Equity Investments - 2 - Free MCQ Practice Test with solutions, CFA Level

An analyst is valuing Hartwell Corporation using the Gordon Growth Model. The stock's next expected dividend (D₁) is $2.40, the required return on equity is 10%, and the long-run dividend growth rate is 4%. What is the estimated intrinsic value of the stock?

Priya Desai, CFA, is converting a firm's FCFF to FCFE. She has the following data: FCFF = $130M, interest expense = $20M, tax rate = 30%, and net borrowing = $15M. Which of the following correctly expresses the relationship between FCFF and FCFE?

A research analyst gathers the following information for Crestline Manufacturing: shares outstanding = 50 million, share price = $10.00, total debt = $150M, cash and equivalents = $50M, and EBITDA = $120M. What is the firm's EV/EBITDA multiple?

An analyst calculates FCFF for Meridian Industries using the following data: EBIT = $200M, tax rate = 25%, depreciation and amortization = $30M, capital expenditures = $40M, increase in net working capital = $10M, and net borrowing = $15M. Which of the following is the correct FCFF?

A two-stage DDM is applied to Vantage Corp. D₀ = $1.00, the high-growth rate (g_S) = 20% for two years, the long-run growth rate (g_L) = 5%, and the required return (r) = 10%. What is the estimated intrinsic value?

Which of the following best describes the key assumption of the H-model for dividend discount valuation?

An analyst calculates the justified P/B ratio for Oakwood Financial. ROE = 15%, required return on equity (r) = 10%, and sustainable growth rate (g) = 5%. What is the justified P/B?

A stock trades at $50. Its trailing twelve-month EPS is $4.00 and next year's expected EPS is $4.50. Which of the following correctly states the leading and trailing P/E ratios?

Lexington Corp. reports net income of $50M and book value of equity of $400M. An analyst uses a required return on equity of 10%. What is the residual income (RI) for the period?

Using the bridge formula, an analyst computes FCFE from FCFF for Arcadia Technologies: FCFF = $130M, interest expense = $20M, tax rate = 30%, and net borrowing = $15M. What is FCFE?

A stock currently trades at $54. The next expected dividend (D₁) is $3.24 and the required return on equity is 12%. Using the Gordon Growth Model, what is the implied long-run dividend growth rate?

An analyst reviews EV/EBITDA data for three comparable firms:

Which of the following conclusions is most accurate?

An analyst values a 30% minority stake in a private firm. The control value of the entire firm is $10M. The discount for lack of control (DLOC) is 20% and the discount for lack of marketability (DLOM) is 15%. What is the estimated value of the minority stake?

An analyst applies the residual income model to value Bridgepoint Corp. Book value per share (B₀) = $20, required return on equity (r) = 10%, and annual residual income is expected to be $1.00 per share in perpetuity with no growth. What is the estimated intrinsic value per share?

A technology firm has never paid a dividend, retains all earnings for reinvestment, but generates significant positive free cash flow. Which valuation model is most appropriate for this firm?

An analyst computes the justified leading P/E for Cascade Retail. The required return on equity (r) = 12%, sustainable growth rate (g) = 6%, and the dividend payout ratio = 40%. What is the justified leading P/E?

Which of the following best describes the franchise P/E component in the P/E decomposition framework?

An analyst applies the H-model to value Clearbrook Energy: D₀ = $2.00, short-run growth rate (g_S) = 20%, long-run growth rate (g_L) = 5%, H = 4 (half-life of high-growth phase), and required return (r) = 11%. What is the estimated intrinsic value?

Under the justified P/B framework, if a firm's return on equity (ROE) equals its required return on equity (r), the justified P/B ratio is best described as:

An analyst derives FCFF from net income for Paragon Industrial. Net income = $80M, interest expense = $20M, tax rate = 30%, D&A = $25M, capital expenditures = $35M, and increase in net working capital = $8M. What is FCFF?

Which of the following scenarios most clearly indicates high bargaining power of suppliers within Porter's Five Forces framework?

An analyst values Northgate Holdings using the residual income model. Book value per share (B₀) = $100, annual residual income (RI) = $5 per share, required return (r) = 10%, and RI is assumed to persist as a perpetuity with no growth. What is the estimated intrinsic value per share?

A valuation analyst is determining the value of a closely held private manufacturing firm. She identifies three comparable publicly traded companies and uses their price-to-earnings and EV/EBITDA multiples to derive a value estimate. This approach is best classified as which private company valuation method?

A three-stage dividend discount model is most appropriate for valuing which of the following types of firms?

An analyst calculates enterprise value (EV) for Irongate Corp as $950M. Total market value of debt = $200M, preferred stock = $50M, and cash and equivalents = $30M. What is the implied equity market capitalization?

In private company valuation, the discount for lack of marketability (DLOM) is best described as a reduction in value reflecting:

An analyst computes the justified trailing P/E for Summit Consumer Goods: dividend payout ratio = 50%, required return (r) = 10%, and sustainable growth rate (g) = 4%. What is the justified trailing P/E?

Residual income valuation is most advantageous relative to a dividend discount model (DDM) when:

Which of the following best characterizes a firm operating in the mature phase of the industry life cycle?

An analyst values Horizon Tech using a two-stage FCFF model. FCFF₁ = $50M, growing at 10% per year for two years, then a stable growth rate of 4% thereafter. WACC = 9%. What is the estimated firm value?

Note: FCFF₂ = $55M; FCFF₃ = $60.5M.