Equity Valuation: Concepts and Basic Tools practice questions

What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

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:

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:

Equity Investments

Equity Valuation: Concepts and Basic Tools

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

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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: