MAC 412
2 N D ASSESSMENT
QUESTION 1
_______________ is the price per unit of
risk.
QUESTION 2
TRUE/FALSE: The security market line
is the graphical representation of the
capital asset pricing model, and it
depicts the relationship between risk-
free rate and required rate of return.
QUESTION 3
What do you call a group of
investments, such as stocks and
bonds, held by an investor?
QUESTION 4
TRUE/FALSE: The EBIT-EPS indifference
point is the level of earnings per share
(EPS) that results to same earnings
before interest and taxes (EBIT) for
both options.
QUESTION 5
What do you call the capital structure
that balances risk and return to
maximize the value of the firm?
QUESTION 6
Yieee Corporation is considering a project for the coming year that will
require a P100 million investment. The company plans to finance the project
by combining debt and equity, as follows:
Issue P20M of 10-year bonds at a price of 102, with an interest rate of
10%, and flotation cost of 3% of par.
Use P80M of funds generated from earnings retained in the business.
The expected market rate of return is 14%. The current rate of T-bills is 8%.
The beta coefficient of Yieee Corporation is 1.12. The corporate income tax
is 30%.
Using CAPM, what is the cost of equity capital?
QUESTION 7
Suppose a particular stock has a risk-free
rate of 5%, a price per unit of risk of 12%,
and a required rate of return of 19%. How
much is the quantity of risk (a measure of
volatility)?
QUESTION 8
DAE Company offers fashion clothes to its customers. Currently, the company
relied to its own capital and generated income for the operation of the business.
During the year, the company’s consultant urges them to issue debt because it
can lower cost of capital at a certain point. The following are the company’s plans:
Plan A: Issue 20,000 bonds with face amount of P100 each, yielding 7% interest.
Plan B: Issue 30,000 bonds with face amount of P100 each, yielding 9% interest.
The estimated EBIT for the period is 1,000,000, and the cost of equity for the Plan
A is 10% while 16% for Plan B.
Using the traditional approach, how much is the market value of the firm under
Plan A?
QUESTION 9
At present, An Dru Corporation’s capital structure is composed of
200,000 shares of common stocks outstanding with a market price
of 20 per share. It also has 4 million in 8% bonds and 2 million in
10%, 10 par value preferred stocks, both currently selling at par.
The company is considering a 3 million expansion program which
will be financed with issuing additional common stocks. If the
expansion program is undertaken, the company estimates that it
can earn EBIT of 2,000,000. The income tax rate is 30%. Solve for
the earnings per share if expansion program is followed.
END OF ASSESSMENT
QUESTION 1
_______________ is the price per unit of risk.
Market Risk Premium
QUESTION 2
TRUE/FALSE: The security market line is the
graphical representation of the capital asset pricing
model, and it depicts the relationship between risk-
free rate and required rate of return.
FALSE
QUESTION 3
What do you call a group of investments, such as
stocks and bonds, held by an investor?
Portfolio
QUESTION 4
TRUE/FALSE: The EBIT-EPS indifference point is the
level of earnings per share (EPS) that results to
same earnings before interest and taxes (EBIT) for
both options.
FALSE
QUESTION 5
What do you call the capital structure that balances
risk and return to maximize the value of the firm?
Optimal Capital Structure
QUESTION 6
Yieee Corporation is considering a project for the coming year that will require a
P100 million investment. The company plans to finance the project by
combining debt and equity, as follows:
Issue P20M of 10-year bonds at a price of 102, with an interest rate of
10%, and flotation cost of 3% of par.
Use P80M of funds generated from earnings retained in the business.
The expected market rate of return is 14%. The current rate of T-bills is 8%. The
beta coefficient of Yieee Corporation is 1.12. The corporate income tax is 30%.
Using CAPM, what is the cost of equity capital?
14.72%
QUESTION 7
Suppose a particular stock has a risk-free
rate of 5%, a price per unit of risk of 12%,
and a required rate of return of 19%. How
much is the quantity of risk (a measure of
volatility)?
1.17
QUESTION 8
DAE Company offers fashion clothes to its customers. Currently, the company relied to its
own capital and generated income for the operation of the business. During the year, the
company’s consultant urges them to issue debt because it can lower cost of capital at a
certain point. The following are the company’s plans:
Plan A: Issue 20,000 bonds with face amount of P100 each, yielding 7% interest.
Plan B: Issue 30,000 bonds with face amount of P100 each, yielding 9% interest.
The estimated EBIT for the period is 1,000,000, and the cost of equity for the Plan A is
10% while 16% for Plan B.
Using the traditional approach, how much is the market value of the firm under Plan A?
P10,600,000
QUESTION 9
At present, An Dru Corporation’s capital structure is composed of
200,000 shares of common stocks outstanding with a market price of 20
per share. It also has 4 million in 8% bonds and 2 million in 10%, 10 par
value preferred stocks, both currently selling at par. The company is
considering a 3 million expansion program which will be financed with
issuing additional common stocks. If the expansion program is
undertaken, the company estimates that it can earn EBIT of 2,000,000.
The income tax rate is 30%. Solve for the earnings per share if expansion
program is followed.
2.79
END OF ANSWER KEY
