MOCK

EXAMINATION NO.1

(Coverage: Risk, Returns and Bonds)

NAME: DATE:

TEST I. Choose the correct answer.

1. Statement 1.Call Provision gives right to the issuer to redeem the
bonds prior to maturity date. Statement 2. If the Coupon Interest
Rate (Nominal) is greater than Yield to Maturity (YTM), the bond
is priced higher than face value or so called Discounted Price.

A. True, True C. True, False
B. False, True D. False, False

2. When the Bond is issued at a premium:

A. The value of the bond increases as it reaches its maturity since
YTM is higher than the Coupon Interest Rates (CIR)
B. The amount of amortization decreases as it reaches the
maturity date
C. The value of the bond decreases as it reaches its maturity
D. The present value of the bond is higher than the face value
since YTM is higher than the Coupon Interest Rate (CIR)

3. Statement 1.The ultimate goal of a corporation is shareholders
wealth maximization. Statement 2. Bond is valued at a premium
if the Nominal interest rate is higher than the Yield to Maturity
(YTM).

A. True,True C. True, False
B. False,False D. False, True

4. The right of the bondholder which requires the issuer to redeem
the bond prior to maturity in the event that the Market rate
increases is called:

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 1


A. Indenture C. Debenture
B. Call Provision D. Put Provision

5. A model based on the proposition that any stock’s required rate
of return is equal to the risk-free rate of return plus a risk
premium that reflects only the risk remaining after
diversification.

A. Gordon Growth Model
B. Markowitz Portfolio Model
C. Capital Asset Pricing Model
D. D. Black-Scholes Option Pricing Model

6. What will happen to a stock’s expected rate of return with a beta
of 1.5 and a market risk premium of 9% if the Treasury bill yield
(Risk free rate) increases from 3% to 5%?

A. The expected rate of return will remain unchanged.
B. The expected rate of return will increase by 1.0%.
C. The expected rate of return will increase by 2.0%.
D. The expected rate of return will increase by 3.0%.

7. The difference between the rate of return on the market
portfolio and risk-free rate

a. Standard Deviation
b. Correlation Coefficient
c. Market Risk Premium
d. Expected return on stock



8. What is the value of a 17 year face 1000 Bond with yield to
maturity of 7% and Coupon interest rate of 10% on the 17th year?

A. 1000 C. 950
B. 1078 D. 1010

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 2


9. A formal agreement between the issuer and the bondholder is
known as?
A. Junk Bond C. Indenture
B. Debenture D. Investment grade bond

16. If the Yield to Maturity (YTM) is equal to the Coupon/ Stated
Interest rate:

A. The bond is valued at Premium

B. The bond is valued at Discount
C. The bond price will not change as it reaches its maturity
D. The bond price will increase as it reaches its maturity

17. What is the present value factor of ordinary annuity for a 10 year
1000 bond with 10% yield to maturity and 9% Coupon interest
rate?

A. P938.55 C. 6.14456
B. P935.58 D. 6.11456

18. A specified date on which the par value of the bond must be
repaid?

A. Interest payment date C. Double Date
B. Maturity Date D. Birth Date

19. If the bond is valued at its par value of 1000, which of the following
is not incorrect:
A. The Stated Interest Rate is equal to the Yield To Maturity
B. The Coupon Payment will be constant
C. The Amortization is constant Zero
D. All of the above statements are not wrong

20. When Bonds are issued at a Discount

A. The present value of the bond is higher than the face value

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 3

 B. The amount of amortization decreases as it reaches its
maturity date
C. The value of the bond increases as it reaches its maturity
D. The value of the bond decreases as it reaches its maturity

TEST II. Supply the correct answer. (round-off to 5 decimal places in
using present value factors, round-off your final answers to 2 decimal
places)

Problem A. BarakoBamma has investments in three companies with
details as follows:

Company Amount Beta

NoyBi P 500,000 0.63
MarBin P 140,000 1.75
NoyMar P 410,000 1.67

1. What is the portfolio’s beta?
2. Assuming that the risk-adjusted discount rate derived
from the prevailing short-term treasury rate is stated at
“0.09” and the average return on the market currently is
stated at 11.5%, what is the required rate of return of
NoyMar?
3. Assuming Pedring has interest in acquiring all your shares
of NoyBi and has offered you a package giving you a return
of 13% just to relinquish your shares in NoyBi, using the
data given in number 2, would you accept Pedring’s offer?
(Yes / No, then indicate the required rate of return
computed)

Problem B: BSMA Phones is interested in investing some of its
petty cash in eleven year AMV Wireless bonds which has P1,000 face
value, annual coupon rate of 8% and yield to maturity of 12%.

4. What is the value of the bond upon its issuance?
5. What is the value of the bond on the 11th year?

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 4

 6. If YTM increases to 14%, but the BSMA Phones does not
intend to return the bonds to the market, what is the
expected rate of return?

Problem C: You are to manage the P10,000,000 portfolio of BSMA
Corp that has a beta of 1.25 and a required rate of return of 12%. The
current risk-free rate is 5.25%. Assume that you receive another
P1,000,000 and invest it in a stock with a beta of 0.75.

7. What is the required rate of return of the P 1,000,000
investment?

Problem D: The earnings, dividends and stock price of Glove
Telecommunications (Glove) are expected to grow at 7% per year
after this year. Smart’s common stock sells for P120 share, its last
dividend was P8.00 and will pay P8.56 at the end of the current year.
Smart should pay P4.50 floatation cost. Currently, risk-free rate is
stated at 10% and the market risk premium on Glove’s stock is 0.14.
Glove’s stock has beta of 1.75.

8. What would be the new required rate of return on Glove’s
stock if the inflation rate rose by 3.5%?
9. What would be the new required rate of return on Glove’s
stock if there is change in the Risk Aversion Behavior of
the investor in which the Market Return on Average Stock
rose by 3.5%?

Problem E: Robert Cru, the President and CEO of Shmart
Telecommunications has a P15,000,000 portfolio with a beta of 1.5.
The risk-free rate is 4.5% and the market risk premium is 5.5%. The
manager expects to receive an additional P3,750,000, which he plans
to invest in a number of stocks. After investing the additional funds,
he wants the fund’s required return to be 15%.

10. What should be the average beta of the new stock or
stocks to be added to the portfolio?

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 5

 11. What is the required rate of return for additional P3.75M
investment?

Problem F: Imelda Corp. has bonds outstanding with P1000 face value
and 10 years left until maturity. The bonds may be called starting year
3 at 110% of the par value. They have 12% coupon interest rates and
their current price is P1165.

12. What is the Yield to Maturity?
13. What is the Yield to call if called in year 3?

Problem G: Ivan and Alexis Co. issued a 30-year bond with 8%
yield to maturity and 0.09 coupon interest rate. The par value of the
bond is 1000.

14. What is the bond price on the 30th year?

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 6


MOCK EXAMINATION NO.2

(Coverage: Stock Valuation)

NAME: DATE:

TEST I: TRUE OR FALSE: Write A if the statement is TRUE and write X

if the statement is FALSE.

1. The market value of the stock is also known as the “perceived

value” which is affected by investor’s demands of the stocks in the
market.

2. There is market equilibrium when the stock’s market value (true

value) is equal to the intrinsic value (perceived value).

3. If the intrinsic value of the stock is lower than the market value of
the stocks, the said stocks is said to be undervalued.

4. The required rate of return on stock is calculated by adding the
Risk free rate (Rfr); and the product of Market Risk Premium
(Mrp) and Beta (β).

5. In an equilibrium condition and during a constant growth phase,
the stock’s growth rate should equal the capital gains yield.

6. An analyst might advise a “buy” order on the stock when a stock’s
intrinsic value exceeds its market value, thus, is undervalued.

7. The intrinsic value of the stock pertains to its “true value” which
can readily be observed.

8. A stock's total return is realized from two principal sources, its
dividend yield and any gain from the increase in its selling price
over the original purchase price of the stock.

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 7

 9. Preemptive right is the provision in the corporate charter or
bylaws that gives the preferred stockholders the right to purchase
on a pro rata basis new issues of common stock.

10. The dividend yield is computed by dividing the expected dividend
from the current price of the share.

11. The expected total return is the sum of the expected dividend
yield (income from waiting) and expected capital gains yield
(income from selling)

12. The intrinsic value of the non-constant growth stock is the
summation of the Present Value of the Dividend in the Non
Constant Growth Phase and the Present value of the Terminal
Value in the Constant Growth Phase.

13. In computing the expected free cash flow, the amounts of Capital
expenditure and Change in net operating working capital are
deducted from the summation of Net operating profit after tax,
depreciation expense and amortization.

14. The free cash flow is the cash generated before any payments are
made to equity investors to compensate common and preferred
stockholders but not bondholders.

15. The terminal date which is also known as horizon date is the date
when the non-constant period ends and the constant period
begins.

16. Assuming the terminal date is in year 3, the terminal value is
computed by dividing the expected dividend in year 3 by the
difference of required rate of return on stock (rs) and constant
growth rate (g).

17. Growth rate can be computed by multiplying the so called
Retention Ratio (RR) by the Return on Equity (ROE) while the

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 8

 while the Dividend Yield can be computed by dividing Payout
ratio by Price Earnings ratio.

18. In computing the price of constant growth stock, the expected
price after 1 year (P1) can be computed by multiplying the price
of the stock today by the summation of 100% and growth rate in
percentage (100%+g%), hence, P1= P0(100%+g%).

19. If there exist a market equilibrium, the Capital Gains Yield (CGY)
is the same as the growth rate (g) of the stock.

20. In estimating the intrinsic value, analyst use both discounted
dividend model and corporate valuation model, the former is
more appropriately used when the company is highly paying
dividend while the latter is appropriately used when the company
is has no history of dividends.

TEST II: PROBLEM SOLVING: Round off your final answers to two (2)
decimal places. (Use five (5) decimal places during the process of
solving)

PROBLEM A: An analyst is trying to estimate the intrinsic value of the
stock of TERRANMOKO Development Corporation. The analyst
estimates that TERRANMOKO Development Corporation’s free cash
flow during the next year will be P54 million. The analyst also
estimates that the company’s free cash flow will increase at a constant
rate of 8% a year and that the company’s WACC is 12%.
TERRANMOKO Development Corporation has P400 million of long-
term debt and preferred stock and 50 million outstanding shares of
common stock.
(use 5 decimal places in PV factor if necessary)

1. What is the estimated per-share price of TERRANMOKO
Development Corporation’s common stock?
2. In the Philippine Stock Exchange, If TERRANMOKO Development
Corporation’s stock is traded at P27.00, are you willing to buy the
stocks? (yes/no)

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 9


PROBLEM B: In December 31, 2013, an analyst is trying to estimate
the intrinsic value of the stock of ALEXIS DEO Development
Corporation. The analyst determined and estimated the ALEXIS DEO
Development Corporation’s free cash flow per year:
• December 31, 2013 – 5,000,000
• December 31, 2014 – 10,000,000
• December 31, 2015 – 13,000,000
• December 31, 2016 – 17,500,000
The analyst also estimates that the company’s free cash flow will
increase at a constant rate of 7% a year beginning year 2017 and that
the company’s WACC is 12%. ALEXIS DEO Development Corporation
has P 198,300,000 of long-term debt and preferred stock and 2.5
million outstanding shares of common stock.
(use 5 decimal places in PV factor if necessary)

3. What is the amount of ALEXIS DEO Development Corporation’s
market value as of December 31, 2013?
4. What is the estimated per-share price of ALEXIS DEO
Development Corporation’s common stock?

Problem C: ABI Bags’ stock price is P48.5 and it recently paid a P 1.75
dividend. The dividend is expected to grow by 15% for the next three
(3) years, then grow forever at a constant growth rate. The risk free
rate and average rate of return on the market are 4% and 8%
respectively. The beta coefficient of ABI Bags’ stock is 1.5 aggressive
beta. The Weighted average cost of capital (WACC) is 8%.

5. What is the amount of Horizon or Terminal Value of ABI Bag?
6. At what constant rate is the stock expected to grow after the
third (3rd) year?
7. What is the ABI Bag’s stock price in year 2 (P2)?

Problem D: ADO’s stock is currently trading at P50 per share on
December 31, 2016. The stock’s dividend is projected to increase at a
constant rate of 8 percent per year. The market rate of return on the
stock is 15 percent, Risk free rate is 0.06 and the stocks beta is 0.5.

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 10


8. What is the expected dividend yield on December 31, 2016? What
is the expected stock price three years after December 31, 2017?

PROBLEM E: TINTIN’s stock is currently selling for P30 a share. The
stock is expected to pay a P1.50 dividend at the end of the year. The
stock’s dividend is expected to grow at a constant rate of 7% per year
forever. The risk-free rate is 7% and the market risk premium is also
4%.

9. What is the TINTIN stock’s Beta?
10. What is the expected price of TINTIN stock after 5 years?

PROBLEM F: THOBY Corporation’s financial information as of
December 31, 2017 stated the following:
• Price-Earnings Ratio – 4:1
• Dividend per share for common stocks – P3.00
• Net Income – P1,200,000
• Outstanding common stocks – 100,000 shares
• Average common equity – P2,000,000
• Growth rate on common equity – 3.5%

11. What is the retention ratio or plowback ratio?
12. What is the expected price of the common stock on December 31,
2018?

PROBLEM G: Last year, ASI Company paid P1.00 per share dividend.
ASI’s growth rate is expected to be constant for 10% for 2 years, after
which dividends are expected to grow at a rate of 5% forever. The
market risk premium is 5% and risk free rate is 6%. ASI Company’s
beta of stock is 1.2.

The Weighted average cost of capital is 10%. ASI has an expected
Operating Income of P 12 Million. The non-cash deductibles such as
Depreciation and Amortization are expected to be P 100 Thousand
and P 50 Thousand respectively. The Capital expenditure was
estimated to be P1.8 Million and the Net Operating working capital is

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 11

 expected to change by an increase of P 250 thousand. The market
values of the Company’s debt and preferred stocks are P 140 Million
and P 80 Thousand respectively. The company’s estimated growth
rate is 6%. The weighted average number of ordinary share
outstanding is 1.5Million. Tax rate 30%.

13. Using Discount Dividend model, What is the present value of
terminal value or horizon value?

14. Assuming the current price in the market is P 15 per share. Using
Discount Dividend model in estimating the “true value”, What is
the intrinsic value of the stock today (P0) and identify whether the
stock is Overvalued or (Undervalued)?

15. Using Discount Dividend model, What is the stock price of ASI
three years from today (P3)?

16. Using the Corporate valuation Model, what is the amount of MV of
the firm?

17. Assuming the current price in the market is P15 per share. Using
the Corporate Valuation Model to estimate the “true value” of
stock, determine the intrinsic value and identify whether the
stock is overvalued / (undervalued)?







“That in All Persons and Things, GOD may be glorified!”

FM reviewer: Atty. Ivan Yannick S. Bagayao CPA MBA. 12