3/19/22, 2:39 PM AE321 Midterm Quiz 1

AE321 Midterm Quiz 1

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Multiple Choice

During the first five years after incorporation, the entity did not declare 1 point

dividends and funnels most cash to long-lived assets and R&D. When sales
were starting to rise, small dividends were declared. This is supportive of
which dividend theory? *

Life Cycle Theory

Trade-off Theory

Residual Theory

Dividend Signaling Theory

How many of the following is/are advantage(s) of issuing bonds to raise 1 point
capital? (A) Does not require interest payment when the entity is incurring
severe losses; (B) Generally requires fixed interest payments which can
easily be used in budgeting; (C) Interest is a tax-deductible expense. *

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

XYZ Corp. raised P50 million from bonds and P110 million from ordinary 1 point
shares. It invested P150 million of these into operating assets.
Subsequently, XYZ was offered a project that is similar to its operations but
requires a higher level of insurance coverage. This would require P10 million
in invested capital. What is the most likely discount rate to be used for
evaluating this project? *

A project-specific rate which is the adjusted weighted average cost of capital

A project-specific rate which is the adjusted incremental cost of capital

Weighted average cost of capital

Incremental cost of capital

[S1] By executing a rights offering, we acknowledge the preemptive right 1 point

of current ordinary shareholders. [S2] When an initial public offering has
been made, the underwriter would remit to the issuing entity cash equal to
the total issue price less any issuance cost chargeable against the former. *

Only S1 is true.

Only S2 is true.

Both are true.

Both are false.

Which lists the financing options from less to more risky? * 1 point

Preference shares, Ordinary shares

Ordinary shares, Bonds

Equity, Debt

Externally financed equity, Internally financed equity

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

Under this concept, the entity would first use a fixed ratio of retained 1 point
earnings and long-term debt financing to meet its financing needs *

Pecking Order Theory

Retained earnings breakpoint

Signalling Theory

Financial leverage

[S1] Preference shares are considered a hybrid type of financing because 1 point

dividends paid to preference shareholders are tax deductible. [S2]

Cumulative preference shares require the payment of dividends but the
timing of payment may be adjusted according to the wishes of the board
of directors. *

Only S2 is true.

Both are false.

Only S1 is true.

Both are true.

If the lease agreement involves a seller-lessee and a buyer-lessor, the lease 1 point
agreement is called *

tripartite lease agreement

finance lease

a sales and leaseback agreement

a leverage lease

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

[S1] Share warrants are often attached to debt instruments to entice 1 point
creditors to also become ordinary shareholders especially when the entity
would be unable to pay interests. [S2] An entity needing a large sum of
financing would prefer issuing bonds with share warrants over bonds with
conversion rights. *

Only S1 is true.

Only S2 is true.

Both are true.

Both are false.

In the context of choosing a share repurchase over declaring dividends, a 1 point

share repurchase would *

Decrease available financing whereas declaring dividends increase available

financing.

Increase earnings per share by decreasing the number of shares outstanding.

Decrease earnings per share by decreasing dividends payable

invlove all shareholders.

The cost of retained earnings is less than the cost of ordinary shares 1 point
because of *

the trust fund doctrine.

agency costs of free cash flow.

the issuance cost.

the taxation on earnings.

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

A bond has a nominal interest rate of treasury bond rate plus 5%. This same 1 point
bond requires the entity to have its investment property as collateral. This
would indicate that it is a/an *

Equipment trust bond with a variable rate

Mortgage bond with a fix rate

Equipment trust bond with a fix rate

Mortgage bond with a variable rate

[S1] When unrelated traders buy and sell stocks, the entity which issued the 1 point

shares will be able to obtain additional financing. [S2] The underwriting

syndicate is an underground group of individual assisting in the issuance of
shares and the collection of cash investments. *

Only S1 is true.

Only S2 is true.

Both are true.

Both are false.

ABC Corporation pays dividends of P10 per share every year. If the growth 1 point

rate of the equity is expected to be zero, then *

Dividends would continue to stay at P10 per share.

The value of equity would remain the same every year.

All earnings are paid out.

All of the above

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

A bond does not pay out regular interest. This means that * 1 point

This is a bad investment.

It is a junk bond.

It is a zero-coupon bond.

It is unsecured.

GHI Corp., a new and relatively unknown entity, has issued 5-year bonds 1 point

with an interest rate of 30%. These may also be traded in by the holder for
5 ordinary shares for every P1,000 face value of the bond. GHI added this
feature so that once it has better profits, it can entice creditors to be
investors instead. This would mean that the bond is a/an *

redeemable junk bond

convertible income bond

redeemable income bond

convertible junk bond

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

ABC would like to repurchase 50,000 of its ordinary shares. Investor X 1 point
offered to sell his 20,000 shares at P20 per share. Investor Y offered to sell
his 30,000 shares at P21 per share. Lastly, Investor Z offered to sell his
50,000 shares at P22 per share. ABC eventually paid Investors X and Y P21
per share to complete the repurchase. This is a/an *

Dutch auction self-tender repurchase

Open market operation

Selective buy-back

Fixed price tender offer

When the effective cost of debt is greater its the nominal cost, * 1 point

the initial net measurement of the bond is more than the face value.

The interest expense is less than the interest payments.

The net proceeds is more than the face value.

The entity records a discount on the bond payable.

How many of the following is/are advantage(s) of issuing ordinary shares to 1 point

raise capital? (A) No contractual obligation to pay dividends; (B) Presence

of easily determinable maturity date; (C) Dividends are tax-deductible
expenses. *

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

As a micro-enterprise, which sets of financing are the most likely to be 1 point

used? *

Public issuance of equity and debt

Tax holidays and leases

Retained earnings and convertible securities

Banks and venture capitalists

[S1] When the entity issues a long-term debt instrument, it exposes itself to 1 point
solvency risk. [S2] When the board of directors agreed to regularly issue
stock dividends, it faces liquidity risk. *

Only S2 is true.

Both are false.

Only S1 is true.

Both are true.

[S1] The dividend decision generally involves the same factors as the 1 point

earnings retention decision. [S2] Under the Dividend Relevance Theory,

dividends are valued more than capital gains. *

Only S1 is true.

Only S2 is true.

Both are true.

Both are false.

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3/19/22, 2:39 PM AE321 Midterm Quiz 1

ABC has profits of P100,000, P200,000, P250,000 and P200,000 during 1 point
the last four quarters. It paid dividends of P0.30, P0.60, P0.75 and P2.20.
Their dividend policy would most likely be *

Constant dividend per share

Constant dividend per share plus extra

Constant percentage of net earnings

Constant percentage of net earnings plus extra

* 1 point

Option 1

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