = ₱110 ÷ ₱100 = 1.10 c = = ₱3.4689
1+4.50%
D = ₱90 ÷ ₱100 = 0.9

2. RRX stock is currently at ₱50 and it is expected to either go up or down by 15%. The expected price of the stock after
one period is exercise price of ₱54. The risk free rate is 5%. The intrinsic value of the
stock would be?

S+ = ₱50 (1+15%) = 57.5 (1+5%)-1.15

S- = ₱50 (1-15%) = 42.5 π = = 0.6667
0.85-1.15
C+ = Max (0, ₱57.5 - 54) = 3.5
0.6667(3.5)
C- = Max (0, ₱42.5 - 54) = 0 c = = ₱2.2222
U = ₱57.5 ÷ ₱50 = 1.15 1+5%
D = ₱42.5 ÷ ₱50 = 0.85

3. DBR Corporation announced a net income of ₱2 million after deducting all expenses that includes non-cash expenses
and interest expense amounting to ₱400,000 and ₱250,000 respectively. The tax rate is30%. The balance sheet shows an
increase in current assets (except cash) amounting to ₱300,000 and an increase in current liabilities (except loans)
amounting to ₱400,000. The firm had also acquired long-term asset amounting to ₱600,000. The FCFF of the firm would
be?

FCFF = 2,000,000 + 400,000 + (250,000(1-30%)) – 300,000 + 400,000 – 600,000 = ₱2,075,000

4. Use #3. The firm expects that the FCFF will grow by 6% continuously. The firm’s WACC is 15%.
The value of operation would be?

2,075,000
VOperation = (1+6%) = ₱24,438,888.89
15% - 6%

5. Use #4. Assume that the market value of debt and preferred equity is ₱4 million and ₱6 million
respectively. While the number of common shares outstanding is 1 million. The value per share would
be? (Hint: Deduct market value of debt and preferred equity from the value of operation and afterwards, divide by the
number of common shares outstanding).

24,438,888.89 – 4,000,000 –
Value per share = 6,000,000 = ₱14.44
1,000,000

6. RBD Corporation announced a net income of ₱3 million after deducting all expenses that includes non-cash expenses
and interest expense amounting to ₱600,000 and ₱450,000 respectively. The tax rate is 30%. The balance sheet shows a
decrease in current assets (except cash) amounting to ₱400,000 and a decrease in current liabilities (except loans)
amounting to ₱300,000. The firm had also acquired long-term asset amounting to ₱800,000. The FCFF of the firm would
be?

FCFF = 3,000,000 + 600,000 + (450,000(1-30%)) + 400,000 - 300,000 – 800,000 = ₱3,215,000

7. Use #6. The firm expects that the FCFF will grow by 5% continuously. The firm’s WACC is 12%.
The value of operation would be?

3,215,000
VOperation = (1+5%) = ₱48,225,000
12% - 5%

8. Use #7. Assume that the market value of debt and preferred equity is ₱10 million and ₱12 million
respectively. While the number of common shares outstanding is 2 million. The value per share would
be? (Hint: Deduct market value of debt and preferred equity from the value of operation and afterwards, divide by the
number of common shares outstanding).

48,225,000– 10,000,000 –
Value per share = 12,000,000 = ₱13.11
2,000,000

9. TRW Corporation announced that its cash flows from operations is ₱5 million. It also presents that the capital
expenditure amounts to ₱1 million and they acquired additional debt amounting to ₱1,500,000. The FCFE of the firm
would be?

FCFE = (1,000,000 – 1,500,000) + 5,000,000 = ₱5,500,000

10. Use #9. The FCFE is expected to grow by 4%. Assume that the required rate of return of the
shareholders is 12%, the value of equity would be?

5,500,000
VEquity = (1+4%) = ₱71,500,000
12% - 4%

11. TRW Corporation announced that its cash flows from operations is ₱3 million. It also presents that the capital
expenditure amounts to ₱800,000 and they issued new debts amounting to ₱1,000,000. The FCFE of the firm would be?

FCFE = (800,000 – 1,000,000) + 3,000,000 = ₱3,200,000

12. Use #11. The FCFE is expected to grow by 5%. Assume that the required rate of return of the
shareholders is 15%, the value of equity would be?

3,200,000
VEquity = (1+5%) = ₱33,600,000
15% - 5%

13. Use #12. The market value of the firm’s preferred equity is ₱1 million. If the firm has 500,000 common shares
outstanding, the value per share would be? (Hint: Deduct market value of preferred equity from the value of equity).

33,600,000– 1,000,000
Value per share = = ₱65.2
500,000
14. GRT Corporation announced a net income of ₱2 million after deducting all expenses that includes an interest expense
amounting to ₱400,000. Tax rate is 30%. The firm acquired additional long-term asset amounting to ₱800,000. The
firm’s WACC is 12%. The economic value added of the firm would be?

NOPAT = 2,000,000 + 400,000 (1 – 30%) = 2,280,000

Economic Value = 2,280,000 – (800,000 x 12%) = ₱2,184,000

15. TRP Corporation announced a net income of ₱5 million after deducting all expenses that includes an interest expense
amounting to ₱800,000. Tax rate is 30%. The firm acquired additional long-term asset amounting to ₱1,500,000. The
firm’s WACC is 18%. The economic value added of the firm would be?

NOPAT = 5,000,000 + 800,000 (1 – 30%) = 5,560,000

Economic Value = 5,560,000 – (1,500,000 x 18%) = ₱5,290,000