The bonds that are considered as junk bonds and termed as higher yield as classified as 

a. Expansion debentures
b. Premium debentures
c. Subordinated debentures
d. Ordinate debentures

Regulatory actions, lawsuits, strikes, and increased competition are 

a. diversifiable risk.
b. nondiversifiable risk.
c. economic risk.
d. systematic.

Stock X has a beta of 0.5 and Stock Y has a beta of 1.5. Which of the following statements must be
true, according to the CAPM? 
a. If you invest P50,000 in Stock X and P50,000 in Stock Y, your 2-stock portfolio would have a beta
significantly lower than 1.0, provided the returns on the two stocks are not perfectly correlated.
b. Stock Y's realized return during the coming year will be higher than Stock X's return.
c. If the expected rate of inflation increases but the market risk premium is unchanged, the required
returns on the two stocks should increase by the same amount.
d. Stock Y's return has a higher standard deviation than Stock X.
e. If the market risk premium declines, but the risk-free rate is unchanged, Stock X will have a larger
decline in its required return than will Stock Y.

 Perfectly _________ correlated series move exactly together and have a correlation coefficient of
_________, while perfectly _________ correlated series move exactly in opposite directions and have a
correlation coefficient of _________. 
a. negatively; –1; positively; +1
b. negatively; +1; positively; –1
c. positively; –1; negatively; +1
d. positively; +1; negatively; –1
 The expected value and the standard deviation of returns for asset A is 

a. 12 percent and 4 percent.

b. 12.7 percent and 2.3 percent.
c. 12.7 percent and 4 percent.
d. 12 percent and 2.3 percent.

The future value of a peso _________ as the interest rate increases and _________ the farther in the future
an initial deposit is to be received.
a. decreases; decreases
b. decreases; increases
c. increases; increases
d. increases; decreases
 
In comparing an ordinary annuity and an annuity due, which of the following is true?
a. The future value of an ordinary annuity is always greater than the future value of an otherwise
identical annuity due.
b. The future value of an annuity due is always less than the future value of an otherwise identical
ordinary annuity, since one less payment is received with an annuity due.
c. The future value of an annuity due is always greater than the future value of an otherwise identical
ordinary annuity.
d. All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.

 The purpose of adding an asset with a negative or low positive beta is to 
a. reduce profit.
b. reduce risk.
 
c. increase profit.
d. increase risk.
 Maximization of shareholder’s wealth is a concept in which 
a. Increased earnings are of primary importance
b. Profits are maximized on a quarterly basis.
c. Virtually all earnings are paid as dividends to common stockholders.
d. Optimally increasing the long-term value of the firm is emphasized.
Statement 1: Everything else being equal, the higher the discount rate, the higher the present value.
Statement 2: Annuity due is an amount that occurs at the beginning of each period. 
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.
 
Statement 1: The nominal (stated) annual rate is the rate of interest actually paid or earned. Statement
2: For any interest rate and for any period of time, the more frequently interest is compounded, the
greater the amount of money that has to be invested today in order to accumulate a given future
amount. 
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.

The type of trading member who takes position every day and also liquidate it on the same day is
classified as 
a. Day traders
b. Broker traders
c. Non-position traders
d. Commercial traders

 The bids of bidder which tells that how much treasury bills bidder wants to buy is classified
a. Federal acceptance bid
b. Bankers’ acceptance bid
c. Non-competitive bids
d. Competitive bids

 Statement 1: The creation of a portfolio by combining two assets having perfectly positively correlated
returns cannot reduce the portfolio’s overall risk below the risk of the least risky asset, whereas a
portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a
level below that of either of the components. Statement 2: Any investor (or firm) must be concerned
solely with nondiversifiable risk because it can create a portfolio of assets that will eliminate all, or
virtually all, diversifiable risk. 
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false. 

Statement 1: Two assets whose returns move in the opposite directions and have a correlation
coefficient of –1 are either risk free assets or low risk assets. Statement 2: A portfolio combining two
assets with less than perfectly positive correlation can reduce total risk to a level below that of either of
the components. 
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.
 

 The amount of money that would have to be invested today at a given interest rate over a specified
period in order to equal a future amount is called 
a. future value.
b. present value.
c. future value interest factor.
d. present value interest factor.
Statement 1: The risk of an asset may be found by subtracting the worst outcome from the best
outcome. Statement 2: Coefficient of variation is a measure of relative dispersion used in comparing
the expected returns of assets with differing risks. 

a. Both statements are true

b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.

 Real capital 
a. This form of capital is found on the balance sheet under long-term liabilities and equity.
b. Securities with a maturity of less than 1 year.
c. The high inflation rates of the 1980s caused this form of capital to hold its value better than other
forms of capital during this time period.
d. A and C 

An increase in the Treasury Bill rate _________ the required rate of return of a common stock. 
a. has no effect on
b. increases 
c. decreases
d. cannot be determined by

Insider trading occurs when 

a. Someone has information not available to the public which they use to profit from trading in
stocks
b. Corporate officers buy stock in their company
 
c. Lawyers, investment bankers, and others buy common stock in companies represented by their
firms.
d. Any stock transaction occurs in violation of the restrictions in monopolies. 

Statement 1: The beta coefficient is an index of the degree of movement of an asset’s return in
response to a change in the risk-free asset return. Statement 2: The value of zero for beta coefficient of
the risk free asset reflects not only its absence of risk but also the fact that the asset’s return is
unaffected by movements in the market return. 
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.
 

In financial markets, the decrease in investment results in 

a. Increase in interest rate

b. Decrease in interest rate
c. Increase in availability
d. Decrease in availability

If the present value of a perpetual income stream is increasing, the discount rate must be
a. increasing.
b. decreasing.
c. changing unpredictably.
d. increasing proportionally.

The _________ is a statistical measure of the relationship between series of numbers 

a. coefficient of variation
b. standard deviation
c. correlation
 
d. probability

Statement 1: The more certain the return from an asset, the less variability and therefore the less risk.
Statement 2: New investments must be considered in light of their impact on the risk and return of the
portfolio of assets because the risk of any single proposed asset investment is not independent of
other assets.
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false. 

A capital market does not include which of the following securities? 

a. Common stock
b. Commercial paper
c. Government bonds
d. Preferred stock

 A savings bond can be bought for P29.50 and will have a value of P100 at the end of 25 years, what is
the annual rate of return on the bond? 
a. 5 percent
b. 6 percent
c. 7 percent
d. 8 percent 

The present value interest factor is

a. between 2.0 and 0.0.
b. always negative.
c. always less than 1.0.
 d. a discount rate.
 In financial market, inflation has 
a. Increased corporation’s reliance on debt for capital expansion needs.
 
b. Created larger asset values on the firm’s historical statement of financial position.
c. Made it cheaper in terms of interest costs for firms to borrow money
d. All of the given choices. 

Statement 1: An abnormal probability distribution is a symmetrical distribution whose shape resembles

a bell-shaped curve. Statement 2: The beta of a portfolio is a function of the standard deviations of the
individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the
correlation between the returns of those securities. 
a. Both statements are true
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.

Which of the following is not a true statement about the goal of maximizing shareholders’ wealth?  
a. It takes into account the timing of cash flows.
b. It is a short-run point of view which takes risk into account.
c. It considers risk as a factor.
d. None of the above.

 Which of the following statements is CORRECT? 

a. If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is
+1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two
stocks will have a standard deviation that is less than that of the individual stocks.
b. A portfolio with a large number of randomly selected stocks would have more market risk than a
single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is
stable.
c. If a stock has a negative beta, its expected return must be negative.
d. A portfolio with a large number of randomly selected stocks would have less market risk than a
single stock that has a beta of 0.5.
e. According to the CAPM, stocks with higher standard deviations of returns must also have higher
expected returns.
A collection of assets is called a(n) 
a. grouping.
b. portfolio.
c. investment.
d. diversity.
Future financial managers will need to understand 
a. International cash flows
b. Computerized funds transfers
c. International currency hedging strategies
d. All of the given choices
Statement 1: In general, with an amortized loan, the payment amount remains constant over the life of
the loan, the principal portion of each payment grows over the life of the loan, and the interest portion
of each payment declines over the life of the loan. Statement 2: When computing the number of
deposits needed to accumulate to a future sum, it will take longer the lower the interest rate, holding
the future value and deposit size constant. 
a. Both statements are true 
b. Both statements are false
c. Statement 1 is true but statement 2 is false.
d. Statement 2 is true but statement 1 is false.

Primary market
a. A market where the securities being traded are new public offerings.
 
b. Market composed of common stock, preferred stock, commercial and government bonds and other
long-term securities.
c. This market trades previously issued securities.
d. All of the given choices.

 A corporate restructuring can result in

a. Changes in the capital structure
b. Selling of low-profit margin divisions
c. Reduction in the work force
d. All of the given choices
 

Which of the following is a result of a high inflation? 

a. Phantom profits
b. Under-valued assets
c. Lower profitability
d. All of the given choices 

The beta of the market 

a. is greater than 1.
b. is less than 1.
c. is 1.
d. cannot be determined.

 Which asset would the risk averse financial manager prefer? 

a. Asset A.
b. Asset B.
c. Asset C.
d. Asset D.

Today, ABC acquires some risky assets that cause its beta to increase by 30%. In addition, expected
inflation increases by 2.00%. What is the stock's new required rate of return? (in percentage %)  
14
 

 
Find the present value of the following stream of cash flows, assuming that the firm’s opportunity cost
is 14 percent. 

131065

 
P100 is received at the beginning of year 1, P200 is received at the beginning of year 2, and P300 is
received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined
future value at the end of year 3 is _________. 
727

 
ABC's stock has a required return of 11.75%, risk-free rate is 4.30% and beta of 1.23. What is the
required rate of return on the market? (In percentage %) 
10.36
 
BSA’s dreams and aspirations to become a CPA will begin four years from now. To pay for college
education, BSA decided to save P1,000 a quarter for the next four years in a savings account paying 12
percent interest. How much will BSA have at the end of the fourth year?
ANSWER: 20157

Suppose you hold a portfolio consisting of a P10,000 investment in each of 8 different common stocks.
The portfolio’s beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00
and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio’s new
beta be? 
1.29

 
CPA has recommended a P100,000 portfolio containing assets B, D, and F. P20,000 will be invested in
asset B, with a beta of 1.5; P50,000 will be invested in asset D, with a beta of 2.0; and P30,000 will be
invested in asset F, with a beta of 0.5. The beta of the portfolio is at what amount? 
1.45

 
CPA plans to buy a house and funds it by investing P2,000 at the end of each year for the next 10 years.
If CPA can earn 10 percent on his investment, how much will he have at the end of the tenth year?  
Correct answer

31874

 
Find the future value at the end of year 3 of the following stream of cash flows received at the end of
each year, assuming the firm can earn 17 percent on its investments. 
20127
 

 
The future value of an ordinary annuity of P1,000 each year for 10 years, deposited at 3 percent, is at
what amount? 
11464

P2- LONG-TERM BONDS & VALUATION OF BONDS

 
ABC Corp, is thinking about recalling P30 million of 15 year, P1,000 par value bonds, that were issued
ten years ago. The bonds carry a coupon rate of 7.8% and have a call price of P1,110. Initially the bonds
generated total proceeds of P28.65 million and the flotation costs were P500,000. ABC Corp. wants to
sell P30 million of 5 year, P1,000 par value bonds with a 5.8% coupon rate to retire the old bonds. The
flotation costs on the new bond issue are estimated to be P525,000. Due to having issue the new
bonds before the old bonds can be retired the company expects a period of 3 months were they have to
pay interest on the old and the new bonds. Assume a tax rate of 30%. What are the annual net cash
flow savings from issuing the new bonds? 
281067.00
281067
281,067.00

 In 2022, ABC Corporation cold a P250 million bond issue to finance the purchase of new jet airliners.
These bonds were issued in P1000 denominations with an original maturity of 12 years and a coupon
rate of 12%. In 2014, determine the value of one of these bonds to an investor who requires a 14% rate
of return on these securities. 
Correct answer

895.68

 
A bond currently trades at P975 on the secondary market. The bond has 10 years until maturity and
pays an annual coupon at 9% of face value. The face value of the bond is P1,000. What is the yield to
maturity for this bond? 
Correct answers

9.04%
9.40%
9.4%
 
ABC Investors is interested in purchasing the bonds of the XYZ Company. ABC’s bonds are currently
priced at P1,100.00 and have 14 years to maturity. Is the bonds have a 6% coupon rate what is the
yield-to-maturity of these annual coupon paying bonds? 
5.00%
 

 Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%.
The bond has face value of $1,000 and makes semiannual interest payments. If you require an 11.0%
nominal yield to maturity on this investment, what is the maximum price you should be willing to pay
for the bond?
891.00
 

 
ABC Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal yield
to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $850. What is the bond's
nominal (annual) coupon interest rate? 
7.71%
 

 
What is the value of a 15-year 10% coupon bond with a face value of P1,000. The required return on the
bond is 12% and the bond makes semiannual payments. 
862.35
 

 
ABC Corp, is thinking about recalling P30 million of 15 year, P1,000 par value bonds, that were issued
ten years ago. The bonds carry a coupon rate of 7.8% and have a call price of P1,110. Initially the bonds
generated total proceeds of P28.65 million and the flotation costs were P500,000. ABC Corp. wants to
sell P30 million of 5 year, P1,000 par value bonds with a 5.8% coupon rate to retire the old bonds. The
flotation costs on the new bond issue are estimated to be P525,000. Due to having issue the new
bonds before the old bonds can be retired the company expects a period of 3 months were they have to
pay interest on the old and the new bonds. Assume a tax rate of 30%. What is the initial investment in
the new bond issue
Correct answers

2977433.00
2977433
2,977,433.00

 What is the yield to maturity for ABC Company’s zero coupon bond that matures in 14 years if the bond
is selling for P530.00? 
4.64%
 

ABC Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000
and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the
bonds sell? 
894.65
 

 
ABC Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon
payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?  
923.22
 

 
Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value of
$1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to maturity on these
bonds? *
2/2

5.85%
 

 
ABC Inc.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual
coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to
maturity (YTM)? 
9.01%
 
 

To expand its business, the ABC factory would like to issue a bond with par value of P1,000, coupon
rate of 10 percent, and maturity of 10 years from now. What is the value of the bond if the required rate
of return is 8%? 
1134.00
 

 ABC Corp, is thinking about recalling P30 million of 15 year, P1,000 par value bonds, that were issued
ten years ago. The bonds carry a coupon rate of 7.8% and have a call price of P1,110. Initially the bonds
generated total proceeds of P28.65 million and the flotation costs were P500,000. ABC Corp. wants to
sell P30 million of 5 year, P1,000 par value bonds with a 5.8% coupon rate to retire the old bonds. The
flotation costs on the new bond issue are estimated to be P525,000. Due to having issue the new
bonds before the old bonds can be retired the company expects a period of 3 months were they have to
pay interest on the old and the new bonds. Assume a tax rate of 30%. What is the call premium per
bond? 
Correct answers

110
110.00

P3- CAPITAL STOCK

62.88
 

ABC Co. expects to earn $3.50 per share during the current year, its expected dividend payout ratio is
65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for
$32.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5%
would be incurred. What would be the cost of equity from new common stock? 
13.37%
 

19.27%
 

2.09
 

 
13.31%
 

ABC Inc.'s perpetual preferred stock sells for $97.50 per share, and it pays an $8.50 annual dividend. If
the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid
by investors. What is the company's cost of preferred stock for use in calculating the WACC?  
9.08%
 

130.31
 

 
ABC Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been
provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM
approach, what is the cost of common from retained earnings? 
10.93%
 

 
To help finance a major expansion, ABC Company sold a noncallable bond several years ago that now
has 20 years to maturity. This bond has a 9.25% annual coupon, paid semiannually, sells at a price of
$1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt
for use in the WACC calculation? 
5.08%
 

1.75
 

 
ABC Inc.’s common stock currently sells for $45.00 per share, the company expects to earn $2.75 per
share during the current year, its expected payout ratio is 70%, and its expected constant growth rate is
6.00%. New stock can be sold to the public at the current price, but a flotation cost of 8% would be
incurred. By how much would the cost of new stock exceed the cost of common from retained
earnings? 
0.37%
 

 
You were hired as a consultant to ABC Company, whose target capital structure is 40% debt, 15%
preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%,
and the cost of common using retained earnings is 12.75%. The firm will not be issuing any new stock.
What is its WACC?
9.26%
 
 
ABC Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow
at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The
before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45%
debt and 55% common equity. What is the company’s WACC if all the equity used is from retained
earnings? 
7.67%
 

 
Assume that you are a consultant to ABC Inc., and you have been provided with the following data: D1 =
$0.67; P0 = $27.50; and g = 8.00% (constant). What is the cost of common from retained earnings
based on the DCF approach? 
10.44%
 

33.11
 

16.56%
 

265.65
 

You were hired as a consultant to ABC Company, whose target capital structure is 35% debt, 10%
preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is
6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not
be issuing any new common stock. What is ABC's WACC?
8.15%
 

 
Assume that ABC Inc. hired you as a consultant to help estimate its cost of common equity. You have
obtained the following data: D0 = $0.90; P0 = $27.50; and g = 7.00% (constant). Based on the DCF
approach, what is the cost of common from retained earnings?
10.50%
 
2.57%

Basic Function of Financial System

A financial system functions as an intermediary and facilitates the flow of funds from the areas
of surplus to the areas of deficit. It is a composition of various institutions, markets, regulations
and laws, practices, money managers, analysts, transactions, and claims & liabilities.

The Money Market

 good place for individuals, banks, other companies, and governments to park cash for a short
period of time, usually one year or less. It exists so that businesses and governments that need
cash to operate can get it quickly at a reasonable cost, and so that businesses that have more
cash than they need can put it to use.
 The money market is the trade in short-term debt. It is a constant flow of cash between
governments, corporations, banks, and financial institutions, borrowing and lending for a term as
short as overnight and no longer than a year.
 The money market is a short-term lending system. Borrowers tap it for the cash they need to
operate from day to day. Lenders use it to put spare cash to work.
 The money market is less risky than the capital market while the capital market is potentially
more rewarding.

The Capital Market

 is where stocks and bonds are traded. Its movements from hour to hour are constantly
monitored and analyzed for clues as to the health of the economy at large, the status of every
industry in it, and the consensus for the short-term future.
 The overriding goal of the companies institutions that enter into the capital markets is to raise
money for their long-term purposes, which usually come down to expanding their businesses
and increasing their revenues. They do this by issuing stock shares and by selling corporate
bonds.
 The capital market is geared toward long-term investing. Companies issue stocks and bonds to
raise money to grow their businesses. Investors buy them to share in that growth.

The capital market is roughly divided into a primary market and a secondary market.

 A company that issues a round of stock or a new bond places it in the primary market for sale
directly to investors or institutions.
 If and when those buyers decide to sell their shares or bonds, they do so on the secondary
market. The original issuer of those stocks or bonds does not immediately benefit from their
resale, although companies certainly have an interest in the price of their stock shares rising
over time.

examples of financial markets

 stock market,
 the bond market,
 the commodities market.

Investment Procedure

 Establishing portfolio objectives;

 Developing the strategic and tactical asset allocation;
 Manager research, selection and configuration;
 Portfolio implementation; and.
 Ongoing monitoring and due diligence.
TIME VALUE OF MONEY

Future Value

PV(1+Interest)*n

Present Value

FV/(1+Interest)*n

Compounded Interest

P(1+r/t)*nt

APR= (Fees+Interest)/Principal

N ×365 ×100

Risk and Rates of Return

 Realized return is the holding period return earned in the past.

 Expected return is the expected holding-period return for a stock in the future based on
expected dividend yield and the expected price appreciation return.