THEORIES Flashcards
It is highly dependent on the value of the assets as
declared in the audited financial statements, particularly the
balance sheet or the statement of financial position.
Book Value Method
The value of
the individual assets shall be adjusted to reflect
the relative value or cost equivalent to replace that
asset.
Replacement Value Method
No external information is available that can serve
as basis for replacement cost of assets that are highly specialized in
nature. In this case, _______ is used instead.
Reproduction Value Method
Is an equity valuation approach that
considers the salvage value as the value of the asset.
Liquidation value method
It is more commonly used by analysts and valuators since the asset is the best representation of what the
company currently has less the
non-equity claim against the
assets.
Asset-based valuation
In some texts, it is also known as net asset value.
Liquidation Value
Assets are sold strategically over an orderly period to attract and generate the most money for the assets.
Orderly liquidation
Liquidation is done immediately especially if creditors have sued or a bankruptcy is filed. Assets are sold in the market at the soonest time possible which result in lower prices because of the rush sale. This ultimately drives down liquidation value.
Forced liquidation
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.
dividend irrelevance
Believes that dividend or capital gains has an impact on the price of the stock.
Bird-in-the hand theory
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
Earning accretion
will reduce value if there
future circumstances that will affect the firm negatively.
earnings dilution
is the amount that is added to the value of the firm in order to gain control of it.
Equity control premium
is the excess of the company earnings after deducting
the cost of capital. The excess earnings shall be
accumulated for the firm.
Economic Value Added (EVA)
This refers to the value of any asset based on the assumption that there is hypothetically
complete understanding of its investment characteristics.
A. Fair market Value
B. Intrinsic Value
C. Going concern Value
D. Liquidation Value
B. Intrinsic Value
This refers to the possible range of values where the real firm values lies.
A. Risk of the Unknown
B. Uncertainty
C. Volatility
D. Solvency
B. Uncertainty
This pertains to how much a particular object is worth a particular set of eyes.
A. Value
B. Cost
C. Price
D. Fundamentals
A. Value
Valuation places great emphasis on the___________ that are associated in the exercise.
A. Due Diligence
B. Human reasoning
C. Professional Skepticism
D. Professional Judgement
D. Professional Judgement
________ is particularly relevant for companies that are experiencing severe financial distress.
A. Going Concern Value
B. Intrinsic Value
C. Liquidation Value
D. Fair Market Value
C. Liquidation Value
Value is determined under the going concern assumption.
A. Liquidation Value
B. Intrinsic Value
C. Going Concern Value
D. Fair Market Value
C. Going Concern Value
The value of a business can be basically liked to three major factors, except:
A. Current Operations
B. Future Prospects
C. Embedded Risk
D. None of the above
D. None of the above
The price expressed in terms of cash equivalents, at which property would change hands
between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting
at arm’s length in an open and unrestricted market. When neither is under compulsion to buy or
sell and when both have reasonable knowledge of the relevant facts.
A. Fair Market Value
B. Going Concern Value
C. Intrinsic Value
D. Liquidation Value
A. Fair Market Value
Which key principles in valuation refers to general concepts for most valuation techniques put
emphasis on future cash flows except for some circumstances where value can be better derived
from asset liquidation?
A. The value of a business is defined only at a specific point in time
B. Market dictates the appropriate rate of return for investors
C. Firm value can be impacted by underlying net tangible assets
D. Value varies based on the ability of business to generate future cash flows
D. Value varies based on the ability of business to generate future cash flows
Generally, the valuation process considers these steps, except:
A. Understanding the business
B. Forecasting financial performance
C. Preparing valuation model based on forecasts
D. None of the above
D. None of the above
One of the basic relationships in interest rate theory is that, other things held constant, for a
given change in the required rate of return, the the time to maturity, the the change
in price.
A. longer; smaller.
B. shorter; larger.
C. longer; greater.
D. shorter; no change in price.
C. longer; greater
Which of the following statements is most correct?
A. All else equal, if a bond’s yield to maturity increases, its price will fall.
B. All else equal, if a bond’s yield to maturity increases, its current yield will fall.
C. If a bond’s yield to maturity exceeds the coupon rate, the bond will sell at a premium
over par.
D. All of the statements above are correct.
A. All else equal, if a bond’s yield to maturity increases, its price will fall.
A 15-year bond with a face value of P1,000 currently sells for P850. Which of the following
statements is most correct?
A. The bond’s yield to maturity is greater than its coupon rate.
B. If the yield to maturity stays constant until the bond matures, the bond’s price will
remain at P850.
C. The bond’s current yield is equal to the bond’s coupon rate.
D. Statements b and c are correct.
A. The bond’s yield to maturity is greater than its coupon rate.
Which of the following statements is most correct?
A. The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A
must have a higher yield to maturity than Bond B.
B. If a bond is selling at a discount, the yield to call is a better measure of return than the
yield to maturity.
C. If a coupon bond is selling at par, its current yield equals its yield to maturity.
D. Statements a and b are correct.
C. If a coupon bond is selling at par, its current yield equals its yield to maturity.
Which of the following statements is most correct?
A. If a bond is selling for a premium, this implies that the bond’s yield to maturity
exceeds its coupon rate.
B. If a coupon bond is selling at par, its current yield equals its yield to maturity.
C. If rates fall after its issue, a zero coupon bond could trade for an amount above its par
value.
D. Statements b and c are correct
B. If a coupon bond is selling at par, its current yield equals its yield to maturity.
Which of the following statements is most correct?
A. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must
also exceed its coupon rate.
B. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less
than its maturity value.
C. If two bonds have the same maturity, the same yield to maturity, and the same level of
risk, the bonds should sell for the same price regardless of the bond’s coupon rate.
D. Statements b and c are correct.
B. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less
than its maturity value.
Which of the following statements is most correct?
A. The constant growth model takes into consideration the capital gains earned on a stock.
B. It is appropriate to use the constant growth model to estimate stock value even if the
growth rate never becomes constant.
C. Two firms with the same dividend and growth rate must also have the same stock price.
D. All of the statements above are correct
A. The constant growth model takes into consideration the capital gains earned on a stock.
Which of the following statements is most correct?
A. The stock valuation model, P0 = D1/(ks - g), can be used for firms which have negative
growth rates.
B. If a stock has a required rate of return ks = 12%, and its dividend grows at a constant rate
of 5%, this implies that the stock’s dividend yield is 5%.
C. The price of a stock is the present value of all expected future dividends, discounted at the
dividend growth rate.
D. Statements a and c are correct
A. The stock valuation model, P0 = D1/(ks - g), can be used for firms which have negative
growth rates.
If two constant growth stocks have the same required rate of return and the same price, which of
the following statements is most correct?
A. The two stocks have the same per-share dividend.
B. The two stocks have the same dividend yield.
C. The two stocks have the same dividend growth rate.
D. The stock with the higher dividend yield will have a lower dividend growth rate
D. The stock with the higher dividend yield will have a lower dividend growth rate
A 12-year bond has a 9% annual coupon, a yield to maturity of 8%, and a face value of
P1,000. What is the price of the bond?
A. P1,469
B. P1,000
C. P 928
D. P1,075
D. P1,075
You intend to purchase a 10-year, P1,000 face value bond that pays interest of P60 every 6
months. If your nominal annual required rate of return is 10% with semiannual compounding,
how much should you be willing to pay for this bond?
A. P 826.31
B. P1,086.15
C. P 957.50
D. P1,124.62
D. P1,124.62
A bond that matures in 12 years has a 9% semiannual coupon (i.e., the bond pays a P45 coupon
every six months) and a face value of P1,000. The bond has a nominal yield to maturity of 8%.
What is the price of the bond today?
A. P 927.52 B. P 928.39 C. P1,073.99 D. P1,076.23
D. P1,076.23
A P1,000 par value bond pays interest of P35 each quarter and will mature in 10 years. If
your nominal annual required rate of return is 12% with quarterly compounding, how much
should you be willing to pay for this bond?
A. P 941.36 B. P1,051.25 C. P1,115.57 D. P1,391.00
C. P1,115.57
The Company has outstanding bonds with an annual 8% coupon. The bonds have a par value
of P1,000 and a price of P865. The bonds will mature in 11 years. What is the yield to maturity
on the bonds?
A. 10.09% B. 11.13% C. 9.25% D. 8.00%
A. 10.09%
A corporate bond has a face value of P1,000, and pays a P50 coupon every six months (that
is, the bond has a 10 % semiannual coupon). The bond matures in 12 years and sells at a price of
P1,080. What is the bond’s nominal yield to maturity?
A. 8.28% B. 8.65% C. 8.90% D. 9.31%
C. 8.90%
The Company has decided to undertake a large project. Consequently, there is a need for
additional funds. The financial manager plans to issue preferred stock with a perpetual annual
dividend of P5 per share and a par value of P30. If the required return on this stock is currently 20%,
what should be the stock’s market value?
A. P150 B. P100 C. P 50 D. P 25
P 25
The Corporation is growing at a constant rate of 6% per year. It has both common stock and nonparticipating preferred stock outstanding. The cost of preferred stock (kp) is 8%. The par value of the
preferred stock is P120, and the stock has a stated dividend of 10 % of par. What is the market value
of the preferred stock?
A. P125 B. P120 C. P175 D. P150
D. P150
. A share of preferred stock pays a quarterly dividend of P2.50. If the price of this preferred stock
is currently P50, what is the nominal annual rate of return?
A. 12% B. 18% C. 20% D. 23%
C. 20%
Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your
expectations are that you will not receive a dividend at the end of Year 1, but you will receive a
dividend of P9.25 at the end of Year 2. In addition, you expect to sell the stock for P150 at the end of
Year 2. If your expected rate of return is 16 %, how much should you be willing to pay for this stock
today?
A. P164.19 B. P 75.29 C. P107.53 D. P118.35
D. P118.35
The Company stock is expected to pay a year-end dividend, D1, of P4.00. The dividend is
expected to grow at a constant rate of 8% per year, and the stock’s required rate of return is 12 %.
Given this information, what is the expected price of the stock, eight years from now?
A. P200.00 B. P185.09 C. P171.38 D. P247.60
B. P185.09
