Fin 072 Quiz Jan.

7, 2024
Instructions: Answer the questions as outlined below. Submit your HAND WRITTEN
answers as jpeg on or before January 8, 2024 not later than 12 midnight with a CLEAR
photo.
Email to: mtgumban.ui@phinmaed.com
Subject: Family Name, P1Q

I. Multiple Choice Questions. Write the letter of the BEST answer.

1. Time value of money indicates that
a) A unit of money obtained today is worth more than a unit of money obtained in future
b) A unit of money obtained today is worth less than a unit of money obtained in future
c) There is no difference in the value of money obtained today and tomorrow
d) None of the above
2. Time value of money supports the comparison of cash flows recorded at different time
period by
a) Discounting all cash flows to a common point of time
b) Compounding all cash flows to a common point of time
c) Using either a or b.
d) None of the above
3. If the nominal rate of interest is 10% per annum and there is quarterly compounding, the
effective rate of interest will be:
a) 10% per annum
b) 10.10 per annum
c) 10.25%per annum
d) 10.38% per annum
4. Relationship between annual nominal rate of interest and annual effective rate of
interest, if frequency of compounding is greater than one:
a) Effective rate > Nominal rate
b) Effective rate < Nominal rate
c) Effective rate = Nominal rate
d) None of the above
5. Mr. X takes a loan of PhP 50,000 from HDFC Bank. The rate of interest is 10% per
annum. The first installment will be paid at the end of year 5. Determine the amount of
equal annual installments if Mr. X wishes to repay the amount in five installments.
a) PhP 19,500.00
b) PhP 19,400.00
c) PhP 19,310.00
d) None of the above
6. If nominal rate of return is 10% per annum and annual effective rate of interest is
10.25% per annum, determine the frequency of compounding:
a) 1
b) 2
c) 3
d) None of the above
7. Heterogeneous cash flows can be made comparable by
a) Discounting technique
b) Compounding technique
c) Either a or b
d) None of the above
8. Risk of two securities with different expected return can be compared with:
a) Coefficient of variation
b) Standard deviation of securities
c) Variance of Securities
d) None of the above
9. A portfolio having two risky securities can be turned risk less if
a) The securities are completely positively correlated
b) If the correlation ranges between zero and one
c) The securities are completely negatively correlated
d) None of the above.
10. Efficient frontier comprises of
a) Portfolios that have negatively correlated securities
b) Portfolios that have positively correlated securities
c) Inefficient portfolios
d) Efficient portfolios
11. Efficient portfolios can be defined as those portfolios which for a given level of risk
provides
a) Maximum return
b) Average return
c) Minimum return
d) None of the above
12. Capital market line is:
a) Capital allocation line of a market portfolio
b) Capital allocation line of a risk free asset
c) Both a and b
d) None of the above
13. CAPM accounts for:
a) Unsystematic risk
b) Systematic risk
c) Both a and b
d) None of the above
14. A portfolio comprises two securities and the expected return on them is 12% and 16%
respectively. Determine return of portfolio if first security constitutes 40% of total
portfolio.
a) 12.4%
b) 13.4%
c) 14.4%.
d) 15.4%
15. The point of tangency between risk return indifferences curves and efficient frontier
highlights:
a) Optimal portfolio
b) Efficient portfolio
 c) Sub-optimal portfolio
d) None of the above
16. The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a) bond indenture
b) bond debenture.
c) registered bond.
d) bond coupon.

17. The term used for bonds that are unsecured as to principal is
a) mortgage bonds.
b) debenture bonds
c) indenture bonds.
d) callable bonds.
18. Bonds for which the owners' names are not registered with the issuing corporation are
called
a) bearer bonds
b) term bonds.
c) debenture bonds.
d) secured bonds.
19. Bonds that pay no interest unless the issuing company is profitable are called
a) collateral trust bonds.
b) debenture bonds.
c) revenue bonds.
d) income bonds
20. The interest rate written in the terms of the bond indenture is known as the
a) coupon rate.
b) nominal rate.
c) stated rate.
d) coupon rate, nominal rate, or stated rate
21. The rate of interest actually earned by bondholders is called the
a) stated rate.
b) coupon rate.
c) nominal rate.
d) effective rate
22. Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to
multiply the face value by the table value for
a) 10 periods and 10% from the present value of 1 table.
b) 20 periods and 5% from the present value of 1 table.
c) 10 periods and 8% from the present value of 1 table.
d) 20 periods and 4% from the present value of 1 table
23. Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The
bonds are sold to yield 8%. Another step in calculating the issue price of the bonds is to
 a) multiply $10,000 by the table value for 10 periods and 10% from the present value
of an annuity table.
b) multiply $10,000 by the table value for 20 periods and 5% from the present value of
an annuity table.
c) multiply $10,000 by the table value for 20 periods and 4% from the present value of
an annuity table.
d) None of these answers is correct
24. Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a) the effective yield or market rate of interest exceeded the stated (nominal) rate.
b) the nominal rate of interest exceeded the market rate
c) the market and nominal rates coincided.
d) no necessary relationship exists between the two rates.
25. On January 1, 2018, Jacobs Company sold property to Dains Company which
originally cost Jacobs $2,660,000. There was no established exchange price for this
property. Danis gave Jacobs a $4,200,000 zero-interest-bearing note payable in three
equal annual installments of $1,400,000 with the first payment due December 31,
2018. The note has no ready market. The prevailing rate of interest for a note of this
type is 10%. The present value of a $4,200,000 note payable in three equal annual
installments of $1,400,000 at a 10% rate of interest is $3,481,800. What is the amount
of interest income that should be recognized by Jacobs in 2018, using the effective-
interest method?
a) $0.
b) $140,000.
c) $348,180
d) $420,000.

II. Problems. Solve the following problems. Show all your computations. Round off final
answers to 2 decimal places.

1. XYZ Company is in discussion with its investment bankers regarding the

issuance of new bonds. The investment banker has informed the firm that
different maturities will carry different coupon rates and sell at different prices.
The firm must choose among several alternatives as shown in the following
table. In each case the bonds will have a $1,000.00 par value and flotation
costs will be $30 per bond. The company is taxed at 40%.

Alternative Coupon Time to Premium/

s rate maturity (Discount)
A 9% 16 years P250
B 7% 5 years 50
C 6% 7 years Par
D 5% 10 years (75)

Required: Using the approximation formula, calculate the after tax cost of
financing for each alternative. Show your calculations. Select which
alternative is the best for the company.
 2. Determine the cost for each of the following preferred stocks:

Preferre Par Market Flotation Annual

d Value Value Cost Dividend
Stock
A P100.00 P101.00 P9.00 11%
B 40.00 38.00 P3.50 8%
C 35.00 37.00 P4.00 P5.00
D 30.00 26.00 5% of P3.00
par
E 20.00 20.00 P2.50 9%

3. Using the data on the following table, calculate the cost of retained earnings and
the cost of new common stock using the constant-growth valuation model:

Fir Current Dividend Projected Under Flotation

m Market Growth Dividend pricing Cost
Price Per Rate Per per per
Share Share share Share
A P50.00 8% P2.25 P2.00 P1.00
B 20.00 4% 1.00 .50 1.50
C 42.50 6% 2.00 1.00 2.00
D 19.00 2% 2.10 1.30 1.70

III. Compute the Periodic Amortization for the following loans. Prepare the amortization
table for each loan.

A B D E
Principal 150,000.00 200,000.00 500,000.00 1,500,000.00
Term 5 4 3 5
Interest Rate 8% 12% 10% 15%

IV. You are given the following Projects with their respective returns:

Annual Project Xeny Project Zabel

Returns
1 30,000.00 65,000.00
2 40,000.00 55,000.00
3 45,000.00 50,000.00
4 55,000.00 45,000.00
 5 60,000.00 40,000.00

Required:
1) Compute the Standard Deviation and Coefficient of Variation of
each Project,
2) Which of the two would you choose? Why?
3) If you combine the two projects into a portfolio using a 50:50 ratio,
compute, what will be the Standard deviation and Coefficient of
variation of the combination?
4) If the Combination were changed to 60:40, recompute #3.
5) If the combination were changed to 30:70, recompute #3.

END OF QUIZ