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Question 1

A ratio that examines the percentage change in earnings available to ordinary


shareholders that is associated with a given percentage change in earnings before
interest and taxes is a measure of
Response: [none]
Correct answer: The degree of financial leverage
Score: 0 out of 1 No

Question 2
The equity section of Smurf Corporation’s Statement of Financial Position is presented below.

The book value of Smurf Corporation’s ordinary share is


Response: [none]
Correct answer: P18.50
Score: 0 out of 1 No

Question 3
Duke Corporation warrants carry the right to buy10 shares of Duke ordinary shares at
P3.50 per share. The ordinary share has a current market price of P4.25 per share. The
intrinsic or minimum value of one Duke warrant is
Response: [none]
Correct answer: P1.50
Score: 0 out of 1 No

Question 4
Which one of the following would be most likely to cause an immediate increase in
primary earnings per share?
Response: [none]
Correct answer: purchase of treasury stock
Score: 0 out of 1 No
Question 5
Firm E needs to net P7,800,000 from the sale if ordinary shares. Its Investment banker
has informed the firm that the retail price will be P22 per share, and that the firm will
receive P19 per share. Out-of-pocket costs are P100,000. How many shares must be
sold?
Response: [none]
Correct answer: 415,790
Score: 0 out of 1 No

Question 6
The market value of a share of stock is P50, and the market value of one right prior to
the ex-rights date is P2.00 after the offering is announced but while the stock is still
selling rights-on. The offer to the shareholder is that it will take three rights to buy an
additional share of stock at a subscription price of P40 per share. If the theoretical value
of the stock when it goes ex-rights is P47.50, the shareholder
Response: [none]
Correct answer: Does not receive any additional benefit from a rights offering
Score: 0 out of 1 No

Question 7
The rational decision-making process is most often typified by
Response: [none]
Correct answer: Bounded rationality
Score: 0 out of 1 No

Question 8
Many firms have retired their preference share because
Response: [none]
Correct answer: Preference share lacks a maturity date and dividends are not
deductible for tax purposes
Score: 0 out of 1 No

Question 9
The current market price of Lee Company stock is P80 per share and its price-earnings
ratio is 8 to 1. A P4 annual dividend was just paid to current shareholders. If dividends
and earnings are expected to grow at a constant rate of 12 percent, Lee Company’s
cost of retained earnings is
Response: [none]
Correct answer: 17.6%
Score: 0 out of 1 No

Question 10
A firm maintains debt/equity ratio of 1.0. The debt consists of bonds with a before tax
cost of 9%. The equity consists of ordinary shares with a cost of 18%. The marginal
corporate tax is 40%. What is the weighted average cost of capital?
Response: [none]
Correct answer: 11.7%
Score: 0 out of 1 No

Question 11
The market price of India Corporation’s ordinary share is P30 per share, and each
share gives its owner one subscription right. Four rights are required to purchase an
additional ordinary share at the subscription price of P27 per share. If the ordinary share
is currently selling “rights-on,” the theoretical value of a right is
Response: [none]
Correct answer: P0.60
Score: 0 out of 1 No

Question 12
Doors Corporation is considering a public offering of ordinary shares. The firm will offer
one million ordinary shares for sale. The estimated selling price is P30 per share with
Doors Corporation receiving P26.25 per share after the offering. Registration fees are
estimated at P275,000.

If Doors Corporation needs to generate P28 million, how many shares will have to be
sold?
Response: 933,333 shares
Correct answer: 1,077,143 shares
Score: 0 out of 1 No

Question 13
A bond with a coupon rate of 7.5%, maturing in 10 years at a value of P1000 and
current market price of P776 will have a current yield of
Response: [none]
Correct answer: 10.2%
Score: 0 out of 1 No

Question 14
Which of the following is not an advantage of debt?
Response: [none]
Correct answer: Bond holders have no control over the actions of management
Score: 0 out of 1 No

Question 15
Happy Corp. is refunding P8 million worth of 13% debt. The new bonds will be issued
for 8%. The corporation’s tax rate is 35%. The call premium is 9%. What is the net cost
of the call premium?
Response: [none]
Correct answer: P468,000
Score: 0 out of 1 No

Question 16
Dory Company currently has net income of P3 million and 1.5 million ordinary shares
outstanding which sell for P20/share. Dory has decided to issue new stock to raise
P4,000,000 to expand its operations. Dory’s investment banker will sell the stock for
P18 with a spread of 7%. There will be a P60,000 registration cost.

What will be the new EPS immediately after the sale if the PE ratio remains constant?
Response: [none]
Correct answer: P1.722
Score: 0 out of 1 No

Question 17
A bond with a P114 annual coupon, maturing in 10 years at a value of P1,000 has a
current market price of P920. What is the normal yield of the bond?
Response: [none]
Correct answer: 11.4%
Score: 0 out of 1 No

Question 18
Which of the following does not help to explain the existence of a premium in the price
of a convertible bond?
Response: [none]
Correct answer: higher transaction costs on convertibles than the cost of trading
ordinary shares
Score: 0 out of 1 No

Question 19
When a firm finances each asset with a financial instrument of the same approximate
maturity as the life of the asset, it is applying
Response: [none]
Correct answer: A hedging approach
Score: 0 out of 1 No

Question 20
A company’s stock trades rights-on for P50.00 and ex-rights for P48.00. The
subscription price for rights holders is P40.00, and four rights are required to purchase
one share of stock.

The value of a right while the stock is still trading rights-on is


Response: [none]
Correct answer: P2.00
Score: 0 out of 1 No

Question 21
June and Company has warrants outstanding, which are selling at Pm premium above
formula value. Each warrant allows its owner to purchase one ordinary share at P25. If
the ordinary shares are currently selling for P28, what is the warrant price?
Response: [none]
Correct answer: P6
Score: 0 out of 1 No

Question 22
A company’s stock trades rights-on for P50.00 and ex-rights for P48.00. The
subscription price for rights holders is P40.00, and four rights are required to purchase
one share of stock.

The value of a right when the stock is trading ex-rights is


Response: [none]
Correct answer: P2.00
Score: 0 out of 1 No

Question 23
Boulder has net income of P2,500,000 and 1,000,000 shares outstanding. Its ordinary
share is currently selling for P40 per share. It needs to raise P3,610,000 in funds for a
new asset. Its investment banker plans to sell an issue of ordinary shares to the public
for P38 for a spread of 5%. How much must Boulder’s after-tax income increase to
prevent dilution of EPS?
Response: [none]
Correct answer: P237,500
Score: 0 out of 1 No

Question 24
A company has ordinary and preference shares outstanding with the following characteristics:

The company has earnings per share of


Response: [none]
Correct answer: P4.00
Score: 0 out of 1 No
Question 25
Using an investment banker to underwrite a firm’s ordinary shares issue means that
Response: [none]
Correct answer: the investment banker buys the stock from the firm at a negotiated
price and then resells it to the public
Score: 0 out of 1 No

Question 26
The Darling Corporation projects the following for the year.

If Darling Corporation’s ordinary share is expected to trade at a price-earnings ratio of eight, the
market price per share (to the nearest peso) would be
Response: [none]
Correct answer: P56
Score: 0 out of 1 No

Question 27
Aja Corp. has a bond with a coupon, maturing in 15 years at a value of P1,000 per
bond. The current market price is P960. What will the current yield be?
Response: [none]
Correct answer: 12.6%
Score: 0 out of 1 No

Question 28
Which of the following is not an advantage for leasing an asset rather than purchasing
the asset with funds from a long term loan?
Response: [none]
Correct answer: The terminal value of the asset goes to the lessee
Score: 0 out of 1 No

Question 29
Bee Corp. will issue P100 million of preference shares. The stock will pay a P9
dividend and offer price to the public will be P50 per share. Bee’s tax rate is 40%.
Assuming floatation costs of P3 per share. Bee’s cost of preference share financing is
Response: [none]
Correct answer: 19.15%
Score: 0 out of 1 No

Question 30
The minimum theoretical value of a warrant to buy 5 shares of ETC stock at P45 per
share is P10. What is the current market price of ETC stock?
Response: [none]
Correct answer: P47.00
Score: 0 out of 1 No

Question 31
Rainbow is about to go public. Its present stockholders own 500,000 shares. The new
public issue will represent 800,000 shares. The shares will be priced at P25 to the
public with a 4% spread. The out-of-pocket costs will be P450,000. What are the net
proceeds to the firm?
Response: [none]
Correct answer: P18,750,000
Score: 0 out of 1 No

Question 32
The Darling Corporation projects the following for the year.

The expected ordinary dividend per share for Darling Corporation is


Response: [none]
Correct answer: P2.10
Score: 0 out of 1 No

Question 33
A firm floats a new stock issue and uses the proceeds from the issue to retire a bond
issue old in which has matured. Which one of the following statements will hold in all
cases?
Response: [none]
Correct answer: the firm has decreased its financial leverage
Score: 0 out of 1 No

Question 34
Subordinates debentures are securities that
Response: [none]
Correct answer: rank lower than are inferior to all other bonds and to senior debt
Score: 0 out of 1 No

Question 35
Brown Corp. has a P10 million bond obligation outstanding which it is considering
refunding. The bonds were issued at 10% and the interest rates on similar bonds have
declined to 8%. The bonds have five years of their 20-year maturity remaining. Brown
will pay a call premium of 5% and will incur underwriting costs consideration on the old
bond. The company is in a 40% tax bracket. To analyze the refunding decision, use a
6% discount rate. What is the net present value of the refunding decision?
Response: [none]
Correct answer: (P56,072)
Score: 0 out of 1 No

Question 36
Long-term financing leases currently
Response: [none]
Correct answer: Show up on the balance sheet
Score: 0 out of 1 No

Question 37
A leasing arrangement in which the lessor borrows money to acquire the leased
property is called a(n)
Response: [none]
Correct answer: Leveraged lease
Score: 0 out of 1 No
Question 38
The least desirable of the following forms of financing for small corporation whose
shareholders are concerned about maintaining control over the firm is
Response: [none]
Correct answer: income bonds
Score: 0 out of 1 No

Question 39
All of the following are good sources of financing for permanent working capital except
Response: [none]
Correct answer: A bank line of credit
Score: 0 out of 1 No

Question 40
Investors in long- term corporate bonds are concerned about interest rate risk. This risk
reflects
Response: [none]
Correct answer: the decrease in bond prices as interest rates rise
Score: 0 out of 1 No

Question 41
In capital markets, the primary market is concerned with the provision of new funds for
capital investments through
Response: [none]
Correct answer: New issues of bond and stock securities
Score: 0 out of 1 No

Question 42
Warrants are
Response: [none]
Correct answer: Investments whose value is directly related to the price of the
underlying stock
Score: 0 out of 1 No

Question 43
A company has ordinary and preference shares outstanding with the following characteristics:

The company has a rate of return on ordinary equity of


Response: [none]
Correct answer: 40.00%
Score: 0 out of 1 No

Question 44
A company has recently introduced total quality management (TQM). The company’s
top management wants to determine a new and innovative approach to foster total
participation throughout the company. Management should
Response: [none]
Correct answer: Bring the employees together for a brainstorming session
Score: 0 out of 1 No

Question 45
The Davao Corp. needs to raise money for an addition to its plant. It will issue 300,000
new ordinary shares. The new shares will be priced at P60 per share with an 8.5%
spread on the offer price. Registration costs will be P150,000. Presently Davao Corp.
has earnings of P3 million and 750,000 shares outstanding

The net proceeds to Davao Corp. will be


Response: [none]
Correct answer: P16,320,000
Score: 0 out of 1 No
Question 46
To the corporate investor, preference shares offer which of the following advantages?
Response: [none]
Correct answer: 70% of preference dividends are tax-exempt
Score: 0 out of 1 No

Question 47
Dion Inc. plans to issue 500,000 new ordinary shares through a rights offering. Each
ordinary shareholder will be entitled to subscribe to one additional ordinary share at P60
a share for each 4 shares held. The 2,000,000 shares currently outstanding have a
market price of P 75. What is the theoretical value of one share when is goes ex-rights?
Response: [none]
Correct answer: P72.00
Score: 0 out of 1 No

Question 48
If company C has a higher rate of return on assets than Company D, this could be
because Company C has a <List C> profit margin on sales, or a <List D> asset-turnover
ratio, or both.
<List C> <List D>
Response: [none]
Correct answer: Higher Higher
Score: 0 out of 1 No

Question 49
When a company has a convertible bond in its capital structure
Response: [none]
Correct answer: It can reduce its debt-to-equity ratio by calling the bond
Score: 0 out of 1 No

Question 50
The equity section of Smurf Corporation’s Statement of Financial Position is presented below.
The ordinary shareholders of Smurf Corporation have preemptive rights. If Smurf Corporation issues
400,000 additional ordinary shares at P6 per share, a current holder of 20,000 ordinary shares of Smurf
Corporation must be given the option to buy
Response: [none]
Correct answer: 4,000 additional shares
Score: 0 out of 1 No

Question 51
A financial instrument which promises to repay the principal at a specified date but will
pay interest only when earned is called
Response: [none]
Correct answer: an income bond
Score: 0 out of 1 No

Question 52
Which of the following are advantages of leasing?
Response: [none]
Correct answer: All of the above
Score: 0 out of 1 No

Question 53
If a P1,000 bond sells for P1,125, which of the following statements are correct?

I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
III. The coupon rate and the market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.
Response: [none]
Correct answer: II and IV
Score: 0 out of 1 No

Question 54
Which of the following statements properly describes an advantage of ordinary shares
over long-term bonds as a source of financing?
Response: [none]
Correct answer: there is less liquidity risk with ordinary shares, and financing flexibility is
maintained
Score: 0 out of 1 No

Question 55
Which of the following is a characteristic of leveraged buyouts?
Response: [none]
Correct answer: All of the above characteristics
Score: 0 out of 1 No

Question 56
Google Corporation’s P1,000 par value convertible debentures are selling at P1,040
when its stock is selling for P46.00 per share. If the conversion ratio is 20, what will be
the conversion price?
Response: [none]
Correct answer: P50.00
Score: 0 out of 1 No

Question 57
The market price of Fauna Corporation’s ordinary shares is P100 per share and each
share gives its owner one subscription right. Five rights are required to purchase an
additional ordinary share at the subscription price of P91 per share.

If the ordinary share is currently selling “rights-on”, the value of a right is closest, in
theory,
Response: [none]
Correct answer: P1.50
Score: 0 out of 1 No

Question 58
Which of the following is not a characteristic of convertible bond issues?
Response: [none]
Correct answer: Large companies with billions of pesos in sales and assets are the
primary issuers
Score: 0 out of 1 No
Question 59
Presented below are partial year-end financial statement data for companies X and Y.

The degree of financial leverage of Company Y, to two decimal places, is


Response: [none]
Correct answer: 1.05
Score: 0 out of 1 No

Question 60
The market price of < de-Corporation’s ordinary shares is P120 per share, and each
share gives the owner one subscription right. Four rights are required to purchase an
additional ordinary share at the subscription price of P108 per share. If the ordinary
share is currently selling “rights-on”, the theoretical value of a right is P2.40. The value
of one ordinary share when it goes “ex-rights’ should, in theory, be
Response: [none]
Correct answer: P117.60
Score: 0 out of 1

Question 1
Which of the following is not an advantage for leasing an asset rather than purchasing
the asset with funds from a long term loan?
Response: [none]
Correct answer: The terminal value of the asset goes to the lessee
Score: 0 out of 1 No

Question 2
The minimum theoretical value of a warrant to buy 5 shares of ETC stock at P45 per
share is P10. What is the current market price of ETC stock?
Response: [none]
Correct answer: P47.00
Score: 0 out of 1 No

Question 3
A convertible debenture is used
Response: [none]
Correct answer: for all of the reasons enumerated above
Score: 0 out of 1 No

Question 4
A firm maintains debt/equity ratio of 1.0. The debt consists of bonds with a before tax
cost of 9%. The equity consists of ordinary shares with a cost of 18%. The marginal
corporate tax is 40%. What is the weighted average cost of capital?
Response: [none]
Correct answer: 11.7%
Score: 0 out of 1 No

Question 5
A bond with a coupon rate of 8.2% maturing in 5 years at a value of P1000 and a
current market price of P770, will have a yield to maturity ( using approximation formula
) of
Response: [none]
Correct answer: 16.6%
Score: 0 out of 1 No

Question 6
Boulder has net income of P2,500,000 and 1,000,000 shares outstanding. Its ordinary
share is currently selling for P40 per share. It needs to raise P3,610,000 in funds for a
new asset. Its investment banker plans to sell an issue of ordinary shares to the public
for P38 for a spread of 5%. How much must Boulder’s after-tax income increase to
prevent dilution of EPS?
Response: [none]
Correct answer: P237,500
Score: 0 out of 1 No

Question 7
The Darling Corporation projects the following for the year.

If Darling Corporation’s ordinary share is expected to trade at a price-earnings ratio of eight, the
market price per share (to the nearest peso) would be
Response: [none]
Correct answer: P56
Score: 0 out of 1 No

Question 8
The market price of Mandalay Corporation’s ordinary shares is P120 per share, and
each share gives the owner one subscription right. Four rights are required to purchase
an additional ordinary share at the subscription price of P108 per share. If the ordinary
share is currently selling “rights-on”, the theoretical value of a right is P2.40. The value
of one ordinary share when it goes “ex-rights’ should, in theory, be
Response: [none]
Correct answer: P117.60
Score: 0 out of 1 No

Question 9
Private placements have many advantages over public debt issues. Which one of the
following is a disadvantage for the debtor of a privately placed debt issue?
Response: [none]
Correct answer: The interest costs of private placements are generally higher than
those public issues
Score: 0 out of 1 No
Question 10
Dory Company currently has net income of P3 million and 1.5 million ordinary shares
outstanding which sell for P20/share. Dory has decided to issue new stock to raise
P4,000,000 to expand its operations. Dory’s investment banker will sell the stock for
P18 with a spread of 7%. There will be a P60,000 registration cost.

What will be the new EPS immediately after the sale if the PE ratio remains constant?
Response: [none]
Correct answer: P1.722
Score: 0 out of 1 No

Question 11
The Davao Corp. needs to raise money for an addition to its plant. It will issue 300,000
new ordinary shares. The new shares will be priced at P60 per share with an 8.5%
spread on the offer price. Registration costs will be P150,000. Presently Davao Corp.
has earnings of P3 million and 750,000 shares outstanding

The net proceeds to Davao Corp. will be


Response: [none]
Correct answer: P16,320,000
Score: 0 out of 1 No

Question 12
If a P1,000 bond sells for P1,125, which of the following statements are correct?

I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
III. The coupon rate and the market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.
Response: [none]
Correct answer: II and IV
Score: 0 out of 1 No

Question 13
The rational decision-making process is most often typified by
Response: [none]
Correct answer: Bounded rationality
Score: 0 out of 1 No

Question 14
Firm E needs to net P7,800,000 from the sale if ordinary shares. Its Investment banker
has informed the firm that the retail price will be P22 per share, and that the firm will
receive P19 per share. Out-of-pocket costs are P100,000. How many shares must be
sold?
Response: [none]
Correct answer: 415,790
Score: 0 out of 1 No

Question 15
The market price of Fauna Corporation’s ordinary shares is P100 per share and each
share gives its owner one subscription right. Five rights are required to purchase an
additional ordinary share at the subscription price of P91 per share.

The value of one share of Fauna’s ordinary share when it goes “ex-rights”, in theory, is
closest to
Response: [none]
Correct answer: P98.50
Score: 0 out of 1 No

Question 16
Using an investment banker to underwrite a firm’s ordinary shares issue means that
Response: [none]
Correct answer: the investment banker buys the stock from the firm at a negotiated
price and then resells it to the public
Score: 0 out of 1 No

Question 17
A highly risk-averse decision maker will often react to bounded rationality by
Response: [none]
Correct answer: Satisficing
Score: 0 out of 1 No

Question 18
Presented below are partial year-end financial statement data for companies X and Y.

The degree of financial leverage of Company Y, to two decimal places, is


Response: [none]
Correct answer: 1.05
Score: 0 out of 1 No

Question 19
A firm must choose between leasing a new asset or purchasing it with funds from a
term loan. Under the purchase option, the firm will pay five equal principal payments of
P1000 each and 6% interest on the unpaid balance. Principal and interest are due at
the end of the year for five years. Alternatively, the firm can lease the asset for five
years at an annual rental cost of P1400 with payments due at the beginning of each
year. The corporate tax rate is 35% and the appropriate after-tax cost of capital is 12%.

Which of the following is closest to the present value cost of purchasing the new asset
with the term loan?
Response: [none]
Correct answer: P4,058
Score: 0 out of 1 No

Question 20
Which of the following statements properly describes an advantage of ordinary shares
over long-term bonds as a source of financing?
Response: [none]
Correct answer: there is less liquidity risk with ordinary shares, and financing flexibility is
maintained
Score: 0 out of 1 No

Question 21
The equity section of Smurf Corporation’s Statement of Financial Position is presented below.

The ordinary shareholders of Smurf Corporation have preemptive rights. If Smurf Corporation issues
400,000 additional ordinary shares at P6 per share, a current holder of 20,000 ordinary shares of Smurf
Corporation must be given the option to buy
Response: [none]
Correct answer: 4,000 additional shares
Score: 0 out of 1 No

Question 22
The disadvantages of debt include all but which of the following?
Response: [none]
Correct answer: Debt may have to be paid back with “cheaper” pesos
Score: 0 out of 1 No

Question 23
Which one of the following would be most likely to cause an immediate increase in
primary earnings per share?
Response: [none]
Correct answer: purchase of treasury stock
Score: 0 out of 1 No

Question 24
The market price of Fauna Corporation’s ordinary shares is P100 per share and each
share gives its owner one subscription right. Five rights are required to purchase an
additional ordinary share at the subscription price of P91 per share.
If the ordinary share is currently selling “rights-on”, the value of a right is closest, in
theory,
Response: [none]
Correct answer: P1.50
Score: 0 out of 1 No

Question 25
The market value of a share of stock is P50, and the market value of one right prior to
the ex-rights date is P2.00 after the offering is announced but while the stock is still
selling rights-on. The offer to the shareholder is that it will take three rights to buy an
additional share of stock at a subscription price of P40 per share. If the theoretical value
of the stock when it goes ex-rights is P47.50, the shareholder
Response: [none]
Correct answer: Does not receive any additional benefit from a rights offering
Score: 0 out of 1 No

Question 26
Warrants are
Response: [none]
Correct answer: Investments whose value is directly related to the price of the
underlying stock
Score: 0 out of 1 No

Question 27
A rights offering will probably fail
Response: [none]
Correct answer: if the subscription price is close to the market price
Score: 0 out of 1 No

Question 28
The Darling Corporation projects the following for the year.
The expected ordinary dividend per share for Darling Corporation is
Response: [none]
Correct answer: P2.10
Score: 0 out of 1 No

Question 29
A company has ordinary and preference shares outstanding with the following characteristics:

The company has a rate of return on ordinary equity of


Response: [none]
Correct answer: 40.00%
Score: 0 out of 1 No

Question 30
A company is growing a rate of 10% per year. This growth requires increases in
accounts receivable, inventory and plant and equipment. Under normal business
financing policy this growth would be funded by
Response: [none]
Correct answer: Increases in current liabilities, long-term liabilities and shareholder’s
equity
Score: 0 out of 1 No

Question 31
Happy Corp. is refunding P8 million worth of 13% debt. The new bonds will be issued
for 8%. The corporation’s tax rate is 35%. The call premium is 9%. What is the net cost
of the call premium?
Response: [none]
Correct answer: P468,000
Score: 0 out of 1 No

Question 32
Cowardly Dog Pet Food has a P1,000 convertible bond outstanding with a conversion
price of P18.00 per share. The bond pays an interest payment of P50 semiannually and
matures in 20 years unless converted into ordinary shares earlier or called by the
company. The ordinary shares sell for P14.70 per share. If the bond sold at its
theoretical bond value it would be priced competitively to yield 12% with bonds of the
same risk class.

How many shares of stock are received on conversion?


Response: [none]
Correct answer: 76.92 shares
Score: 0 out of 1 No

Question 33
The right
Response: [none]
Correct answer: gives holders of ordinary shares first option to purchase additional
ordinary shares
Score: 0 out of 1 No

Question 34
Subordinates debentures are securities that
Response: [none]
Correct answer: rank lower than are inferior to all other bonds and to senior debt
Score: 0 out of 1 No

Question 35
Investors in long- term corporate bonds are concerned about interest rate risk. This risk
reflects
Response: [none]
Correct answer: the decrease in bond prices as interest rates rise
Score: 0 out of 1 No

Question 36
A ratio that examines the percentage change in earnings available to ordinary
shareholders that is associated with a given percentage change in earnings before
interest and taxes is a measure of
Response: [none]
Correct answer: The degree of financial leverage
Score: 0 out of 1 No

Question 37
Which of the following statements is correct regarding effect of preference share has on
a company?
Response: [none]
Correct answer: Preference shareholders’ claims take precedence over the claims of
ordinary shareholders in the event of liquidation
Score: 0 out of 1 No

Question 38
The current market price of Lee Company stock is P80 per share and its price-earnings
ratio is 8 to 1. A P4 annual dividend was just paid to current shareholders. If dividends
and earnings are expected to grow at a constant rate of 12 percent, Lee Company’s
cost of retained earnings is
Response: [none]
Correct answer: 17.6%
Score: 0 out of 1 No

Question 39
The equity section of Smurf Corporation’s Statement of Financial Position is presented below.

The book value of Smurf Corporation’s ordinary share is


Response: [none]
Correct answer: P18.50
Score: 0 out of 1 No

Question 40
Which of the following does not help to explain the existence of a premium in the price
of a convertible bond?
Response: [none]
Correct answer: higher transaction costs on convertibles than the cost of trading
ordinary shares
Score: 0 out of 1 No

Question 41
The least desirable of the following forms of financing for small corporation whose
shareholders are concerned about maintaining control over the firm is
Response: [none]
Correct answer: income bonds
Score: 0 out of 1 No

Question 42
A bond with a coupon rate of 7.5%, maturing in 10 years at a value of P1000 and
current market price of P776 will have a current yield of
Response: [none]
Correct answer: 10.2%
Score: 0 out of 1 No

Question 43
Odinates Inc.’s P1,000 par value preference share paid its P100 per share annual
dividend of April 4 of the current year. The preference share’s current market price is
P960 a share on the date of the dividend distribution. Malibu’s marginal tax rate is 40%
and the firm plans to maintain its current capital structure relationship. The component
cost of preference shares to Malibu would be closest to
Response: [none]
Correct answer: 10.45%
Score: 0 out of 1 No

Question 44
Google Corporation’s P1,000 par value convertible debentures are selling at P1,040
when its stock is selling for P46.00 per share. If the conversion ratio is 20, what will be
the conversion price?
Response: [none]
Correct answer: P50.00
Score: 0 out of 1 No

Question 45
In general, it is more expensive for a company to finance with equity capital than with
debt capital because
Response: [none]
Correct answer: Investors are exposed to greater risk with equity capital
Score: 0 out of 1 No

Question 46
All of the following are good sources of financing for permanent working capital except
Response: [none]
Correct answer: A bank line of credit
Score: 0 out of 1 No

Question 47
A firm using a private placement to raise capital would generally be issuing
Response: [none]
Correct answer: Long-term bonds
Score: 0 out of 1 No

Question 48
Bee Corp. will issue P100 million of preference shares. The stock will pay a P9
dividend and offer price to the public will be P50 per share. Bee’s tax rate is 40%.
Assuming floatation costs of P3 per share. Bee’s cost of preference share financing is
Response: [none]
Correct answer: 19.15%
Score: 0 out of 1 No

Question 49
A “tender offer” is
Response: [none]
Correct answer: A direct appeal to purchase shares from shareholders
Score: 0 out of 1 No

Question 50
Brown Corp. has a P10 million bond obligation outstanding which it is considering
refunding. The bonds were issued at 10% and the interest rates on similar bonds have
declined to 8%. The bonds have five years of their 20-year maturity remaining. Brown
will pay a call premium of 5% and will incur underwriting costs consideration on the old
bond. The company is in a 40% tax bracket. To analyze the refunding decision, use a
6% discount rate. What is the net present value of the refunding decision?
Response: [none]
Correct answer: (P56,072)
Score: 0 out of 1 No

Question 51
A company has recently introduced total quality management (TQM). The company’s
top management wants to determine a new and innovative approach to foster total
participation throughout the company. Management should
Response: [none]
Correct answer: Bring the employees together for a brainstorming session
Score: 0 out of 1 No

Question 52
Which of the following is not an advantage of debt?
Response: [none]
Correct answer: Bond holders have no control over the actions of management
Score: 0 out of 1 No

Question 53
A company’s stock trades rights-on for P50.00 and ex-rights for P48.00. The
subscription price for rights holders is P40.00, and four rights are required to purchase
one share of stock.

The value of a right while the stock is still trading rights-on is


Response: [none]
Correct answer: P2.00
Score: 0 out of 1 No

Question 54
A firm must choose between leasing a new asset or purchasing it with funds from a
term loan. Under the purchase option, the firm will pay five equal principal payments of
P1000 each and 6% interest on the unpaid balance. Principal and interest are due at
the end of the year for five years. Alternatively, the firm can lease the asset for five
years at an annual rental cost of P1400 with payments due at the beginning of each
year. The corporate tax rate is 35% and the appropriate after-tax cost of capital is 12%.

Which of the following is closest to the present value cost of leasing the new asset?
Response: [none]
Correct answer: P3,674
Score: 0 out of 1 No

Question 55
Many firms have retired their preference share because
Response: [none]
Correct answer: Preference share lacks a maturity date and dividends are not
deductible for tax purposes
Score: 0 out of 1 No

Question 56
On January 1 of the current year, Bingo Company issued convertible bonds with
P1,000 par value and a conversation ratio of 50. Which of the following should be the
market price per share of the company’s ordinary share on January 1?
Response: [none]
Correct answer: Under P20
Score: 0 out of 1 No

Question 57
The term “underwriting spread” refers to the
Response: [none]
Correct answer: Difference between the price the investment bank pays for a new
security issue and the price at which the securities are resold
Score: 0 out of 1 No
Question 58
A company has ordinary and preference shares outstanding with the following characteristics:

The company has earnings per share of


Response: [none]
Correct answer: P4.00
Score: 0 out of 1 No

Question 59
Increases in total long-lived assets should not ordinarily be financed by
Response: [none]
Correct answer: Short-term debt
Score: 0 out of 1 No

Question 60
The market price of India Corporation’s ordinary share is P30 per share, and each
share gives its owner one subscription right. Four rights are required to purchase an
additional ordinary share at the subscription price of P27 per share. If the ordinary share
is currently selling “rights-on,” the theoretical value of a right is
Response: [none]
Correct answer: P0.60
Score: 0 out of 1
All of the following are good sources of financing for permanent working capital except
Response: [none]
Correct answer: A bank line of credit
Score: 0 out of 1 No

Question 2
A financial instrument which promises to repay the principal at a specified date but will
pay interest only when earned is called
Response: [none]
Correct answer: an income bond
Score: 0 out of 1 No

Question 3
Using an investment banker to underwrite a firm’s ordinary shares issue means that
Response: [none]
Correct answer: the investment banker buys the stock from the firm at a negotiated
price and then resells it to the public
Score: 0 out of 1 No

Question 4
A firm must choose between leasing a new asset or purchasing it with funds from a
term loan. Under the purchase option, the firm will pay five equal principal payments of
P1000 each and 6% interest on the unpaid balance. Principal and interest are due at
the end of the year for five years. Alternatively, the firm can lease the asset for five
years at an annual rental cost of P1400 with payments due at the beginning of each
year. The corporate tax rate is 35% and the appropriate after-tax cost of capital is 12%.

Which of the following is closest to the present value cost of purchasing the new asset
with the term loan?
Response: [none]
Correct answer: P4,058
Score: 0 out of 1 No

Question 5
ou shares outstanding with the following characteristics:
The company has a rate of return on ordinary equity of
Response: [none]
Correct answer: 40.00%
Score: 0 out of 1 No

Question 6
Increases in total long-lived assets should not ordinarily be financed by
Response: [none]
Correct answer: Short-term debt
Score: 0 out of 1 No

Question 7
A company has recently introduced total quality management (TQM). The company’s
top management wants to determine a new and innovative approach to foster total
participation throughout the company. Management should
Response: [none]
Correct answer: Bring the employees together for a brainstorming session
Score: 0 out of 1 No

Question 8
Which of the following is not an advantage of debt?
Response: [none]
Correct answer: Bond holders have no control over the actions of management
Score: 0 out of 1 No

Question 9
Investors in long- term corporate bonds are concerned about interest rate risk. This risk
reflects
Response: [none]
Correct answer: the decrease in bond prices as interest rates rise
Score: 0 out of 1 No

Question 10
The market price of Fauna Corporation’s ordinary shares is P100 per share and each
share gives its owner one subscription right. Five rights are required to purchase an
additional ordinary share at the subscription price of P91 per share.

If the ordinary share is currently selling “rights-on”, the value of a right is closest, in
theory,
Response: [none]
Correct answer: P1.50
Score: 0 out of 1 No

Question 11
A firm floats a new stock issue and uses the proceeds from the issue to retire a bond
issue old in which has matured. Which one of the following statements will hold in all
cases?
Response: [none]
Correct answer: the firm has decreased its financial leverage
Score: 0 out of 1 No

Question 12
Duke Corporation warrants carry the right to buy10 shares of Duke ordinary shares at
P3.50 per share. The ordinary share has a current market price of P4.25 per share. The
intrinsic or minimum value of one Duke warrant is
Response: [none]
Correct answer: P1.50
Score: 0 out of 1 No

Question 13
Warrants are
Response: [none]
Correct answer: Investments whose value is directly related to the price of the
underlying stock
Score: 0 out of 1 No

Question 14
ABC Corporation is issuing preference shares yielding 10%, and XYZ Corporation is
considering buying the stock. ABC’s tax rate is 20% and XYZ’s tax rate is 34%. What is
the after-tax preference yield for XYZ?
Response: [none]
Correct answer: 8.98%
Score: 0 out of 1 No

Question 15
The equity section of Smurf Corporation’s Statement of Financial Position is presented below.

The book value of Smurf Corporation’s ordinary share is


Response: [none]
Correct answer: P18.50
Score: 0 out of 1 No

Question 16
A firm must choose between leasing a new asset or purchasing it with funds from a
term loan. Under the purchase option, the firm will pay five equal principal payments of
P1000 each and 6% interest on the unpaid balance. Principal and interest are due at
the end of the year for five years. Alternatively, the firm can lease the asset for five
years at an annual rental cost of P1400 with payments due at the beginning of each
year. The corporate tax rate is 35% and the appropriate after-tax cost of capital is 12%.

Which of the following is closest to the present value of the after-tax interest payment?
Response: [none]
Correct answer: P453
Score: 0 out of 1 No

Question 17
The preemptive right
Response: [none]
Correct answer: gives holders of ordinary shares first option to purchase additional
ordinary shares
Score: 0 out of 1 No

Question 18
Cowardly Dog Pet Food has a P1,000 convertible bond outstanding with a conversion
price of P18.00 per share. The bond pays an interest payment of P50 semiannually and
matures in 20 years unless converted into ordinary shares earlier or called by the
company. The ordinary shares sell for P14.70 per share. If the bond sold at its
theoretical bond value it would be priced competitively to yield 12% with bonds of the
same risk class.

How many shares of stock are received on conversion?


Response: [none]
Correct answer: 76.92 shares
Score: 0 out of 1 No

Question 19
The equity section of Smurf Corporation’s Statement of Financial Position is presented below.

The ordinary shareholders of Smurf Corporation have preemptive rights. If Smurf Corporation issues
400,000 additional ordinary shares at P6 per share, a current holder of 20,000 ordinary shares of Smurf
Corporation must be given the option to buy
Response: [none]
Correct answer: 4,000 additional shares
Score: 0 out of 1 No

Question 20
The term “underwriting spread” refers to the
Response: [none]
Correct answer: Difference between the price the investment bank pays for a new
security issue and the price at which the securities are resold
Score: 0 out of 1 No

Question 21
The “call” provisions on some bonds allow
Response: [none]
Correct answer: The corporation to redeem the bonds earlier than maturity, but usually
for a premium over the par value
Score: 0 out of 1 No

Question 22
The rational decision-making process is most often typified by
Response: [none]
Correct answer: Bounded rationality
Score: 0 out of 1 No

Question 23
Bee Corp. will issue P100 million of preference shares. The stock will pay a P9
dividend and offer price to the public will be P50 per share. Bee’s tax rate is 40%.
Assuming floatation costs of P3 per share. Bee’s cost of preference share financing is
Response: [none]
Correct answer: 19.15%
Score: 0 out of 1 No

Question 24
A “subordinated debenture”
Response: [none]
Correct answer: Is an unsecured bond with an inferior claim on assets in the event of
liquidation
Score: 0 out of 1 No

Question 25
A firm must choose between leasing a new asset or purchasing it with funds from a
term loan. Under the purchase option, the firm will pay five equal principal payments of
P1000 each and 6% interest on the unpaid balance. Principal and interest are due at
the end of the year for five years. Alternatively, the firm can lease the asset for five
years at an annual rental cost of P1400 with payments due at the beginning of each
year. The corporate tax rate is 35% and the appropriate after-tax cost of capital is 12%.

Which of the following is closest to the present value cost of leasing the new asset?
Response: [none]
Correct answer: P3,674
Score: 0 out of 1 No

Question 26
Which of the following is not a characteristic of convertible bond issues?
Response: [none]
Correct answer: Large companies with billions of pesos in sales and assets are the
primary issuers
Score: 0 out of 1 No

Question 27
The current market price of Lee Company stock is P80 per share and its price-earnings
ratio is 8 to 1. A P4 annual dividend was just paid to current shareholders. If dividends
and earnings are expected to grow at a constant rate of 12 percent, Lee Company’s
cost of retained earnings is
Response: [none]
Correct answer: 17.6%
Score: 0 out of 1 No

Question 28
The document that outlines the covenants and duties existing between bondholders
and the issuing corporation is called
Response: [none]
Correct answer: An indenture
Score: 0 out of 1 No

Question 29
Doors Corporation is considering a public offering of ordinary shares. The firm will offer
one million ordinary shares for sale. The estimated selling price is P30 per share with
Doors Corporation receiving P26.25 per share after the offering. Registration fees are
estimated at P275,000.

If Doors Corporation needs to generate P28 million, how many shares will have to be
sold?
Response: [none]
Correct answer: 1,077,143 shares
Score: 0 out of 1 No

Question 30
If company C has a higher rate of return on assets than Company D, this could be
because Company C has a <List C> profit margin on sales, or a <List D> asset-turnover
ratio, or both.
<List C> <List D>
Response: [none]
Correct answer: Higher Higher
Score: 0 out of 1 No

Question 31
A company has ordinary and preference shares outstanding with the following characteristics:

The company has earnings per share of


Response: [none]
Correct answer: P4.00
Score: 0 out of 1 No

Question 32
Happy Corp. is refunding P8 million worth of 13% debt. The new bonds will be issued
for 8%. The corporation’s tax rate is 35%. The call premium is 9%. What is the net cost
of the call premium?
Response: [none]
Correct answer: P468,000
Score: 0 out of 1 No

Question 33
Val Company estimates its after-tax cost of long-term debt at 10%, its cost of
preference share is at 15%, and its cost of ordinary equity is at 20%. Val’s marginal tax
rate is 49 percent, and its current capital structure proportions are optimal with long-
term debt at 30 percent, its preference share at 20 percent, and ordinary equity at 50
percent. Val’s weighted average cost of capital is
Response: [none]
Correct answer: 16.0%
Score: 0 out of 1 No

Question 34
The market price of Fauna Corporation’s ordinary shares is P100 per share and each
share gives its owner one subscription right. Five rights are required to purchase an
additional ordinary share at the subscription price of P91 per share.

The value of one share of Fauna’s ordinary share when it goes “ex-rights”, in theory, is
closest to
Response: [none]
Correct answer: P98.50
Score: 0 out of 1 No

Question 35
Firm E needs to net P7,800,000 from the sale if ordinary shares. Its Investment banker
has informed the firm that the retail price will be P22 per share, and that the firm will
receive P19 per share. Out-of-pocket costs are P100,000. How many shares must be
sold?
Response: [none]
Correct answer: 415,790
Score: 0 out of 1 No

Question 36
A bond with a coupon rate of 7.5%, maturing in 10 years at a value of P1000 and
current market price of P776 will have a current yield of
Response: [none]
Correct answer: 10.2%
Score: 0 out of 1 No

Question 37
The market value of a share of stock is P50, and the market value of one right prior to
the ex-rights date is P2.00 after the offering is announced but while the stock is still
selling rights-on. The offer to the shareholder is that it will take three rights to buy an
additional share of stock at a subscription price of P40 per share. If the theoretical value
of the stock when it goes ex-rights is P47.50, the shareholder
Response: [none]
Correct answer: Does not receive any additional benefit from a rights offering
Score: 0 out of 1 No

Question 38
When a firm finances each asset with a financial instrument of the same approximate
maturity as the life of the asset, it is applying
Response: [none]
Correct answer: A hedging approach
Score: 0 out of 1 No

Question 39
GFE Inc. has 250,000 shares outstanding with a P5 par value. The shares were issued
for P14. The stock is currently selling for P34. GFE has P5,000,000 in retained earnings
and has declared a stock dividend that will increase the number of outstanding shares
by 6%. What will be the capital in excess of par account after the share split?
Response: [none]
Correct answer: P2,685,000
Score: 0 out of 1 No

Question 40
If a P1,000 bond sells for P1,125, which of the following statements are correct?

I. The market rate of interest is greater than the coupon rate on the bond.
II. The coupon rate on the bond is greater than the market rate of interest.
III. The coupon rate and the market rate are equal.
IV. The bond sells at a premium.
V. The bond sells at a discount.
Response: [none]
Correct answer: II and IV
Score: 0 out of 1 No

Question 41
The Darling Corporation projects the following for the year.

The expected ordinary dividend per share for Darling Corporation is


Response: [none]
Correct answer: P2.10
Score: 0 out of 1 No

Question 42
A company’s stock trades rights-on for P50.00 and ex-rights for P48.00. The
subscription price for rights holders is P40.00, and four rights are required to purchase
one share of stock.

The value of a right while the stock is still trading rights-on is


Response: [none]
Correct answer: P2.00
Score: 0 out of 1 No

Question 43
When a company has a convertible bond in its capital structure
Response: [none]
Correct answer: It can reduce its debt-to-equity ratio by calling the bond
Score: 0 out of 1 No

Question 44
Boulder has net income of P2,500,000 and 1,000,000 shares outstanding. Its ordinary
share is currently selling for P40 per share. It needs to raise P3,610,000 in funds for a
new asset. Its investment banker plans to sell an issue of ordinary shares to the public
for P38 for a spread of 5%. How much must Boulder’s after-tax income increase to
prevent dilution of EPS?
Response: [none]
Correct answer: P237,500
Score: 0 out of 1 No

Question 45
Rainbow is about to go public. Its present stockholders own 500,000 shares. The new
public issue will represent 800,000 shares. The shares will be priced at P25 to the
public with a 4% spread. The out-of-pocket costs will be P450,000. What are the net
proceeds to the firm?
Response: [none]
Correct answer: P18,750,000
Score: 0 out of 1 No

Question 46
A firm maintains debt/equity ratio of 1.0. The debt consists of bonds with a before tax
cost of 9%. The equity consists of ordinary shares with a cost of 18%. The marginal
corporate tax is 40%. What is the weighted average cost of capital?
Response: [none]
Correct answer: 11.7%
Score: 0 out of 1 No

Question 47
The market price of India Corporation’s ordinary share is P30 per share, and each
share gives its owner one subscription right. Four rights are required to purchase an
additional ordinary share at the subscription price of P27 per share. If the ordinary share
is currently selling “rights-on,” the theoretical value of a right is
Response: [none]
Correct answer: P0.60
Score: 0 out of 1 No
Question 48
Which of the following bonds offers the most security to the bondholder?
Response: [none]
Correct answer: Senior mortgage bonds
Score: 0 out of 1 No

Question 49
A firm using a private placement to raise capital would generally be issuing
Response: [none]
Correct answer: Long-term bonds
Score: 0 out of 1 No

Question 50
A rights offering will probably fail
Response: [none]
Correct answer: if the subscription price is close to the market price
Score: 0 out of 1 No

Question 51
The Davao Corp. needs to raise money for an addition to its plant. It will issue 300,000
new ordinary shares. The new shares will be priced at P60 per share with an 8.5%
spread on the offer price. Registration costs will be P150,000. Presently Davao Corp.
has earnings of P3 million and 750,000 shares outstanding

The net proceeds to Davao Corp. will be


Response: [none]
Correct answer: P16,320,000
Score: 0 out of 1 No

Question 52
A ratio that examines the percentage change in earnings available to ordinary
shareholders that is associated with a given percentage change in earnings before
interest and taxes is a measure of
Response: [none]
Correct answer: The degree of financial leverage
Score: 0 out of 1 No

Question 53
A bond with a P114 annual coupon, maturing in 10 years at a value of P1,000 has a
current market price of P920. What is the normal yield of the bond?
Response: [none]
Correct answer: 11.4%
Score: 0 out of 1 No

Question 54
Which of the following is a characteristic of leveraged buyouts?
Response: [none]
Correct answer: All of the above characteristics
Score: 0 out of 1 No

Question 55
A convertible debenture is used
Response: [none]
Correct answer: for all of the reasons enumerated above
Score: 0 out of 1 No

Question 56
Dory Company currently has net income of P3 million and 1.5 million ordinary shares
outstanding which sell for P20/share. Dory has decided to issue new stock to raise
P4,000,000 to expand its operations. Dory’s investment banker will sell the stock for
P18 with a spread of 7%. There will be a P60,000 registration cost.

What will be the new EPS immediately after the sale if the PE ratio remains constant?
Response: [none]
Correct answer: P1.722
Score: 0 out of 1 No

Question 57
On January 1 of the current year, Bingo Company issued convertible bonds with
P1,000 par value and a conversation ratio of 50. Which of the following should be the
market price per share of the company’s ordinary share on January 1?
Response: Under P20
Correct answer: Under P20
Score: 1 out of 1 Yes

Question 58
The least desirable of the following forms of financing for small corporation whose
shareholders are concerned about maintaining control over the firm is
Response: [none]
Correct answer: income bonds
Score: 0 out of 1 No

Question 59
Private placements have many advantages over public debt issues. Which one of the
following is a disadvantage for the debtor of a privately placed debt issue?
Response: [none]
Correct answer: The interest costs of private placements are generally higher than
those public issues
Score: 0 out of 1 No

Question 60
The Darling Corporation projects the following for the year.

If Darling Corporation’s ordinary share is expected to trade at a price-earnings ratio of eight, the
market price per share (to the nearest peso) would be
Response: P104
Correct answer: P56
Score: 0 out of 1
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