University of San Jose-Recoletos

School of Business and Management

Department of Accountancy and Finance

Acctg 106: Valuation Concepts and Methods

Mr. Joey Faine Jumero, CPA

Quiz 2: Stock Valuation (SET B)

GENERAL INSTRUCTIONS:

1. Write your name and student code on this questionnaire and on your answer sheet. You may write anything in this
questionnaire, provided that you return this. No questionnaire void answer sheet.

2. Do not forget to write your Questionnaire Set in the answer sheet.

3. You have one (1) hour to finish this examination.

1. IDENTIFICATION.

1. This stock valuation method uses multiples and similar markets in assessing the value of stocks.

2. The minimum return an investor will accept for owning a company's stock.

3. The model that establishes the relationship between systematic risks and expected returns for assets.

4. It represents value of firm at the point that growth becomes constant.

5. It is a guide to the firm's value if it is assumed that investors value the earnings of a given firm in the same way they do
the average firm in the industry.

6. An action whereby a person or group succeeds in ousting a firm's management and taking control of the company.

7. A dividend discount model that assumes dividends grow at a consistent rate throughout

8. A phenomenon when a stock's market price equals its theoretical value.

9. These shares are considered as having characteristics of a bond and a share.

10. This is a method where Investors may determine whether a stock is over- or undervalued at its current market price.

II. MULTIPLE CHOICE. Write the CAPITAL LETTER of your choice. Show your solutions as necessary. You may use the
bottom or back portion of the answer sheet for your solutions,

1. Statement 1: To a buyer, an asset's value represents the minimum price that he or she would pay to acquire it, while a
seller views the asset's value as a minimum share price.

Statement 2: If a stock’s expected return as seen by the marginal investor exceeds this investor's required return, then
the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required
return.

a. Statement is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

2. If expected return is less than required return on an asset, rational Investors will

a. sell the asset, which will drive the price up and cause the expected return to reach the level of the required

b. buy the asset, since price is expected to increase

c. sell the asset, which will drive the price down and cause the expected returns to reach the level of the required return

d. buy the asset, which will drive the price up and cause expected return to reach the level of the required return

3. Statement 1: The free cash flow valuation model is based on the same principle as dividend valuation models; that is,
the value of a share of stock is the present value of future cash flows.

Statement 2: The market value per share of common stock is the amount per share of common stock that would be
received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among
common stockholders

a. Statement 1 is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

4. Common stockholders expect to earn a return by receiving

a. semi-annual interest

b. variable dividends

c. annual interest

d. fixed periodic dividends

5. Statement 1: The book value per share of common stock is the amount per share of common stock that would be
received if all of the firm's assets were sold for their accounting value and the proceeds remaining were divided among
common stockholders.

Statement 2: The corporate valuation model cannot be used unless a company pays dividends.

a. Statement 1 is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

6. Common shareholders have a claim on the company's assets

a. at any time, equal to the value of their shares

b. only after the claims of debtholders and preferred shareholders have been satisfied.

c. after the claims of the preferred shareholders have been satisfied, but before the debt holders

d. never. Common shareholders have no calm on the company's assets.

7. Statement 1: The claims of equity holders on the firm's income cannot be paid until the claims of all creditors have
been satisfied. But, the claims of the equity holders on the firm's assets have priority over the claims of creditors because
the equity holders are the owners of the firm.

Statement 2: The free cash flow valuation model that determines the value of an entire company is the present value of
its expected free cash flows discounted at the firm's weighted average cost of equity.

a. Statement 1 is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

8. A decrease in the _____ will cause an increase in common stock value.

a. growth rate

b. required rate of return

c. last paid dividend

d. both band C

9. Statement 1: The number of authorized shares of common stock is always greater than or equal to the number of
outstanding shares of common stock.

Statement 2: The constant growth model is an approach to dividend valuation that assumes that dividends grow at a
constant rate indefinity.

a. Statement 1 is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

10. Which of the following statements is NOT CORRECT?

a. An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements.

b. Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or
continuing value.

c. The corporate valuation made can be used to find the value of a division.

d. The corporate valuation model discounts free cash flows by the required return on equity

e. The corporate valuation model can be both for companies that pay dividends and those that do not pay dividends.

11. Candy's stock is currently selling for P140.00 per share and the firms dividends are expected to grow at 5 percent
indefinitely. In addition, Candy's most recent dividend was P5.50. The RRR is 9%. Candy stack would be

a. not enough information to tell

b. no value

c. overvalued
d. properly valued

e. undervalued

12. Statement 1: Investors purchase a stock when they believe that it is undervalued and sell when they feel that it is
overvalued.

Statement 2: Common stock can be either privately or publicly owned.

a. Statement 1 is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

13. Because equity holders are the last to receive any distribution of assets as a result of bankruptcy proceedings,
common stockholders expect

a. warrants to be attached to the stock as a sweetener

b. all profits to be paid out in dividends

c. greater compensation in the form of dividends and rising stock prices

d. fixed dividend payments

14. Statement 1: For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal
its intrinsic value as seen by the marginal investor and (2) the expected return as seen by the marginal investor must
equal this investor’s required return.

Statement 2: The corporate valuation model cannot be used unless company pays dividends.

a. Statement 1 is true.

b. Statement 2 is true.

c. Both statements are true.

d. No statement is true.

15. Dividends in arrears that must be paid to the preferred stockholders before payment of dividends to common
stockholders are

a. participating

b. noncumulative

c. convertible

d. cumulative

II. PROBLEM SOLVING.

PROBLEM 1

A firm has all expected dividend next year of 1.20 per share, a zero growth rate of dividends, and a required return of 10
percent. The value of a share of the firm's common stock is _________
PROBLEM 2

Moon Co's most recent dividend was P3.10. The dividend growth rate is expected to be 4% for the first 2 years and
afterwards, becomes constant at 6%. The firm's required return is 10.0%. What is the best estimate of the current stock
price?

PROBLEM 3

Walk With You Inc.'s stock has a required rate of return of 10.25%, and it is for P57.50 per share. The dividend is
expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend?

PROBLEM 4

The current price of Beatbox Corporation stock is P26.50 per share. Earnings next year should be P2 per share and it
should pay a P1 dividend. The P/E multiple is 15 times on average. What price would you expect for Beatbox’s stock in
the future?

PROBLEM 5

Dream Graduation's stock is currently selling for P80.00 per share. The expected dividend one year for now is 4.00 and
the required return is 13 percent. What is Blink’s dividend growth rate assuming that dividends are expected to grow at a
constant rate forever?

PROBLEM 6

Tangerine Love, Inc. has an expected dividend next year of P5.60 per share, growth rate of dividends of 10 percent, and a
required return of 20 percent. The value of a share of Tangerine Love, Inc.'s common stock is ______.

PROBLEM 7

Based on the corporate valuation model, Take My Breath Co.'s total corporate value is P2,400 million. The company's
balance sheet shows P240 million of notes payable, P600 million of long-term debt, P100 million of preferred stock, 360
million of retained earnings, and P1,600 million of total common equity. If the company has 30 million shares of stock
outstanding, what is the best estimate of its price per share?

PROBLEM &

Teddy Bear Inc., a domestic corporation of the Republic of the Philippines, plans to sell its stocks in the Philippine Stock
Exchange. Peter Lee intends to invest in Teddy Bear Inc. However, Peter does not know whether the selling price of such
stocks are reasonably made. With a tight market competition in teddy bears, Peter reached out to you to help him
decide.

As the analyst, you referred to the market and noted that if Teddy Bear Inc is to be valued today, an expected profit rate
of 15% is reasonably attainable. The market also provided for a beta of 1/3. Teddy Bear's has an accounting rate of return
and internal rate of return is noted to be at 13% and 13.5%, respectively. You noted these relatively good rates given that
the Philippine Treasury issues bills at a rate of 10.5%.

Further analysis would show that Teddy Bear normally issues increasing dividends at a rate of 5%. However, Teddy Bear
issued a corporate resolution that due to the good performance of the company, the growth rate for the next 5 years are
as follows:

Year 1 and 2: 10%

Year 3 and 4: 13%

Year 5: 12%
Teddy Bear recently issued dividends of P7.00 per share,

Required:

1. What rate should be used as the required rate of return for Teddy Bear Inc.?

2. How much is the estimated stock price of Teddy Bear Inc. for this year (P0)?

3. How much is the Capital Gains Yield for this year?