PHINMA EDUCATION

COMPREHENSIVE FINAL EXAMINATION

S.Y. 2021-2022

FIN 072-FINANCIAL MARKET

1. Financial markets have the basic function of
A. assuring that the swings in the business cycle are less pronounced.
B. assuring that governments need never resort to printing money.
C. bringing together people with funds to lend and people who want to borrow
funds.
D. determining the level of interest rates

2. A corporation acquires new funds only when its securities are sold
A. in the primary market by an investment bank.
B. in the secondary market by a commercial bank
C. in the secondary market by an investment bank.
D. in the secondary market by a stock exchange broker.

3. Money markets are markets for

A. Foreign stocks.
B. Consumer automobile loans.
C. U.S. stocks.
D. Short-term debt securities.

4. Statement 1: Money market securities are usually more widely traded than longer-term
securities and so tend to be more liquid.
Statement 2: Capital market securities are usually more widely traded than longer term
securities and so tend to be more liquid.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
5. Statement 1: The Philippine Stock Exchange is primarily a secondary market.
Statement 2: The Philippine Stock Exchange is an over-the-counter market.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
6. Statement 1: IBM issues 2 million shares of new stock to the public. This is considered a
secondary market transaction.
Statement 2: Selling of 200 shares of IBM stock in the open market is secondary market
transaction
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
7. What is the proper procedure when investing at Philippine Stock Exchange?
I. Choose a stockbroker.
II. Pay before the settlement date.
III. The investor shall receive from his/her broker either the proceeds of the sale of
his/her stocks (after 3 business days) or proofs of ownership of the stocks he/she
bought (confirmation receipt and invoice).
IV. Give the order to the trader, and then ask for the confirmation receipt.
V. Open an account and fill out a customer account information form and submit
identification papers for verifications.

A. I, V, IV, II, III

B. I, II, IV, V, III
C. I, IV, V, II, III
D. I, IV, II, V, III

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8. Which of the following is not a function of investment banker?
A. Give advice to the corporate clients on long-term financial matters.
B. Middleman engaged in raising long-term funds for businesses and government
agencies.
C. It provides advice to the issuing corporation on the prices and securities to be issued.
D. Raise money so that the firm he/she is working for can support its operations,
including future expansion.

9. Which of the following can be described as involving direct finance?

A. A pension fund manager buys commercial paper from the issuing corporation.
B. A corporation buys commercial paper in a secondary market.
C. A corporation takes out loans from a bank.
D. People buy shares in a mutual fund.

10. Which of the following is an example of a capital market instrument?

A. Commercial paper.
B. Preferred stock.
C. U.S. Treasury bills.
D. Banker’s acceptances.

11. Statement 1: The cash flows for an annuity due must all occur at the beginning of the
periods.
Statement 2: The cash flows for an ordinary (or deferred) annuity all occur at the
beginning of the periods.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

12. You are considering two equally risky annuities, each of which pays P5,000 per year for
10 years. Investment AA is an ordinary (or deferred) annuity, while Investment BB is an
annuity due. Which of the following statements is CORRECT?

A. The present value of AA exceeds the present value of BB, and the future value of AA
also exceeds the future value of BB.
B. The present value of BB exceeds the present value of AA, and the future value of BB
also exceeds the future value of AA.
C. The present value of AA must exceed the present value of BB, but the future value of
AA may be less than the future value of BB.
D. The present value of BB exceeds the present value of AA, while the future value of
BB is less than the future value of AA.

13. Suppose a bond will pay P1,000 eight years from now. If the going interest rate on these
8-year bonds is 7.3%, how much is the bond worth today?
A. P478.06
B. P500.82
C. P529.28
D. P569.12
E. P631.72
14. To supplement your planned retirement in exactly 42 years, you estimate that you need
to accumulate P1 million by the end of 42 years from today. You plan to make equal
annual end-of-year deposits into an account paying 4 percent annual interest. How large
must the annual deposits be to create the P1 million amount by the end of 42 years?
A. P9,400.00
B. P9,450.02
C. P9,500.00

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D. P9,540.20

15. Statement 1: The present value of a 3-year, P150 annuity due will exceed the present
value of a 3-year, P150 ordinary annuity.
Statement 2: If a loan has a nominal annual rate of 8%, then the effective rate will never
be less than 8%.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect
16. Stocks that have high financial rewards are generally accompanied by:
A. high risk
B. high dividend payments
C. low dividend payments because of internally generated growth
D. All the above

17. The major benefit of diversification is to:

A. reduce the expected risk
B. increase the expected return.
C. remove negative risk assets from the portfolio.
D. reduce the portfolio's systematic risk.

18. Assume that interest rates on 20-year Treasury and corporate bonds with different
ratings, all of which are noncallable, are as follows:
T-bond = 7.72%
AAA = 8.72%
A = 9.64%
BBB = 10.18%

The differences in rates among these issues were most probably caused primarily by:

A. Real risk-free rate differences.

B. Tax effects.
C. Default risk differences.
D. Maturity risk differences.

19. The marketable securities with the least amount of default risk are
A. Federal government agency securities
B. Philippine Treasury securities
C. Repurchase agreements
D. Commercial paper

20. If a Company A has a higher rate of return on assets than Company B, this could be
because Company A:
A. Lower profit margin on sales, or lower asset-turnover ratio, or both.
B. Higher profit margin on sales, or lower asset-turnover ratio, or both.
C. Lower profit margin on sales, or higher asset-turnover ratio, or both.
D. Higher profit margin on sales, or higher asset-turnover ratio, or both.

21. The return on market portfolio is 12% and risk-free rate is 5%. The beta coefficient is 1.4.
Using the capital asset pricing model, what is the required rate of return?
A. 9.8%
B. 12%
C. 14%
D. 14.8%

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22. The return on market portfolio is 12% and risk-free rate is 5%. The original beta
coefficient is 1.4. If the beta coefficient increases to 1.6, the required rate of return will
increase (decrease) by
A. 0.2%
B. 1.4%
C. (0.2%)
D. (1.4%)

23. Bonds that are sold in a foreign country and are denominated in a currency other than
that of the country in which they are sold are known as
A. Foreign bonds.
B. Eurobonds.
C. Eurocurrencies.
D. Eurodollars.

24. Statement 1: P1,000 bond sells for P1,125. This bond is selling at a premium.
Statement 2: P1,000 bond sells for P1,125. The coupon rate of the said bond is equal to
the effective rate.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

25. A five-year P1,000 par value bond pays a 6.50% annual coupon. Given a YTM of 8.0%,
what is the price of the bond today?
A. P 860
B. P 940
C. P1,000
D. P1,040
26. Debentures are
A. Income bonds that require interest payments only when earnings permit
B. Subordinated debt and rank behind convertible bonds.
C. Bonds secured by full faith and credit of the issuing firm
D. A form of lease financing similar to equipment trust certificates

27. The most expensive source of financing for a firm is:

A. Debt
B. Retained earnings
C. Preferred stock
D. New common stock

28. If the expected rate of return on a stock exceeds the required rate,
a. The stock is experiencing supernormal growth.
b. The stock should be sold.
c. The company is probably not trying to maximize price per share.
d. The stock is a good buy.

29. A Corporation has preferred stocks that pay dividends of P6.72 per share. If the cost of
funds (capital) coming from preferred stocks is 12% and the income tax rate is 30%,
what is the price of the preferred stocks?
A. P0.81
B. P1.79
C. P38.08
D. P56.00

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30. A Corporation expects to pay dividends of P5 per share at the end of this year. The
expected growth rate is 10%. Using the dividend growth model, what is the stock's
market price if the cost of capital (common stocks) is 25%?
A. P14.29
B. P33.33
C. P20
D. P50

31. A Corporation expects to pay dividends of P4.80 per share at the end of the current
year. The dividend growth rate is 10% and the cost of common equity capital is 14%. If
the dividend growth model is used to appraise A Corporation’s shares of stocks, the
price of the stocks to the public is
A. 14.00%.
B. 15.40%.
C. P120.00 per share.
D. P5.28 per share

32. A major use of warrants in financing is to:

A. Lower the cost of debt.
B. Avoid dilution of earnings per share.
C. Maintain managerial control
D. Permit the buy-back of the bonds before maturity
33. You are considering the purchase of a bond with a 13% coupon rate paid and
compounded semiannually. The bond will mature in 8 years, and has a P1,000 face
value. The bond currently sells for P867. Calculate the annual yield to maturity for this
bond. (Round to nearest percentage.)
A. 8 percent
B. 13 percent
C. 9 percent
D. 16 percent

34. The component of the risk-adjusted discount rate that is derived from the risk of
Treasury securities is:
A. call premium
B. risk-free rate
C. cost of capital
D. risk premium

35. One of the sources of long-term financing is the issuance of common stocks. The
advantages (to the issuer) of issuing common stocks are as follows, except
A. Common Stock cash dividends are not tax deductible as expense.
B. Common stock dividends are not fixed they are paid from profits when available.
C. The sale of common stock increases credit worthiness of the firm by providing
more equity.
D. Common Stock is frequently more attractive to investors than debt because it
grows in value with the success of the firm.

36. Which of the following brings in additional capital to the firm?

A. Exercise of warrants
B. Two-for-one stock split
C. Issuance of stock dividend
D. Conversion of convertible bonds to common stocks

37. A Corporation presently has 200,000 shares, P10 par value common stocks issued and
outstanding. The common stockholders of A Corporation have preemptive rights. If A

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Corporation issues 100,000 additional shares of common stock at P15 per share, a
current holder of 30,000 shares of A Corporation’s common stock must be given the
option to buy
A. 15,000 additional shares
B. 45,000 additional shares
C. 30,000 additional shares
D. 60,000 additional shares

38. Two constant growth stocks are in equilibrium, have the same price, and have the same
required rate of return. Which of the following statements is CORRECT?
A. The two stocks must have the same dividend per share.
B. If one stock has a higher dividend yield, it must also have a lower dividend
growth rate.
C. If one stock has a higher dividend yield, it must also have a higher dividend
growth rate.
D. The two stocks must have the same dividend growth rate.
E. The two stocks must have the same dividend yield.

39. What will be the price of a bond in which the YTM is higher than the coupon rate?
A. Below face value
B. At face value
C. Above face value
D. Cannot be determined

40. Which of the following statements is correct?

A. Bond prices and interest rates move in the same direction, i.e., if interest rates
rise, so will bond prices.
B. The market price of a discount bond will approach the bond's par value as the
maturity date approaches. Barring changes in the probability of default, the value
of the bond cannot fail to increase each year as the time to maturity approaches.
C. The "current yield" on a noncallable discount bond will normally exceed the
bond's yield to maturity.
D. The "current yield" on a noncallable discount bond will normally exceed the
bond's coupon interest rate.

41. The dividend growth model, when used, assumes that the total return on a share of
common stock is comprised of a:
A. capital gains yield and a dividend growth rate.
B. capital gains growth rate and a dividend growth rate.
C. dividend yield and the expected price next year.
D. dividend yield and a capital gains yield.

42. You are planning to invest in common stock of A, Inc. Lately, the firm paid a dividend of
P7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely.
If you want an annual return of 24.0%, what is the most you should pay for the stock
now?
A. P52.00
B. P32.50
C. P56.68
D. P35.43

43. The expected rate of return on a bond if bought at its current market price and held to
maturity.

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A. Yield to maturity
B. Current yield
C. Coupon yield
D. Capital gains yield

44. Statement 1: If a firm raises capital by selling new bonds, it is called the "issuing firm,"
and the coupon rate is generally set equal to the required rate on bonds of equal risk.
Statement 2: A zero coupon bond is a bond that pays no interest and is offered (and
subsequently sells initially) at par. These bonds provide compensation to investors in
the form of capital appreciation.
A. Only statement 1 is correct
B. Only statement 2 is correct
C. Both statements are correct
D. Both statements are incorrect

45. Which of the following best represents a screening decision?

A. determining which project has the highest net present value
B. determining if a project's internal rate of return exceeds the firm's cost of capital
C. determining which projects are mutually exclusive
D. determining which are the best projects

46. All other factors equal, which of the following would affect a project's internal rate of
return, net present value, and payback period?
A. an increase in the discount rate
B. a decrease in the life of the project
C. an increase in the initial cost of the project
D. all of the above

47. A Company is expected to pay a P1.00 per-share dividend at the end of the year (D1 =
P1.00). The stock sells for P20 per share and its required rate of return is 11 percent.
The dividend is expected to grow at a constant rate, g, forever. What is the growth rate,
g, for this stock?
A. 5%
B. 6%
C. 7%
D. 8%

48. Encompasses the risks outside the risks of financial markets, such as the risks posed by
natural disasters and corporate takeovers.
A. A. Credit risk
B. B. Event risk
C. C. Business risk
D. D. Inflation risk

49. Which of the following is usually not a feature of cumulative preferred stock?
A. Has voting rights
B. Has priority over common stock with regard to assets
C. Has priority over common stock with regard to earnings
D. Has the right to receive dividends in arrears before common stock dividends can be
paid

50. If a firm uses the same company cost of capital for evaluating all projects, which of the
following is likely?

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A. Accepting poor high-risk projects
B. Rejecting good low-risk projects
C. Both A and B
D. Neither A nor B

51. All other things being equal, as cost of capital increases

A. more capital projects will probably be acceptable.
B. fewer capital projects will probably be acceptable.
C. the company will probably want to borrow money rather than issue stock.
D. the number of capital projects that are acceptable will change, but the direction of the
change is not determinable just by knowing the direction of the change in cost of
capital

52. A ______ requires that dividends cannot be paid on common stock until all current and
previously omitted dividends are paid on preferred stock.
A. residual claim
B. preferred margin
C. cumulative provision
D. liquidation claim

53. Which of the following is not a key determinant of financial leverage?

A. Capital structure
B. Level of debt
C. Cost of debt
D. Technology

54. The term structure of interest rates defines the relationship

A. between risk and return.
B. between risk and maturity.
C. between maturity and yield.
D. between default risk ratings and maturity.

55. A Inc. is expected to pay a dividend of $5 per share next year. A’s dividends are
expected to grow by 3 percent annually. The required rate of return for A stock is 15
percent. Based on the dividend discount model, a fair value for A stock is $_______ per
share.
A. 33.33
B. 166.67
C. 41.67
D. 60.00

56. A stock’s beta is estimated to be 1.3. The risk-free rate is 5 percent, and the market
return is expected to be 9 percent. What is the expected return on the stock based on
the CAPM?
A. 5.2 percent
B. 11.7 percent
C. 16.7 percent
D. 10.2 percent

57. According to the capital asset pricing model, the required return by investors on a
security is
A. inversely related with the risk-free rate.

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B. inversely related with the firm’s beta.
C. inversely related with the market return.
D. none of the above

58. A Company’s stock is expected to generate a dividend and terminal value one year
from now of P57.00. The stock has a beta of 1.3, the risk-free interest rate is 6
percent, and the expected return market return is 11 percent. What should the
equilibrium price of Investors’ stock in the market now?
A. P50.67
B. P53.77
C. P43.85
D. P41.22

59. A Company’s stock currently sells for P45.00 per share. It is expected to pay a dividend
of P3.10 next year, its growth rate is a constant 7.0%, and the company will incur a
flotation cost of 12.0% of the market value if it sells new common stock. The firm's tax is
40%. What is the firm's cost of retained earnings?
A. 13.89%
B. 14.83%
C. 14.37%
D. 15.38%

60. Assume the following information about a firm's capital components:

Capital Structure Cost

Debt P2 M 8%
Preferred stock P2 M 11%
Common stock P6 M 14%
What is the firm’s weighted-average cost of capital?
A. 11.00%
B. 12.05%
C. 11.90%
D. 12.20%

61. The overall weighted average cost of capital is used instead of costs for specific sources
of funds because
A. an investment funded by equity or debt is not relevant to this question
B. a project with the highest return would always be accepted under the specific cost
criteria.
C. the use of the cost for specific sources of capital would make investment decisions
inconsistent.
D. none of the given choices.

62. Which of the following are acceptable criteria for determining the weights in the weighted
average cost of capital?

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A. Market value of the capital structure and historical costs of financing.
B. Market value of capital structure and the target mix of debt and equity.
C. Using the after-tax cost of debt and the market value of the capital structure.
D. Using book values of the capital structure and the prior level of debt and equity.

63. The cost of capital at the retained earnings breakpoint is the:

A. cost of new stock
B. weighted average cost of capital
C. marginal cost of capital
D. none of the given choices

64. Capital budgeting techniques are least likely to be used in evaluating

A. the acquisition of a new ship by a shipping line.
B. the adoption of the ABC system in allocating costs to product lines.
C. a disinvestment decision, such as a sale of unprofitable business segment.
D. the implementation of a major advertising program that will have long-term effects on
the
65. A Company has invested in a project that has an eight-year life. It is expected that the
annual cash inflow from the project will be P20,000. Assuming that the project has a
internal rate of return of 12%, how much was the initial investment in the project if the
present value of annuity of 1 for 8 periods is 4.968 and the present value of 1 is 0.404?
A. P 64,640
B. P 99,360
C. P 80,800
D. P 160,000

66. A, Inc. requires all its capital investments to generate an internal rate of return of 14
percent. The company is considering an investment costing P80,000 that is expected to
generate equal annual cash inflows for 5 years. The present value of 1, end of 5 years
is 0.51937 and the present value of annuity of 1 is 3.4331 based on 14 percent required
rate of return. To meet the 14 percent minimum acceptable rate of return, the estimated
annual cash inflow (ignoring income taxes) is:
A. P 23,303
B. P154,033
C. P 51,550
D. P274,648

67. The following incomplete information is provided for an investment decision.

Discount Discounted Cumulative
Year Cash Flow Factor Cash Flows Cash Flows
(10%)
0 P(450,000) 1.000 P(450,000) P(450,000)
1 280,000 .909 254,520
2 210,000 .826
3 140,000 .751
Using break-even time (BET) analysis, when will the investment be recovered?
A. At the end of year 2
B. In 2.73 years
C. In 2.21 years
D. Longer than three years

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68. Which of the following statements is not correct?
A. The discount rate ordinary used in present value calculations is the internal rate of
return.
B. The payback method measures the length of time required to complete the return of the
original investment.
C. The net present value (NPV) method computes the discounted present value of future
cash inflows to determine whether it is greater than the initial cash outflow.
D. In the accounting rate of return method the investment project's undiscounted net
income divided by the original or average investment cost to determine a rate of
profitability of the project.

69. An asset was purchased for P66,000. The asset is expected to last for 6 years and will
have a salvage value of P16,000. The company expects the income before tax to be
P7,200 and the tax rate applicable to the company is 30%. What is the average return
on investment (accounting rate of return)?
A. 7.6%
B. 12.3%
C. 10.9%
D. 17.6%

70. If an investment project has a profitability index of 1.25, the project's

A. discounted cash flow rate of return is 25%.
B. cost of capital is greater than its internal rate of return.
C. time-adjusted rate of return s greater than its internal rate of return.
D. net present value is positive, meaning that the present value of cash inflows is greater
than the present value of the cash outflows

71. A Products, Inc. is considering to invest in one of two projects. Both projects have a net
present value of P25,000; however Project X requires an initial investment of P700,000
while Project Q requires an initial investment of P300,000. Based on this information,
which of the following statements is true?
A. Project Q will have a higher profitability index
B. Project X will have a higher profitability index
C. Both projects will have the same profitability index
D. There is not enough information to determine the profitability index of either project

72. Which of the following statements about the net present value (NPV) and internal rate of
return (IRR) is not correct?
A. IRR is expressed as a percentage and NPV in peso terms
B. NPV and IRR make consistent accept/reject decisions for independent investment
projects.
C. The NPV method can be used to rank mutually exclusive projects, while the IRR method
cannot.
D. IRR assumes reinvestment of project cash flows at the cost of capital, whereas NPV
assumes reinvestment of project cash flows at the internal rate of return

73. If a company’s required rate of return is 12 percent and in using the profitability index
method, a project’s index is greater than 1.0, this indicates that the project’s rate of
return is
A. equal to 12 percent.
B. less than 12 percent.
C. greater than 12 percent.

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D. dependent on the size of the investment.

74. A, Inc. is considering the purchase of an equipment that costs P200,000. Annual cash
savings of P50,000, with a present value at 15 percent of P189,230, are expected for the
next six years. Given this information, which of the following statements is true?
A. This investment offers a negative rate of return
B. This investment offers an actual rate of return of 15 percent
C. This investment offers an actual rate of return of less than 15 percent
D. This investment offers an actual rate of return of more than 15 percent

75. ABC Products, Inc. is considering to invest in one of two projects. Both projects have a
net present value of P25,000; however Project Alpha requires an initial investment of
P700,000 while Project Delta requires an initial investment of P300,000. Based on this
information, which of the following statements is true?
A. Project Alpha will have a higher profitability index
B. Project Delta will have a higher profitability index
C. Both project will have the same profitability index
D. There is not enough information to determine the profitability index of either project

76. If an investment project has a profitability index of 1.25, the project's

A. discounted cash flow rate of return is 25%.
B. cost of capital is greater than its internal rate of return.
C. time-adjusted rate of return s greater than its internal rate of return.
D. net present value is positive, meaning that the present value of cash inflows is greater
than the present value of the cash outflows.

77. A Company uses a 10% discount rate and the total cost approach to capital budgeting
analysis. Both alternatives are Akda Investments which has a marginal cost of capital of
12 percent is evaluating two mutually exclusive projects (X and Y), which have the
following projections:
Project X Project Y

Investment P48,000 P83,225

After-tax cash 12,000 15,200
inflow
Asset life 6 years 10 years
The indifference point for the two projects is
A. 12.00%
B. 16.01%
C. 12.64%
D. 19.33%

78. A, Inc. plans to replace one of its machines with a new efficient one. The old machine
has a net book value of P120,000 with remaining economic life of 4 years. This old
machine can be sold for P80,000. If the new machine were acquired, the cash operating
expenses will be reduced from P240,000 to P160,000 for each of the four years, the
expected economic life of the new machine. The new machine will cost A,Inc a cash
payment to the dealer of P300,000. The company is subject to 32 percent tax and for

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this kind of investment, a marginal cost of capital of 9 percent. The present value of
annuity of 1 and the present value of 1 for 4 periods using 9 percent are 3.23972 and
0.70843, respectively. The net present value to be provided by the replacement of the
old machine is
A. P15,693
B. P46,794
C. P28,493
D. P59,594
79. The A Corporation has to replace its completely damaged boiler machine with a new
one. The old machine has a net book value of P100,000 with zero market value;
therefore it will give a tax shield, based on 35% tax rate if replaced, by P35,000. The
company has a 10 percent cost of capital. Understandably, the new machine, through a
uniform decrease in cash operating costs, will give a positive net present value because
this machine will provide an internal rate of return of 12 percent.The present values at
10% and 12%, respectively, are:
10% 12%
Annuity of 1, 6 periods 4.35526 4.11141
1 end of 6 periods 0.56447 0.50663
If the machine were to be depreciated using straight-line method for 6 years without any
salvage value, the estimated profitability index is:
A. 0.94
B. 1.07
C. 1.06
D. 1.20
80. A Company is considering replacing its old machine with a new and more efficient one.
The old machine has book value of P100,000, a remaining useful life of 4 years, and
annual straight-line depreciation of P25,000. The existing machine has a current market
value of P80,000. The replacement machine would cost P160,000, have a 4-year life,
and will save P50,000 per year in cash operating costs. If the replacement machine
would be depreciated using the straight-line method and the tax rate is 40%, what
should be the increase in annual income taxes?
A. P 4,000
B. P28,000
C. P14,000
D. P40,000

81. The price of a stock is the:

A. future value of all expected future dividends, discounted at the dividend growth rate.
B. present value of all expected future dividends, discounted at the dividend growth rate.
C. future value of all expected future dividends, discounted at the investor’s required
return.
D. present value of all expected future dividends, discounted at the investor’s required
return.

82. The A Corporation finds that it is necessary to determine its marginal cost of capital.
A’s current capital structure calls for 45 percent debt, 15 percent preferred stock and
40 percent common equity. The costs of the various sources of financing are as
follows: debt, after-tax 5.6 percent; preferred stock, 9 percent; retained earnings, 12
percent; and new common stock, 13.2 percent. If the firm has P12 million retained
earnings, and A has an opportunity to invest in an attractive project that costs P45
million, what is the marginal cost of capital of A Corporation?
A. 8.83 percent

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B. P9.95 percent
C. 8.91 percent
D. P12.40 percent

83. The underlying assumption of the dividend growth model is that a stock is worth
A. the present value of the future cash flows which it generates.
B. the same amount to every investor regardless of the investor's desired rate of return.
C. an amount computed as the next annual dividend divided by the market rate of return.
D. an amount computed as the next annual dividend divided by the required rate of return.

84. A Company will pay an annual dividend of P3.15 a share on their common stock end of
this year. Last year, the company paid a dividend of P3.00 a share. The company
adheres to a constant rate of growth dividend policy. What will one share of this common
stock be worth ten years from now if the applicable discount rate is 12.5 percent?
A. P56.78
B. P68.41
C. P65.16
D. P71.83

85. A, Inc. is a very cyclical type of business which is reflected in their dividend policy. The
firm pays a P3.50 per share dividend every other year. The next dividend will be paid
end of this year. Four years from now, the company plans to pay a P77 liquidating
dividend per share. What is the current market value of this stock if the market rate of
return is 18.5 percent?
A. P43.32
B. P46.59
C. P44.11
D. P48.37

86. The degree of financial leverage for A Company is 3.0, and the degree of financial
leverage for B Corporation is 6.2. According to this information, which firm is considered
to have greater overall risk?
A. A Company.
B. B Corporation.
C. To determine which firm has the greater total risk, we need to know the financial
breakeven point of each firm.
D. The degree of financial leverage is a measure of financial risk, so the only conclusion
that can be made with the information given is that B Corporation has greater financial
risk than A Company -- we cannot tell which firm has greater total risk.

87. Hedging refers to the act of adopting strategies to:

A. counteract the macroeconomic policies of government.
B. eliminate the uncertainty associated with conducting transactions.
C. the process of selling calls on stock that you expect to increase in price.
D. reduce the overall risk resulting from fluctuations in the market value of assets.

88. A company has recently purchased some stock of a competitor as part of a long-term
plan to acquire the competitor. However, it is somewhat concerned that the market price
of this stock could decrease over the short run. The company could hedge against the
possible decline in the stock’s market price by
A. selling a put option on that stock

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B. purchasing a put option on that stock
C. purchasing a call option on that stock
D. obtaining a warrant option on that stock

89. A company has recently purchased some stock of a competitor as part of a long-term
plan to acquire the competitor. However, it is somewhat concerned that the market price
of this stock could decrease over the short run. The company could hedge against the
possible decline in the stock’s market price by
A. selling a put option on that stock
B. purchasing a put option on that stock
C. purchasing a call option on that stock
D. obtaining a warrant option on that stock

90. Statement1: Treasury and hedge accounting can be run independently

Statement 2: Hedge accounting is an "all-or-nothing" endeavor

A. Statement 1 is correct
B. Statement 2 is incorrect
C. Both statements are incorrect
D. Both statements are correct

-NOTHING FOLLOWS-

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