Topacio, Rizza C.

Valuation Concepts and Methods

BSMA 3-1 2020-04238-MN-0
ACTIVITY 6
MULTIPLE CHOICE THEORIES. Write the letter of the best answer before the number
of the question or statement being answered.
1. A valuation approach that is based on the concept that the actual value of a
business lies in the ability to produce revenue, profit and eventually wealth in the
future.

a. Income Based Valuation Approach

b. Market Based Valuation Approach
c. Asset Based Valuation Approach
d. Liquidation Valuation Approach

2. The following methods are NOT income-based valuation technique except

a. Economic Value Added, Capitalizing current earnings and discounted future

earnings
b. Economic Value Added, Capitalization of earnings method and discounted
cashflow method
c. Economic Value Added, Capitalizing past earnings and discounted cashflow
approach
d. Economic Value Added, Discounted Cashflow and Revenue Approach

3. Valuation approach that determines the equity value by calculating the present
value of the expected future net cash flows or profits

a. Revenue Approach
b. Discounted Cashflows Method Approach
c. Capitalization of Earnings Approach
d. Economic Value Added

4. A valuation method used to estimate a firm's worth based on earnings forecasts.

It uses these forecasts for the earnings of a firm and the firm's estimated terminal
value at a future date, and discounts these back to the present using an
appropriate discount rate.

a. Revenue Approach
 b. Discounted Cashflows Analysis
c. Capitalization of Earnings Approach
d. Economic Value Added

5. The following are ways on to estimate terminal value except

a. Liquidation Value Model

b. Multiples Approach
c. Stable Growth Approach
d. Going Concern Model

6. In Income based valuation, investors consider two opposing theories

a. dividend relevance theory and bird-in-hand theory

b. bird-in-hand theory
c. dividend irrelevance theory
d. both b and c

7. The __________ theory was 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.

a. dividend relevance theory

b. bird-in-hand theory
c. dividend irrelevance theory
d. both b and c

8. The __________ theory believes that dividend or capital gains has an impact on
the price of the stock.

a. dividend relevance theory

b. bird-on-hand theory
c. dividend irrelevance theory
d. both a and b

9. The __________ is also known as Income based valuation approach

a. earnings approach
 b. market approach
c. asset-based approach
d. going concern approach

10. In sensitivity analysis, this factor 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.

a. earning accretion
b. earning dilution
c. earning increments
d. earning decrements

11. In sensitivity analysis, this factor will reduce value if there future circumstances that
will affect the firm negatively.

a. earning accretion
b. earning dilution
c. earning increments
d. earning decrements

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

a. equity accretion
b. earnings premium
c. equity control premium
d. additional paid in capital

13. These are the factors that can be considered to properly value the asset using
income-based valuation approach, except __________.

a. earning accretion or dilution

b. equity accretion or dilution
c. equity control premium
d. precedent transaction
14. Using the income-based valuation, these are previous deals or experiences that
can be similar with the investment being evaluated.

a. earning accretion or dilution

b. equity accretion or dilution
c. equity control premium
d. precedent transaction

15. These transactions are considered risks that may affect further the ability to realize
the projected earnings.

a. earning accretion or dilution

b. equity accretion or dilution
c. equity control premium
d. precedent transaction

16. A key factor that is used to discount the net cash flows in the future is __________.

a. cost of equity
b. cost of earnings
c. cost of debt
d. cost of capital

17. The cost of __________ can be computed primarily by getting the weight of cost
of sources of fund, through __________ and __________.

a. cost of equity; weighted average cost of capital; capital asset pricing model
b. cost of equity, average cost of capital; capital asset pricing model
c. cost of capital; weighted average cost of capital; capital asset pricing model
d. cost of capital; average cost of capital; capital asset pricing model

18. The __________ is a calculation of a firm's __________ in which each category of

__________ is proportionately weighted.

a. weighted average cost of capital; capital; cost of capital

b. weighted average cost of capital; cost of capital; capital
c. average cost of capital; capital; cost of capital
d. average cost of capital; cost of capital; capital
19. The beta in Capital Asset Pricing Model is __________.

a. use to represent volatility/risk of the market

b. arbitrary systematic risk coefficient
c. the pricing multiple used to compute for the cost of capital
d. the credit spread/debt premium added to risk free rate.

20. The following statements are correct for the Economic Value Added (EVA), except:

a. The most conventional way to determine the value of the asset is through its
economic value added.
b. Economic value added (EVA) is a convenient metric in evaluating investment
as it quickly measures the ability of the firm to support its cost of capital using
its earnings.
c. EVA is the excess of the company's equity after deducting the cost of capital.
d. The general concept here is that higher EVA is better for the firm.

21. The elements that must be considered in using EVA are as follows, except
__________.

a. Reasonableness of earnings
b. Appropriate cost of capital
c. Volatility of the market
d. Both a and b

22. In which income-based valuation method wherein the value of the asset or the
investment is determined using the anticipated earnings of the company divided
by the cost of capital?

a. Economic Value Added (EVA)

b. Capitalization of Earnings Method
c. Capital Asset Pricing Method
d. Discounted Cashflow Method

23. The following statements are factual discussions about Capitalization of Eamings
Method except:
 a. In capitalization of earnings method, the value of the asset or the investment is
determined using the anticipated earnings of the company divided by the cost
of capital.
b. You may use past earnings in the Capitalization of Earnings method for cases
wherein earnings are fixed.
c. The formula used in Capitalization of Earnings is actually grossing up the future
earnings using capitalization rate to come up with the estimated asset value.
d. Cost of Capital used in the Capitalization of Earnings method is equivalent to
the expected yield or the required rate of return.

24. In capitalization of earnings method, these types of assets are not part of the
computation hence need to be added to the Capitalized Earnings.

a. Fixed Assets
b. Idle Assets
c. Current Assets
d. Noncurrent Assets

25. The following statements are limitations of capitalization of earnings method,

except

a. this does may not fully account for the future earnings or cash flows thereby
resulting to over or undervaluation
b. inability to incorporate contingencies
c. assumptions used to determine the cashflows may not hold true since the
projections are based on a limited time horizon.
d. It is simple and convenient
MULTIPLE CHOICE PROBLEM. Write the letter of the best answer before the number
of the question or statement being answered.
1. HBB Company for the last ten years, has earned and had cash flows of about Php
500,000 every year. As per the predictions of the company's earnings, the same
cash flow would continue for the foreseeable future. The expenses for the business
every year is about Php 100,000 only. Based on the available public information a
Php 4 million Treasury bond has a prevailing return of Php 400,000 annually.

Using Capitalization of Earnings approach, what is the value of HBB Company?

a. Php 4,000,000.00
b. Php 3,000,000.00
c. Php 2,000,000.00
d. Php 1,000,000.00

2. HCB Company for the last ten years, has earned and had cash flows of about
P600,000 every year. As per the predictions of the company's earnings, the same
cash flow would continue for the foreseeable future. The expenses for the business
every year is about P500,000 only. Based on the available public information a
Php 4 million Treasury bond has a prevailing return of Php 40,000 quarterly.

Using Capitalization of Earnings approach, what is the value of HCB Company?

a. Php 3,000,000.00
b. Php 2,500,000.00
c. Php 3,500,000.00
d. Php 1,000,000.00

3. Heart, Inc. plans to sell its business and has used Capitalization of Earnings to be
an appropriate valuation method with a stable cashflow of Php 1,000,000.00 for
the last 5 years. Forecast shows that similar level of cashflow would continue in
the next several years. With the stability of the business it was sold to HBB, Inc.
for Php 6,000,000.00 with premium of Php 1,000,000.00. Similar instruments
based on the available data is a Treasury Note with a determined quarterly interest
rate. Annual Operating Expenses is Php 600,000.00 Compute for the capitalization
rate used by Heart, Inc.

a. 2%
b. 4%
c. 8%
 d. 10%

4. Hai-dee is looking to buy a property that costs Php115,000, and can be leased out
for Php750 a month. She has done some research and has determined the net
operating expenses to be Php5,000 per year. Her desired cap rate is 10%. What
is the appraisal value of this property using the capitalization of eamings
approach?

a. Php 40,000.00
b. Php 42,500.00
c. Php 45,000.00
d. Php 50,000.00

5. Heinz, Inc. expects to generate earnings over the next five years of Php50,000.00;
Php60,000.00; Php65,000.00; Php70,000.00 and Php75,000.00. Using the
Capitalization of Earnings Method, what is the estimated value of the firm using
10.00% required rate of return?

a. Php 640,000.00
b. Php 657,378.72
c. Php 657,738.72
d. Php 604,000.00

6. Herbert, Inc. expects to generate earnings over the next five years of
Php50,000.00; Php60,000.00; Php65,000.00; Php70,000.00 and Php75,000.00.
Using the Capitalization of Earnings Method, what is the estimated value of the
firm using 8.00% required rate of return?

a. Php 600,000.00
b. Php 800,000.00
c. Php 500,000.00
d. Php 700,000.00

7. Ernesto, Inc. has projected average earnings every year of Php 100 Million. Debt
to Equity Ratio is 3:1. After tax cost of debt is 5% while cost of equity is 10%. The
Board of Directors of the company decided to sell the company for P1 Billion.
Compute for the Economic Value Added (EVA).

a. Php 37,500,000.00
 b. Php 50,000,000.00
c. Php 0.00
d. Php 25,000,000.00

8. Using Weighted Average Cost of Capital (WACC), ignoring taxes, compute the
cost of capital of a company with debt ratio of 0.75:1 and is paying yearly average
interest for its loans of 4% and dividend rate of 5% yearly.

a. 4.00%
b. 4.25%
c. 4.50%
d. 5.00%

9. Using Capital Asset Pricing Method (CAPM), compute for the cost of capital
(equity) with risk-free rate of 5%, market return of 12% and Beta of 1.3.

a. 14.01%
b. 14.10%
c. 14.00%
d. 14.11%

10. Using Capital Asset Pricing Method (CAPM), compute for the cost of capital
(equity) with risk-free rate of 4%, market return of 8% and Beta of 1.5.

a. 10.00%
b. 11.00%
c. 12.00%
d. 13.00%

11. With risk-free rate of 5%, Beta of 1.5, market return of 8%, prevailing credit spread
of 3%, tax rate of 30% and Equity ratio of 30%, compute for the weighted average
cost of capital.

a. 6.00%
b. 6.77%
c. 7.00%
d. 7.77%
12. With risk-free rate of 6%, Beta of 1.5, market return of 8%, prevailing credit spread
of 3%, tax rate of 30% and Equity ratio of 30%, Using CAPM method compute for
the cost of equity.

a. 9.00%
b. 6.77%
c. 8.00%
d. 8.77%

13. The appropriate WACC of a firm is 6.43%. With risk-free rate of 4%, market return
of 8%, prevailing credit spread of 3%, tax rate of 30% and Equity ratio of 30%,
compute for the volatility of stocks or Beta.

a. 1.00
b. 1.25
c. 1.50
d. 1.75

14. The appropriate WACC of a firm is 6.43%. With risk-free rate of 4%, market return
of 8%, prevailing credit spread of 3%, tax rate of 30% and Equity ratio of 30%,
compute for the after-tax cost of debt.

a. 4.90%
b. 5.00%
c. 7.00%
d. 10.00%

15. SPPE Corp. is planning to expand, and new projects is expecting to earn an
average of Php375,000 annually. If the project requires for Php5,000,000
investment at 10% cost of capital. Compute for the Economic Value Added.

a. Php 125,000.00
b. (Php 125,000.00)
c. Php 875,000.00
d. (Php 875,000.00)

16. SLAC Corp. is planning to expand and new projects is expecting to earn an
average of Php750,000 annually. If the project requires for Php5,000,000
investment at 12% cost of capital. Compute for the Economic Value Added.
 a. Php 150,000.00
b. (Php 150,000.00)
c. Php 600,000.00
d. (Php 600,000.00)

17. SPRO Corp. is planning to expand and new projects is expected to have an EVA
of Php200,000.00. The annual cost of capital at 10% amounts to Php400,000.00.
What is the average monthly earning projected for this project?

a. Php 600,000.00
b. Php 50,000.00
c. Php 60,000.00
d. Php 500,000.00

18. SLMA Corp. for the last ten years, has earned and had cash flows of about
P600,000 every year. As per the predictions of the company's earnings, the same
cash flow would continue for the foreseeable future. The expenses for the business
every year is about P500,000 only. Based on the available public information a P4
million Treasury bond has a prevailing return of P40,000 quarterly.

Using Capitalization of Earnings approach, assuming SLMA would sell 20% of its
shareholdings, what will be the minimum selling price?

a. Php 2,500,000.00
b. Php 500,000.00
c. Php 1,500,000.00
d. Php 1,000,000.00

19. SPLI, Inc. has a Debt to Equity Ratio of 3:1. After tax cost of debt is 5% while cost
of equity is 10%. The Board of Directors of the company decided to sell 100% of
the company for Php 1 Billion. Compute for the projected monthly average
earnings assuming an EVA of Php 57,500,000.00

a. Php 37,500,000.00
b. Php 10,000,000.00
c. Php 120,000,000.00
d. Php 100,000,000.00
20. The appropriate WACC of a firm is 6.77%. With market return of 8%, prevailing
credit spread of 3%, tax rate of 30% and Equity ratio of 30%, what is the risk free
rate of the firm with Beta of 1.5?

a. 4%
b. 5%
c. 6%
d. 7%