CFA Level I subject

Equity Investments practice questions

Equity Investments questions test market organization, indexes, valuation inputs, industry analysis, and equity security characteristics. This section currently includes 159 public practice questions across 10 topic modules, with explanations, formulas, traps, and key takeaways.

Indicative public exam weight: 11-14%. Start with a topic guide when you need focused review, or use adaptive mode for mixed practice and due reviews.

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Company Analysis: Forecasting

16 public questions with explanations, formulas, and exam traps.

Company Analysis: Past and Present

16 public questions with explanations, formulas, and exam traps.

Company, Industry, and Forecasting

3 public questions with explanations, formulas, and exam traps.

Equity Valuation

7 public questions with explanations, formulas, and exam traps.

Equity Valuation: Concepts and Basic Tools

25 public questions with explanations, formulas, and exam traps.

Industry and Competitive Analysis

16 public questions with explanations, formulas, and exam traps.

Market Efficiency

16 public questions with explanations, formulas, and exam traps.

Market Organization and Structure

20 public questions with explanations, formulas, and exam traps.

Overview of Equity Securities

20 public questions with explanations, formulas, and exam traps.

Security Market Indexes

20 public questions with explanations, formulas, and exam traps.

Moderate

Equity Investments

Company Analysis: Forecasting

A consumer-products company reports current revenue of USD500 million. An analyst forecasts unit volume growth of 6.0% and average selling-price growth of 3.0%. Assuming no change in product mix, forecast revenue using exact multiplicative decomposition is closest to:

Easy

Equity Investments

Company Analysis: Forecasting

A top-down revenue forecast most likely begins with:

Easy

Equity Investments

Company Analysis: Forecasting

Scenario analysis in forecasting is best described as:

Moderate

Equity Investments

Company Analysis: Forecasting

A firm's industry volume is 10 million units. The industry is expected to grow 4%, the firm's market share is expected to rise from 8.0% to 8.5%, and average price is expected to rise from 50 to 51.50. Forecast revenue is closest to:

Moderate

Equity Investments

Company Analysis: Forecasting

A company has sales of 200, variable costs equal to 60% of sales, and fixed operating costs of 50. If sales rise 10%, the expected percentage increase in operating income is closest to:

Very Difficult

Equity Investments

Company Analysis: Forecasting

Sales are forecast to rise from 100 to 120. Net working capital is targeted at 15% of sales, and current net working capital is 15. Planned capital expenditures are 12. The forecast investment in net working capital plus capital expenditures is closest to:

Moderate

Equity Investments

Company Analysis: Forecasting

A company's real unit growth is forecast at 3.0% and price inflation at 4.0%. Using exact compounding, nominal revenue growth is closest to:

Easy

Equity Investments

Company Analysis: Past and Present

A company's business model is best described as:

Easy

Equity Investments

Company Analysis: Past and Present

A company with strong pricing power is most likely able to:

Moderate

Equity Investments

Company Analysis: Past and Present

A company has sales of 100, variable costs of 60, and fixed operating costs of 25. If sales increase by 5% and the cost structure is unchanged, operating income is expected to increase by approximately:

Moderate

Equity Investments

Company Analysis: Past and Present

For a retailer, a rising inventory turnover ratio, with stable gross margins and no supply disruptions, most likely indicates:

Very Difficult

Equity Investments

Company Analysis: Past and Present

A high-growth company increases revenue rapidly but consistently earns a return on invested capital below its cost of capital. The growth is most likely:

Very Difficult

Equity Investments

Company Analysis: Past and Present

A company reports accounting ROE of 9%. Investors require 11% on equity with similar risk. The most accurate interpretation is that:

Moderate

Equity Investments

Company, Industry, and Forecasting

An analyst begins a company report by identifying how the issuer converts inputs into revenue, which customers pay, why customers choose the product, and which costs scale with unit volume. This section is best characterized as analysis of the company's:

Moderate

Equity Investments

Company, Industry, and Forecasting

A mature industry has slow unit growth, high switching costs, few close substitutes, and suppliers whose input represents only a small portion of customers' total cost. Under Porter's Five Forces, the industry's profitability is most likely supported by:

Moderate

Equity Investments

Company, Industry, and Forecasting

A company with stable market share in a cyclical industry forecasts revenue by projecting industry units under three macro scenarios and applying expected company market share and price inflation. The most defensible critique is that the analyst should also explicitly forecast:

Moderate

Equity Investments

Equity Valuation

A stock just paid a USD2.40 dividend. Dividends are expected to grow indefinitely at 4.0%, and the required return is 10.0%. Under the Gordon growth model, the intrinsic value is closest to:

Moderate

Equity Investments

Equity Valuation

A firm just paid a USD1.60 dividend. Dividends are expected to grow by 18% for two years and 5% thereafter. The required return is 11%. The two-stage DDM value is closest to:

Moderate

Equity Investments

Equity Valuation

A nonconvertible preferred share pays an annual dividend of USD5.50. Investors require 8.5% on this preferred issue. The value is closest to:

Moderate

Equity Investments

Equity Valuation

A company's board declares a 10% stock dividend. Before the dividend, the share price is USD55 and 20 million shares are outstanding. Ignoring taxes and signaling effects, immediately after the stock dividend the share count and theoretical share price are closest to:

Moderate

Equity Investments

Equity Valuation

A company has expected next-year EPS of USD4.00, dividend payout ratio of 45%, required return of 11%, and sustainable dividend growth of 5%. The justified leading P/E is closest to:

Moderate

Equity Investments

Equity Valuation

A comparable-company analysis indicates an appropriate EV/EBITDA multiple of 8.2x. The target has EBITDA of USD120 million, debt of USD260 million, cash of USD45 million, minority interest of USD30 million, preferred stock of USD20 million, and 50 million common shares. The implied value per common share is closest to:

Moderate

Equity Investments

Equity Valuation

An asset-based valuation starts with reported assets of USD900 million. The analyst identifies an unrecorded brand worth USD80 million, PPE undervalued by USD70 million, and inventory overvalued by USD20 million. Liabilities are USD500 million and shares outstanding are 25 million. The asset-based value per share is closest to:

Easy

Equity Investments

Equity Valuation: Concepts and Basic Tools

An analyst estimates a stock's intrinsic value at 42 when its market price is 38. The stock is most appropriately described as:

Easy

Equity Investments

Equity Valuation: Concepts and Basic Tools

Using P/E, P/B, P/S, and P/CF multiples of comparable companies is best described as:

Easy

Equity Investments

Equity Valuation: Concepts and Basic Tools

The Gordon growth dividend discount model most likely values a common share as:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A non-callable, non-convertible preferred stock pays an annual dividend of 5.00. If the required return is 8.0%, its intrinsic value is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A stock just paid a dividend of 2.00. Dividends are expected to grow at 5.0%, and the required return is 10.0%. Using the Gordon growth model, intrinsic value is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A stock has a current price of 36, next year's expected dividend of 1.80, and expected constant dividend growth of 4.0%. The required return implied by the Gordon growth model is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A company has market value of common equity of 500, debt of 200, preferred stock of 50, cash of 30, and EBITDA of 90. Its EV/EBITDA multiple is closest to:

Very Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

A stock just paid a dividend of 1.00. Dividends are expected to grow 10% for two years and 4% thereafter. The required return is 9%. The intrinsic value using a two-stage DDM is closest to:

Very Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

A company has an expected dividend payout ratio of 40%, required return of 10%, and expected sustainable growth of 5%. The justified forward P/E is closest to:

Very Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

A stock begins the year at 50, ends the year at 48, and pays a dividend of 1.00. The investor's total shareholder return for the year is closest to:

Easy

Equity Investments

Industry and Competitive Analysis

In Porter's Five Forces, high barriers to entry most directly reduce the:

Easy

Equity Investments

Industry and Competitive Analysis

An industry whose revenues are relatively stable across the business cycle is best described as:

Moderate

Equity Investments

Industry and Competitive Analysis

A mature industry with excess capacity, slow demand growth, and high fixed costs is most likely to experience:

Moderate

Equity Investments

Industry and Competitive Analysis

A new environmental regulation that raises compliance costs for chemical producers is most directly a factor in the:

Very Difficult

Equity Investments

Industry and Competitive Analysis

An industry is growing rapidly, but entry barriers are low, products are undifferentiated, and buyers can easily switch suppliers. The most accurate conclusion is that:

Very Difficult

Equity Investments

Industry and Competitive Analysis

A company differentiates its product through a strong brand and high switching costs. The competitive effect is most likely:

Moderate

Equity Investments

Market Efficiency

A market contains thousands of analysts, low trading costs, mandatory real-time disclosure, and few legal barriers to short selling. An analyst's profitable strategy uses only past price patterns after transaction costs. The strategy's persistence would most directly challenge:

Moderate

Equity Investments

Market Efficiency

A portfolio manager estimates a stock's value using discounted expected cash flows of USD72 while the current quoted price is USD61. The most accurate interpretation is that USD72 and USD61 are, respectively:

Easy

Equity Investments

Market Efficiency

Weak-form market efficiency most directly implies that:

Easy

Equity Investments

Market Efficiency

Semi-strong-form market efficiency most directly implies that security prices reflect:

Moderate

Equity Investments

Market Efficiency

A company releases unexpectedly favorable earnings at 8:00 a.m. By 8:05 a.m., the price has adjusted and traders using only the announcement earn no abnormal return. This result is most consistent with:

Moderate

Equity Investments

Market Efficiency

A security's intrinsic value is best described as:

Moderate

Equity Investments

Market Efficiency

High trading costs, short-sale constraints, and difficulty financing arbitrage positions most likely:

Very Difficult

Equity Investments

Market Efficiency

A small-cap value strategy has earned abnormal returns in some long samples, but the return advantage is weaker after transaction costs and varies across periods. This evidence is best described as:

Easy

Equity Investments

Market Efficiency

An analyst believes prices reflect past prices, trading volume, all public information, and all material private information. The analyst's view is best described as:

Moderate

Equity Investments

Market Organization and Structure

A portfolio manager buys 1,000 shares at USD50 using 50% initial margin. The maintenance margin is 30%. Ignoring interest and dividends, the share price at which the manager would most likely receive a margin call is:

Easy

Equity Investments

Market Organization and Structure

The main function of a financial system is best described as:

Moderate

Equity Investments

Market Organization and Structure

A trader shorts 800 shares at USD40. The initial margin requirement is 50%. The shares are covered at USD34 after the trader pays a USD0.50 per share dividend to the lender. Ignoring commissions and margin interest, the return on the initial margin is closest to:

Easy

Equity Investments

Market Organization and Structure

A company sells additional shares to investors after it is already listed on an exchange. The transaction is most likely in the:

Moderate

Equity Investments

Market Organization and Structure

An institutional trader submits an order: 'Buy 50,000 shares at a limit price of USD24.20, good until canceled, all-or-nothing, settle regular way.' The all-or-nothing instruction is best classified as a:

Easy

Equity Investments

Market Organization and Structure

A dealer is best described as an intermediary that:

Moderate

Equity Investments

Market Organization and Structure

A security trades in a market where dealers continuously post bid and ask prices from their own inventories. A client submits a market order during a fast market after the displayed ask changes sharply. The trade execution is most accurately described as occurring in a:

Easy

Equity Investments

Market Organization and Structure

A trading system that matches investor orders using a central limit order book is best described as:

Moderate

Equity Investments

Market Organization and Structure

A stock is quoted at 19.96 bid and 20.04 ask. An investor who enters a market order to buy 500 shares will most likely pay, before commissions:

Moderate

Equity Investments

Market Organization and Structure

An investor buys 100 shares at 50 using 50% initial margin. One year later, the shares are sold for 55. Dividends are 1.00 per share, and margin interest is 0.50 per share. The investor's return on the margin transaction is closest to:

Very Difficult

Equity Investments

Market Organization and Structure

An investor buys shares at 80 using 40% initial margin. The maintenance margin is 25%. Ignoring interest and dividends, the share price at which the investor would receive a margin call is closest to:

Easy

Equity Investments

Market Organization and Structure

A market has narrow bid-ask spreads, large depth at the best quotes, timely trade reporting, and prices that quickly reflect new public information. The market is best described as having:

Moderate

Equity Investments

Overview of Equity Securities

A preferred share issue pays fixed dividends, requires missed dividends to be paid before common dividends resume, and allows holders to share in earnings above a specified threshold. The issue is best described as:

Moderate

Equity Investments

Overview of Equity Securities

A U.S. investor wants exposure to a Japanese company without trading ordinary shares in Japan and without settling in yen. The most appropriate instrument is most likely a:

Moderate

Equity Investments

Overview of Equity Securities

A company reports book value of equity of USD600 million and market capitalization of USD1.8 billion. Its accounting ROE is 14%, estimated cost of equity is 9%, and investors currently require 11% on comparable risk equity. The most accurate statement is:

Easy

Equity Investments

Overview of Equity Securities

Common shares are best described as securities that:

Easy

Equity Investments

Overview of Equity Securities

A cumulative preferred share is best described as preferred stock for which:

Easy

Equity Investments

Overview of Equity Securities

Under cumulative voting, a shareholder with 100 shares voting on five board seats has a total of how many votes to allocate across candidates?

Moderate

Equity Investments

Overview of Equity Securities

A company announces a 2-for-1 stock split. Ignoring signaling and market frictions, the immediate mechanical effect is most likely:

Moderate

Equity Investments

Overview of Equity Securities

An investor in Country A buys a locally traded certificate representing shares of a company listed in Country B. This security is best described as:

Moderate

Equity Investments

Overview of Equity Securities

A company has 20 million common shares outstanding at a market price of 18 per share. Common shareholders' book equity is 240 million. The company's market capitalization and price-to-book ratio are closest to:

Easy

Equity Investments

Overview of Equity Securities

An investor owns 8% of a company before a rights offering. The investor wants to maintain the same ownership percentage. The right most directly protecting this objective is:

Easy

Equity Investments

Overview of Equity Securities

Compared with a publicly traded common share, private equity securities most likely have:

Moderate

Equity Investments

Security Market Indexes

An equity index begins the month at 2,500 and ends at 2,625. During the month, constituent securities paid cash distributions equivalent to 40 index points. The index's total return is closest to:

Moderate

Equity Investments

Security Market Indexes

A price-weighted index initially contains three stocks priced at 60, 90, and 150, with divisor 3. The 150 stock then has a 3-for-1 split, and the divisor is adjusted immediately. At the next close, prices are 63, 87, and 55. The index return from immediately before the split to the next close is closest to:

Moderate

Equity Investments

Security Market Indexes

A float-adjusted market-capitalization-weighted index has three stocks. Initial data are: A: price 20, shares 10 million, float 80%; B: price 40, shares 5 million, float 60%; C: price 30, shares 8 million, float 25%. End-of-period prices are 22, 39, and 33. The index return is closest to:

Moderate

Equity Investments

Security Market Indexes

An index committee annually updates the list of eligible securities based on market capitalization and liquidity, and quarterly resets constituent weights to target weights without changing constituents. The annual process and quarterly process are best described, respectively, as:

Easy

Equity Investments

Security Market Indexes

A security market index is best described as:

Easy

Equity Investments

Security Market Indexes

Compared with a price return index, a total return index most likely includes:

Easy

Equity Investments

Security Market Indexes

An index provider removes companies that no longer meet eligibility rules and adds newly eligible companies. This process is best described as:

Moderate

Equity Investments

Security Market Indexes

An index begins the period at 1,200 and ends at 1,260. Dividends are equivalent to 18 index points. The total return is closest to:

Moderate

Equity Investments

Security Market Indexes

Three stocks in a price-weighted index have prices of 20, 30, and 50 at the start of the period and 22, 27, and 55 at the end. Assuming no divisor change, the price-weighted index return is closest to:

Moderate

Equity Investments

Security Market Indexes

Stock A has 10 million shares and falls from 20 to 18. Stock B has 1 million share and rises from 30 to 33. The market-capitalization-weighted index return for these two stocks is closest to:

Moderate

Equity Investments

Security Market Indexes

A two-stock float-adjusted index has Stock A with 10 million shares, an 80% float factor, and price from 40 to 44. Stock B has 20 million shares, a 50% float factor, and price from 30 to 27. The float-adjusted market-capitalization-weighted return is closest to:

Very Difficult

Equity Investments

Security Market Indexes

A price-weighted index has an index level of 100 and a divisor of 2.00 before a 2-for-1 split. Before the split, constituent prices are 40, 60, and 100. Immediately after the split, the third stock's price is 50. The new divisor is closest to:

Easy

Equity Investments

Security Market Indexes

A fundamentally weighted equity index most likely weights constituents by:

Moderate

Equity Investments

Market Organization and Structure

By enabling savers to compare expected returns across investments and borrowers to compare financing costs, financial markets establish the price of capital that equates the total supply of savings with the total demand for borrowing. This activity is best described as the financial system's function of:

Easy

Equity Investments

Market Organization and Structure

A negotiable bank certificate of deposit that matures in six months is best classified as a:

Moderate

Equity Investments

Market Organization and Structure

A trader holds a short position in a stock currently trading at USD 45 and wants a standing order that limits losses if the price rises. The most appropriate order is a:

Easy

Equity Investments

Market Organization and Structure

Liquid secondary markets most likely support primary markets by:

Moderate

Equity Investments

Market Organization and Structure

An exchange collects orders submitted during the night session and executes all of them against one another at a single market-clearing price at the open. No trades occur between these scheduled auctions. This trading arrangement is best described as a:

Moderate

Equity Investments

Market Organization and Structure

An investor purchases shares at USD 40.00 each, depositing the minimum initial margin of 25% and borrowing the remainder. Ignoring margin interest, commissions, and dividends, if the share price rises 7%, the return on the investor's equity is closest to:

Difficult

Equity Investments

Market Organization and Structure

A trader sells short 400 shares at USD 36.00 per share with an initial margin requirement of 50% and a maintenance margin requirement of 30%. Ignoring interest and dividends, the share price at which the trader would first receive a margin call is closest to:

Moderate

Equity Investments

Market Organization and Structure

An investor buys 200 shares at USD 25.00 per share using 60% initial margin, borrowing the rest at 8% annual interest. The stock pays no dividends. After exactly one year, the shares are sold at USD 30.00. Ignoring commissions, the one-year return on the investor's equity is closest to:

Easy

Equity Investments

Security Market Indexes

A security market index is least likely to be used to:

Moderate

Equity Investments

Security Market Indexes

In constructing a float-adjusted market-capitalization-weighted index, the shares most likely excluded from a constituent's index weight are shares:

Moderate

Equity Investments

Security Market Indexes

The index weighting method that most likely requires the most frequent rebalancing to maintain its target weights is:

Easy

Equity Investments

Security Market Indexes

A price return index begins the year at 800.00 and ends the year at 856.00. During the year, constituent securities paid dividends equal to 12.00 index points. The index's price return for the year is closest to:

Moderate

Equity Investments

Security Market Indexes

An equal-weighted index contains three stocks. Over the period, Stock X's price moves from USD 25.00 to USD 27.50, Stock Y's from USD 50.00 to USD 48.00, and Stock Z's from USD 40.00 to USD 42.40. No dividends are paid. The equal-weighted index return for the period is closest to:

Moderate

Equity Investments

Security Market Indexes

A market-capitalization-weighted index has three constituents: Stock A with 2 million shares outstanding at USD 50.00, Stock B with 12 million shares outstanding at USD 25.00, and Stock C with 5 million shares outstanding at USD 20.00. Stock B's weight in the index is closest to:

Difficult

Equity Investments

Security Market Indexes

A market-capitalization-weighted index contains two stocks. Stock A has 10 million shares outstanding; its price moves from USD 20.00 to USD 21.00 and it pays a dividend of USD 0.50 per share. Stock B has 2 million shares outstanding; its price moves from USD 50.00 to USD 51.00 and it pays a dividend of USD 1.00 per share. The index's total return for the period is closest to:

Moderate

Equity Investments

Market Efficiency

If equity markets are semi-strong-form efficient, an active strategy that selects stocks using published financial statements and consensus analyst forecasts is most likely to:

Difficult

Equity Investments

Market Efficiency

A regulator's study finds that corporate insiders, trading legally in their own companies' shares, earn persistent risk-adjusted abnormal returns. Taken alone, this evidence most likely indicates that the market is:

Moderate

Equity Investments

Market Efficiency

An investor quickly sells shares that have risen above cost but refuses to sell shares trading below cost, even after the companies' fundamentals have deteriorated, because she does NOT want to realize a loss. This behavior is most consistent with:

Easy

Equity Investments

Market Efficiency

An investor disregards her own analysis and buys a stock mainly because many other investors have been buying it. This behavior is best described as:

Difficult

Equity Investments

Market Efficiency

A calendar-based return anomaly was documented in academic research and widely publicized. In the two decades since publication, the pattern has largely disappeared from market data. This outcome is most consistent with:

Easy

Equity Investments

Market Efficiency

Compared with the price of a small-cap stock followed by no professional analysts, the price of a heavily traded large-cap stock followed by forty analysts most likely:

Very Difficult

Equity Investments

Market Efficiency

A stock's quarterly earnings exceed the consensus forecast by 20%. Its price rises 4.2% on the announcement day and then rises an additional 2.6% on a risk-adjusted basis over the following 45 trading days. A strategy of buying immediately after such positive surprises earns an average abnormal return of 1.8% per event after round-trip transaction costs of 0.8%. If this pattern persists, it most directly challenges:

Moderate

Equity Investments

Overview of Equity Securities

A shareholder owns 2,500 shares of a company that is electing four directors in a single election. The maximum number of votes the shareholder can cast for a single candidate under cumulative voting, compared with the maximum possible for a single candidate under statutory voting, is greater by:

Moderate

Equity Investments

Overview of Equity Securities

A company reports net income of USD 45 million for the year. Common shareholders' equity was USD 280 million at the beginning of the year and USD 320 million at the end of the year. Using average equity, the company's accounting return on equity for the year is closest to:

Easy

Equity Investments

Overview of Equity Securities

A convertible preference share most likely gives its holder the right to:

Moderate

Equity Investments

Overview of Equity Securities

Compared with otherwise identical non-putable common shares of the same issuer, putable common shares most likely:

Easy

Equity Investments

Overview of Equity Securities

For securities of a single issuer, which of the following most likely orders the securities from lowest to highest investment risk?

Moderate

Equity Investments

Overview of Equity Securities

A depositary bank establishes a depository receipt program based on a foreign company's shares without the participation of the foreign company. Holders of these depository receipts most likely:

Moderate

Equity Investments

Overview of Equity Securities

A company based in an emerging market raises capital from international investors by issuing US dollar-denominated depository receipts that trade on the London and Luxembourg stock exchanges. These securities are best described as:

Moderate

Equity Investments

Overview of Equity Securities

A publicly listed company that needs financing quickly sells a large block of newly issued common shares directly to a small group of institutional investors at a discount to the current market price. This transaction is best described as:

Easy

Equity Investments

Overview of Equity Securities

The market value of a company's common equity is most likely determined by:

Moderate

Equity Investments

Company Analysis: Past and Present

A beverage producer's revenue increased from USD 400.0 million to USD 441.0 million during the year, and units sold increased by 5.0%. Using exact multiplicative decomposition, the growth in average selling price is closest to:

Moderate

Equity Investments

Company Analysis: Past and Present

A company reports revenue of USD 800 million, cost of goods sold of USD 480 million, selling, general, and administrative expenses of USD 160 million, and interest expense of USD 24 million. The company's operating profit margin is closest to:

Moderate

Equity Investments

Company Analysis: Past and Present

A company reports operating profit of USD 150 million and has an effective tax rate of 20%. Total debt is USD 400 million and total equity is USD 600 million. The company's return on invested capital (ROIC) is closest to:

Easy

Equity Investments

Company Analysis: Past and Present

Which of the following operating expenses is most likely to vary directly with a company's revenue?

Easy

Equity Investments

Company Analysis: Past and Present

A company reports revenue growth of 12% for the year, of which 7 percentage points resulted from a business acquired during the year. The portion of growth attributable to the acquisition is best described as:

Difficult

Equity Investments

Company Analysis: Past and Present

An analyst compares two apparel retailers. Retailer X reports a gross margin of 28% and includes distribution and store occupancy costs in cost of goods sold. Retailer Y reports a gross margin of 41% and includes those same cost types in selling, general, and administrative expenses. The analyst's most appropriate initial conclusion is that:

Difficult

Equity Investments

Company Analysis: Past and Present

In Year 1, a company reported sales of USD 500 million and total operating costs of USD 420 million. In Year 2, sales were USD 600 million and total operating costs were USD 480 million. Using these two years to separate fixed and variable operating costs, the company's forecast operating profit at Year 3 sales of USD 700 million is closest to:

Difficult

Equity Investments

Company Analysis: Past and Present

A company has inventory turnover of 6.0, receivables turnover of 10.0, and payables turnover of 8.0. Using a 365-day year, the company's cash conversion cycle is closest to:

Difficult

Equity Investments

Company Analysis: Past and Present

A company reports net income of USD 230 million and pays preferred dividends of USD 30 million. Weighted average common shares outstanding are 50 million. Employees hold options on 4 million shares with an exercise price of USD 20, and the average market price of the stock during the year was USD 25. The company's diluted earnings per share is closest to:

Very Difficult

Equity Investments

Company Analysis: Past and Present

An online retailer collects cash from customers at the time of sale, holds inventory for about 30 days, and pays suppliers about 75 days after purchase, resulting in a negative cash conversion cycle. If the retailer's revenue grows rapidly, the most likely effect on its cash position from working capital is that:

Easy

Equity Investments

Industry and Competitive Analysis

Industry analysis is least likely used by an equity analyst to:

Easy

Equity Investments

Industry and Competitive Analysis

An analyst forms peer groups by clustering companies whose historical equity returns have been highly correlated with one another. This industry classification approach is best described as grouping by:

Moderate

Equity Investments

Industry and Competitive Analysis

A company earns 40% of its revenue from industrial machinery, 35% from consumer appliances, and 25% from financial services. Under a major commercial industry classification system, the company will most likely be:

Moderate

Equity Investments

Industry and Competitive Analysis

Producers in an industry purchase a critical component that is available from only two suppliers worldwide. The component has no close substitutes, it represents a large share of the producers' total costs, and switching to the other supplier requires a lengthy and costly requalification process. In a five-forces analysis of the producers' industry, these conditions most likely indicate:

Moderate

Equity Investments

Industry and Competitive Analysis

An industry's growth rate, once rapid, is now slowing sharply. Competitors increasingly compete on price, industry-wide overcapacity is emerging, and weaker firms are being acquired or are exiting. In the industry life-cycle model, this industry is most likely in the:

Moderate

Equity Investments

Industry and Competitive Analysis

An analyst evaluating the long-term demand outlook for hearing-aid manufacturers notes that the median age of the population in the company's key markets is rising steadily. Within a PESTLE analysis, this influence is best classified as:

Moderate

Equity Investments

Industry and Competitive Analysis

During the growth stage of the industry life cycle, rivalry among existing competitors is often relatively low. The most likely reason is that:

Moderate

Equity Investments

Industry and Competitive Analysis

To assess demand trends in an industry, an analyst conducts original interviews with the industry's distributors and end customers rather than relying on published trade-association reports. The analyst's information-gathering approach is best described as:

Difficult

Equity Investments

Industry and Competitive Analysis

A building-materials company has the lowest per-unit production costs in its industry, sells a largely undifferentiated product at the prevailing market price, and consistently earns operating margins above the industry average. The company's competitive strategy is best described as:

Difficult

Equity Investments

Industry and Competitive Analysis

A telecommunications-equipment industry long classified as mature experiences a major technological innovation that creates substantial new sources of demand. An analyst concludes that because the industry is mature, its next stage must be decline. The analyst's conclusion is best characterized as:

Easy

Equity Investments

Company Analysis: Forecasting

An analyst forecasts total industry demand using a macroeconomic model and then separately projects a company's market share and selling prices from its announced capacity additions and existing customer contracts. The analyst's revenue forecasting approach is best described as:

Easy

Equity Investments

Company Analysis: Forecasting

An analyst forecasts that a company's operating margin will move gradually from its current 18% toward the 12% industry average over five years, reasoning that competition typically erodes above-average profitability over time. This forecasting approach is best described as using:

Moderate

Equity Investments

Company Analysis: Forecasting

After completing a base-case earnings model, an analyst re-estimates forecast earnings per share after changing only the gross margin assumption by one percentage point, holding every other input unchanged. This exercise is best described as:

Moderate

Equity Investments

Company Analysis: Forecasting

In building a multi-year financial forecast, which expense is most appropriately projected as a constant percentage of revenue?

Moderate

Equity Investments

Company Analysis: Forecasting

A beverage company reports current-year revenue of USD 800 million. For next year, the analyst forecasts unit volume growth of 12% and average selling price growth of 7%. Next year's forecast revenue is closest to:

Moderate

Equity Investments

Company Analysis: Forecasting

A company currently has sales of USD 500 million. Variable operating costs equal 60% of sales, and fixed operating costs are USD 120 million per year. The analyst forecasts sales to grow 10% next year with an unchanged cost structure. Next year's forecast operating income is closest to:

Difficult

Equity Investments

Company Analysis: Forecasting

An analyst forecasts next year's revenue at USD 730 million and cost of goods sold at USD 547.5 million. The company is expected to maintain days sales outstanding of 40 days and days inventory on hand of 60 days. Using a 365-day year, the forecast combined balance of accounts receivable and inventory is closest to:

Difficult

Equity Investments

Company Analysis: Forecasting

An analyst forecasts a company's capital expenditures in two parts. Maintenance capital expenditure is estimated as current-year depreciation of USD 50 million adjusted upward for 4% equipment cost inflation. Growth capital expenditure is estimated as 15% of the forecast increase in revenue. Revenue is forecast to rise from USD 1,000 million to USD 1,140 million. Total forecast capital expenditure is closest to:

Very Difficult

Equity Investments

Company Analysis: Forecasting

A company reports current revenue of USD 1,200 million. For next year, an analyst forecasts unit volume growth of 5% and price growth of 3%. Cost of goods sold is forecast at 55% of revenue, variable selling costs at 10% of revenue, and fixed administrative costs at USD 300 million. Next year's forecast operating profit is closest to:

Easy

Equity Investments

Equity Valuation: Concepts and Basic Tools

An analyst estimates the value of a common share as the present value of the company's expected future free cash flows to equity, discounted at the required return on equity. This valuation approach is best described as a:

Easy

Equity Investments

Equity Valuation: Concepts and Basic Tools

An analyst who is confident in her model inputs estimates the intrinsic value of a common share at USD 58.00. The share currently trades in the market at USD 64.00. Based only on this comparison, the analyst would most appropriately conclude that the share is:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A profitable industrial company has never paid a dividend and states that it does NOT intend to pay one for the foreseeable future. An analyst wants to value the company's common shares using a discounted cash flow model. The most appropriate cash flow measure for this valuation is:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

An analyst compares three companies in the same industry whose debt-to-capital ratios range from 10% to 65%. One of the three reported negative earnings per share for the most recent year, although all three generated positive operating profit before depreciation. For comparing the valuations of these three companies, the most appropriate multiple is:

Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

An analyst considers using asset-based valuation to estimate the value of common equity. The approach is most likely to produce a reliable value estimate for:

Easy

Equity Investments

Equity Valuation: Concepts and Basic Tools

A non-callable, non-convertible perpetual preferred stock with a par value of USD 100 pays a fixed annual dividend of USD 4.80. If investors require a 6.0% return on this issue, the intrinsic value of one preferred share is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

An investor plans to buy a stock, hold it for one year, and then sell it. She expects the stock to pay a dividend of USD 1.50 at the end of the year and expects to sell the stock immediately afterward for USD 45.00. If her required return is 9.0%, the maximum price she should pay today is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A regulated water utility is expected to pay a dividend of USD 3.15 per share one year from today. Dividends are expected to grow at a constant 4.5% per year indefinitely, and the required return on the shares is 11.0%. Using the Gordon growth model, the intrinsic value per share is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A specialty chemicals company earns a return on equity of 14.0% and maintains a dividend payout ratio of 35%. Assuming both figures are sustained and no external equity is issued, the company's sustainable dividend growth rate is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A food retailer is expected to maintain a dividend payout ratio of 55%. Its required return on equity is 9.5%, and its dividends are expected to grow at a constant 3.5% per year. Based on these fundamentals, the company's justified forward P/E multiple is closest to:

Moderate

Equity Investments

Equity Valuation: Concepts and Basic Tools

A commercial printing company reports total assets of USD 1,900 million, total liabilities of USD 980 million, and preferred equity of USD 120 million. It has 40 million common shares outstanding, and its common stock trades at USD 47.00 per share. The company's price-to-book (P/B) ratio is closest to:

Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

An investor expects a stock to pay dividends of USD 2.00 one year from today and USD 2.20 two years from today. She expects to sell the stock for USD 60.00 immediately after receiving the second dividend. If her required return is 10.0%, the intrinsic value of the stock today is closest to:

Very Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

A branded footwear company just paid an annual dividend of USD 3.00 per share. An analyst forecasts dividends to grow at 12.0% per year for the next two years and at 3.0% per year thereafter. The required return on the shares is 10.0%. Using a two-stage dividend discount model, the intrinsic value per share today is closest to:

Very Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

A packaging manufacturer just paid an annual dividend of USD 1.90 per share. The company earns a stable return on equity of 12.0% and pays out 40% of earnings as dividends, and both are expected to continue indefinitely. The required return on the shares is 11.0%. Using the sustainable growth rate and the Gordon growth model, the intrinsic value per share is closest to:

Difficult

Equity Investments

Equity Valuation: Concepts and Basic Tools

A household-products company has a dividend payout ratio of 50%, expected constant dividend growth of 4.0% per year, and a required return on equity of 10.0%. Based on these fundamentals, the company's justified trailing P/E multiple (price relative to the most recent year's earnings) is closest to: