Valuation and Concepts

The industry has the following average financial ratios
Dividend Yield 4%
Earnings Yield 13%
Price-earnings ratio 8 times
Price-to-book ratio 4:1
Price-to-cash flow ratio 15 times
The company also have the following data for the year just ended:
Earnings per share P130
Cash flow per share 60
Dividends per share 45
Par value per share 200
Book value per share 310
The difference in stock valuation when using dividend yield versus earnings yield is
● 125
● 40
● 115
● 85
XYZ Inc. reported P4.8 million net income. Included computation of net income are P2.5 million
depreciation and amortization and P3 million cost and other cash expenses. Assets and
liabilities of XYZ follows:
Year 1 Year 2
Current assets (trade) P 15 million P 13 million
Noncurrent assets 30.2 million 34.4 million
Current liabilities (trade) 12 million 9 million
Noncurrent liabilities 21 million 19.5 million
The amount of free cash flow to equity is

● 400,000
● 3,600,000
● 600,000
● 2,600,000
The 30,000 outstanding common shares of ABC Inc. paid P8 dividend per share last December
31. Dividend is expected to grow 8% every year thereafter. Cost of equity is calculated at 13%.
The market value per share of the common stocks is
● 61.54
● 160
● 66.46
● 172.80
The industry has the following average financial ratios
Dividend Yield 4%
Earnings Yield 13%
Price-earnings ratio 8 times
Price-to-book ratio 4:1
Price-to-cash flow ratio 15 times
The company also have the following data for the year just ended:
Earnings per share P130
Cash flow per share 60
Dividends per share 45
Par value per share 200
Book value per share 310
The difference in stock valuation when using price-to-cash flow ratio versus price-to-book ratio
is
● 125
● 340
● 200
● 240
XYZ Inc. has the following financial ratios:

Year Price-earnings ratio Price-to-book ratio
2020 20 times 5:1
2019 22 times 7:1
2018 18 times 8:1
2017 24 times 10:1
XYZ projects a P30 million shareholders’ equity and P8 million net income. XYZ also has
preferred stocks with P8 million liquidation value and P1 million dividends. XYZ has 200,000
outstanding common shares. What is the market value per share using average price-earnings
multiple?
● 735
● 840
● 825
● 1.125
The company has the following information for the current year:
FCFE P 2,500,000
FCFF 1,200,0000
PV of debt 12,800,000
WACC 12%
CAPM 15%
G initial (4 years) 8%
G stable 5%
The terminal value of free cash flow to equity is

● 35,712,835
● 53,538,127
● 51,018,336
● 52,476,003
XYZ Inc. issues a P3 million par value bonds and payable at the end of 4 years. The bond was
quoted at 6% in the market and pays 5% interest per annum. What is the market value of the
bonds?
● 3,078,525
● 3,106,380
● 2,896,065
● 2,951,070
The 30,000 outstanding common shareholders of ABC Inc. expect to receive P8 dividend per
share next year. Dividend growth rate is 8%. Required rate of return is calculated at 13%. The
total market value of the common stocks amounts to
● 5,184,000
● 1,993,800
● 1,846,200
● 4,800,000
ABC corporation issues a P9 million par value bonds payable in three equal annual installments.
The bond was quoted at 13% in the market and pays 14% interest per annum. What is the
market value of the bonds?
● 8,927,504
● 8,854,884
● 9,215,684
● 9,147,606
ABC Corporation has 25,000 outstanding common stocks ABC paid P16 dividend per share this
year and expects to pay P20 dividend per share the following year. Dividend is expected to
increase at the same rate thereafter. Cost of common stocks is 29%. The market value per
common share is
● 500
● 222.22
● 400
● 177.77
The company has the following result of operation for the current year:
Sales 3,400,000
Cash operating expenses 1,100,000
Depreciation and amortization 500,000
Interest expense 200,000
Tax expense 400,000
Additionally, working capital increased by P150,000 while capital expenditures amounted to

P800,000.
The free cash flow to firm is

● 810,000
● 1,050,000
● 900,000
● 1,110,000
Company Y’s common stock has a bet of 0.90, investors demand a market rate of return of
approximately 10%, and the risk-free rate is 3%. The required rate of return is
● 6.3%
● 14.7%
● 11.7%
● 9.3%
XYZ is projecting its rate of return for its equity securities using CAPM. XYZ has 1.40 systematic
risk coefficient. Rate of return on the market is 8% and the risk-free rate is 3%. The risk-
adjusted market equity premium is
● 10%
● 5%
● 15%
● 7%
ABC Corporation is calculating the cost of its common equity using CAPM. The company is
subject to 1.2 beta coefficient. Government securities currently yields 2.5% while the stock
market average yield is 6%. The company rate of return on preferred stocks is 5%. The required
rate of return is
● 4.2%
● 6.7%
● 6.2%
● 5.5%
A security has the following historical returns:

Year Rate of Return
1 8%
2 -2%
3 3%
4 12%
What is the average return using geometric mean?
● 3.55%
● 5.25
● 5.24
● 5.12
(putol yung nakasulat sa taas)

Security Average Return Standard deviation
a 12% 14%
b 6% 8%
c 20% 24%
d 15% 17%
The security with the best risk-return trade-off is

● Security A
● Security C
● Security B
● Security D
A P500,000 par value bond earns 10% interest per annum over a course of four years. The
calculated yield to maturity is 12.5%. Determine the market price of the bond.
● 475,000
● 490,000
● 480,000
● 460,000
The required rate of return of ABC stocks using CAPM is calculated to be 19%. RAte of return
based on long-term government bonds is 6.5%. Market rate of return is ar 16.5%. By how many
percent ABC stock price will drop if there is an overall 30% decline in the stock market?
● 125%
● 25%
● 7.5%
● 37.50%
The historical records of XYZ stocks in the portfolio of ABC follows:
Year Rate of Return Market Value
2013 5.00% 1,000,000.00
2014 7.00% 1,200,000.00
2015 13.00% 1,000,000.00
2016 8.50% 1,200,000.00
2017 2.00% 1,500,000.00
2018 9.80% 1,400,000.00
2019 7.50% 1,300,000.00

2020 15.00% 1,500,000.00
ABC assigns 3% possible return for historical returns amounting 5% and below;
then 8% possible return for historical returns greater than 5% up to 10%;
and 12% possible return for actual returns exceeding 10%
Compute the expected return of XYZ’s stocks.
● 8.25%
● 8.48%
● 7.75%
● 6.20%
The following are the historical returns of XYZ securities for the past years:
Year Rate of return
2016 10%
2017 2%
2018 14%
2019 8%
2020 6%
The population variance is

● 0.0016
● 0.0020
● 0.0447
● 0.0400
Standard deviation is 0.25

Coefficient of variation is 1.25
The variance is
● 0.20
● 0.50
● 0.625
● 1.12
The expected rate of return for the stock of ABC Enterprises is 15%, with a standard deviation
of 20%. The expected rate of return for the stock of XYZ Associates is 9%, with a standard
deviation of 10%. The riskier stock is
● XYZ because the coefficient of variation is lower
● ABC because the coefficient of variation is lower
● ABC because the coefficient of variation is higher
● XYZ because the coefficient of variation is higher
The following are the historical returns of XYZ securities for the past years:
Year Rate of return
2016 10%
2017 2%
2018 14%
2019 8%
2020 6%
The standard deviation of returns from the sample period is

● 0.0016
● 0.0020
● 0.0447
● 0.0400
ABC. Inc. issued a P2.5 million par value bonds with 9% stated rate and will mature after 8
years. The bonds has 8% market rate. WHat is the market value of the bonds?
● 2,500,080
● 2,643,735
● 2,361,710
● 2,595,742
Consider the following statements:
1.) Beta risk included in the calculation of expected return through CAPM is the
unsystematic risk that remains after diversification.
2.) The risk free rate used in the calculation of expected return through CAPM is based on
low-risk debt securities issued by the government and publicly listed entities.
● Only statement 2 is correct
● Both statements are incorrect
● Both statements are correct

1.) Weighted average is best suited for computing the average return of the portfolio.
2.) Weights used in the average return of the portfolio are based on probabilities of possible
returns calculated using the historical returns.

1.) Total return for stocks is also equals to dividend payout ratio plus capital gains yield.
2.) Total return of equity securities comes from income distribution as dividends and
interest.

1.) Computation of the variance of a sample or population will never yield a negative value.
2.) If the value of the variance is less than 1, then the standard deviation will be greater than
the variance.

1.) Expected return is the sum of the possible return divided by the corresponding
probability.
2.) Weights and probabilities are irrelevant in the computation of arithmetic average and
geometric average.

1.) The higher the coefficient of variation, the better the risk-return trade-off.
2.) The higher the variance, the higher will be the coefficient of variation.

1.) If you are calculating the variance of a stocks that has been held for 20 years , and the
you included ten years of data, it is more appropriate to use the population variance.
2.) If the variance is less than one, then the value of standard deviation will be lower than
the value of the variance.

1.) The greater the difference between the individual return and the mean return, the higher
the variance.
2.) The higher the variance, the higher the standard deviation.

1.) Estimated internal rate of return of a fixed-income security can be calculated using
current yield or yield to maturity.
2.) Current yield and yield to maturity is the expected rate of return for a fixed-income
security that will be held by the investor until maturity.
1.) Systematic risk is beyond the control of the organization.
2.) Unsystematic risk is unavoidable risk that will affect the entire market.

1.) Par value and current market price are relevant in the computation of both current yield
and yield to maturity.
2.) Coupon payment is included in the calculator of both current yield and yield to maturity.

1.) CAPM does not take into account the unsystematic risk specific to the security.
2.) CAPM expected return can be used to calculate the rate of return of fixed-income and
variable-income securities.

1.) Coefficient of variation accounts both the risk and the return on investment.
2.) Higher coefficient of variation is more favorable to the investor in security.

1.) If beta coefficient is equals to 2, then the stock price of a particular security will move up
twice when there is a decline in the stock market.
2.) If beta coefficient is equals to 0.50 and the market experience a 40% upward trend in
stock prices, then the price of a particular security will rise by 20%.

1.) Low level of uncertainty is associated with low level of return.
2.) Risk-return tradeoff presupposes that the potential return rises with an escalation in risk.

1.) Liquidity risk is an example of systematic risk.
2.) Interest risk is an example of unsystematic risk.
A P500,000 par value bond earns 10% interest per annum over a course of four years. The
calculated yield to maturity is 12.5%. Determine the market price of the bond.
● 460,000
● 480,000
● 475,000
● 490,000
The following are the relevant financial ratios pertaining to XYZ equity securities:
Dividend yield, 12%
Dividend payout, 4 times
Capital gains yield, 60%
Earnings yield, 20%
The total return of XYZ equity securities
● 32%
● 80%
● 64%
● 72%
Company Y’s common stock has a beta of 0.90%, investors demand a market rate of return of
approximately 10%, and the risk-free rate is 3%. The required rate of return is
● 11.7%
● 14.7%
● 6.3%
● 9.3%
ABC Corporation is calculating the cost of its common equity using CAPM. The company is
subject to 1.2% beta coefficient. Government securities currently yields 2.5% while the stock
market average yield is 6%. The company rate of return on preferred stocks is 5%. The required
rate of return is
● 6.2%
● 5.5%
● 6.7%
● 4.2%
Natco has the following investment portfolio.

Investment Expected Return Market Value
A 15% 300,000
B 10% 300,000
C 8% 200,000
D 8% 200,000
What is the average return of the portfolio?

● 10.7%
● 9.6%
● 10.25%
● 9.84%
XYZ is projecting its rate of return for its equity securities using CAPM, XYZ has 1.40 systematic
risk coefficient. Rate of return on the market is 8% and the risk-free rate is 3%. The risk-
adjusted market equity premium is
● 5%
● 15%
● 10%
● 7%
A 5 year bond with P100,000 par value was purchased at a premium of P4,000 at the beginning
of the year. The bonds was quoted at 98 at the end of the current year. Annual coupon payment
is P8,000.
What is the total return on the bonds at the end of the current year?
● 1.92%
● 13.46%
● 2.04%
● 14.29%
is P8,000.
What is the current yield of the bond at the time the investor purchased the security?
● 8%
● 7.84%
● 8.16%
● 7.69%
Consider the following data:

Variance of 36%
Average rate of return 12%
The coefficient of variation is
● 2
● 3
● 5
● 0.50
is P8,000.
What is the yield to maturity at the time the investor purchased the bond?
● 8.63%
● 8.48%
● 7.27%
● 7.06%
The investment in Gameco. shows the following details:

Market value on acquisition this year P200,000
Market value at the end of the year P240,000
Interest income for the year P25,000
What is the total rate of return on the investment this year?
● -6.25
● -32.5%
● 6.25%
● 32.5%
The required rate of return of ABC stocks using CAPM is calculated to be 19%. Rate of return
based on long-term government bonds is 6.5%. Market rate of return is at 16.5%. By how many
percent ABC stock price will drop if there is an overall 30% decline in the stock market?
● 7.5%
● 125%
● 25%
● 37.50%
QUIZ 1
1. A callable bond is one where the investor or holder of the bond has the right to demand
payment even before maturity.
TRUE OR FALSE
2. Debt securities are generally variable income securities.
TRUE OR FALSE
3. NASDAQ is an example of physical exchange.
TRUE OR FALSE
4. Capital market is one where long-term debt securities or equity securities may be issued.
TRUE or FALSE
5. The difference between holders of equity securities and holders of debt securities is that
the former is not entitled to a regular payment.
TRUE OR FALSE.
6. Present value is the equivalent amount that will be received after a certain period
including all the implied interest therein.
TRUE OR FALSE
7. Price is a value term attributed to the buyer and seller.
TRUE OR FALSE
8. Electronic Communications Networks (ECNs) are automated stock trading systems that
are integrated within the stock exchanges.
TRUE OR FALSE
9. Theoretically, the value of present value of 1 factor is always less than one regardless of
the number of periods and the interest rate.
TRUE OR FALSE
10. Bonds may be issued by both government and private firms.
TRUE OR FALSE
11. Participating feature of preference shares allows the shareholders to receive dividends in
arrears.
TRUE OR FALSE
12. Theoretically, the value of present value of an ordinary annuity of 1 factor is always greater
than one regardless of the number of periods and the interest rate.
TRUE OR FALSE
13. Preferred stocks are equity securities that are considered variable income securities.
TRUE OR FALSE
14. Hybrid securities include convertible and callable debt and equity securities.
TRUE OR FALSE
15. Priority in dividend payment is given to preferred stocks over common stock.
TRUE OR FALSE
16. Collateral trust bond may be secured by financial assets such as stock investments,
inventories, real property, and treasury bills.
TRUE OR FALSE
17. Redeemable preference shares are presented in the statement of financial position as
financial liability.
TRUE OR FALSE
18. In option contracts, the buyer is not required to complete the action of buying or selling.
TRUE OR FALSE
19. Banker acceptance is a check or draft guaranteed by the bank.
TRUE OR FALSE
20. A treasury bill is a short-term equity security issued by the government.
TRUE OR FALSE
21. Money market is a subset of the fixed-income market that trades short-term borrowings
issued by government of private companies.
TRUE OR FALSE
22. If the cash flow will be paid in series of annual maturities with the first payment due
immediately, the relevant present value factory for discounting the cash flows is the present
value of an annuity due.
TRUE OR FALSE
23. Share of stocks are not traded in a money market.
TRUE OR FALSE
24. Futures contracts are traded over-the-counter instead of a formal market.
TRUE OR FALSE
25. OTC markets are decentralized markets with physical location.
TRUE OR FALSE
26. Money market mutual funds are pool of investment offered by banks and other financial
intermediaries.
TRUE OR FALSE
27. A hybrid security is one where the holder has an option to convert the security into cash
even before maturity
TRUE OR FALSE
28. Simply put, in derivative market, investors bet on the price of a particular variable such as
price of commodity, foreign exchange rate, and interest rate, among others.
TRUE OR FALSE
29. Common stocks have lower risk than preferred stocks.
TRUE OR FALSE
30. Junk bonds offer very high returns but are subject to very high risk.
TRUE OR FALSE
31. A lender is interested in the valuation of the loan and also the collateral attached to the
obligation.
TRUE OR FALSE
32. A redeemable bond is one where the issuer has the right to redeem the bonds even before
maturity.
TRUE OR FALSE
33. Government debt securities in the Philippines may be issued by the national government
through the Bureau of Treasury or by the local government units.
TRUE OR FALSE
34. The bond market is a virtual network consisting primarily of dealers.
TRUE OR FALSE

Valuation and Concepts

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Valuation and Concepts

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The industry has the following average financial ratios

Earnings Yield 13%

Price-earnings ratio 8 times

Price-to-book ratio 4:1

Price-to-cash flow ratio 15 times

Earnings per share P130

Cash flow per share 60

Dividends per share 45

Par value per share 200

Book value per share 310

Current assets (trade) P 15 million P 13 million

Noncurrent assets 30.2 million 34.4 million

Current liabilities (trade) 12 million 9 million

Noncurrent liabilities 21 million 19.5 million

The amount of free cash flow to equity is

The industry has the following average financial ratios

Earnings Yield 13%

Price-earnings ratio 8 times

Price-to-book ratio 4:1

Price-to-cash flow ratio 15 times

Earnings per share P130

Cash flow per share 60

Dividends per share 45

Par value per share 200

Book value per share 310

XYZ Inc. has the following financial ratios:

2020 20 times 5:1

2019 22 times 7:1

2018 18 times 8:1

2017 24 times 10:1

The terminal value of free cash flow to equity is

Cash operating expenses 1,100,000

Depreciation and amortization 500,000

Interest expense 200,000

Tax expense 400,000

Additionally, working capital increased by P150,000 while capital expenditures amounted to

The free cash flow to firm is

A security has the following historical returns:

(putol yung nakasulat sa taas)

The security with the best risk-return trade-off is

The historical records of XYZ stocks in the portfolio of ABC follows:

Year Rate of Return Market Value

2013 5.00% 1,000,000.00

2014 7.00% 1,200,000.00

2015 13.00% 1,000,000.00

2016 8.50% 1,200,000.00

2017 2.00% 1,500,000.00

2018 9.80% 1,400,000.00

2019 7.50% 1,300,000.00

Year Rate of return

The population variance is

Standard deviation is 0.25

Year Rate of return

The standard deviation of returns from the sample period is

Consider the following statements:

Consider the following statements:

Consider the following statements:

Consider the following statements:

Consider the following statements:

Consider the following statements:

Consider the following statements:

Consider the following statements: