Equity Investments - 3 - Free MCQ Practice Test with solutions, CFA Level

An analyst is valuing Hartwell Corp. using the Gordon Growth Model. The following data are available: next year's expected dividend (D₁) = $2.50, required rate of return = 10%, and the long-run constant dividend growth rate = 4%. Which of the following is closest to Hartwell's intrinsic value per share?

Priya Sharma is analyzing Redstone Manufacturing. She collects the following data: EBIT = $100 million, tax rate = 30%, depreciation and amortization = $15 million, capital expenditures = $20 million, increase in net working capital = $5 million, interest expense = $10 million, and net borrowing = $8 million. Which of the following correctly states both FCFF and FCFE for the current period?

An analyst values NovaTech Ltd. using a two-stage dividend discount model. D₀ = $1.50, the dividend growth rate is 12% for three years, after which it stabilizes at 4% in perpetuity. The required rate of return is 10%. Which of the following is closest to NovaTech's intrinsic value per share?

A company has a required rate of return of 11%, a long-run dividend growth rate of 5%, and a dividend payout ratio of 40%. An analyst wants to calculate both the justified leading P/E and trailing P/E. Which of the following correctly states both multiples?

An analyst gathers the following data for Blackstone Industrials: market capitalization = $500 million, total debt = $200 million, cash and cash equivalents = $50 million, and EBITDA = $100 million. The EV/EBITDA multiple for Blackstone Industrials is closest to:

Meridian Capital is valued using a single-stage FCFF model. Current-year FCFF = $80 million, WACC = 9%, long-run growth rate = 3%, total debt = $400 million, and shares outstanding = 50 million. The intrinsic equity value per share is closest to:

An analyst is evaluating whether to apply the H-model or a two-stage DDM to value a consumer staples company transitioning from high to stable growth. Regarding the H-model's assumption about the growth transition, which of the following is most accurate?

Oakfield Financial reports net income of $50 million, a required return on equity of 10%, and beginning book value of equity of $400 million. The residual income for the period is closest to:

An analyst applies the justified P/B approach to value Crestline Holdings using the formula: P/B = (ROE - g) / (r - g). Given ROE = 15%, required return on equity = 10%, and long-run growth rate = 5%, the justified P/B ratio is closest to:

A private equity analyst is valuing a minority stake in a closely held manufacturing firm. She applies a 20% discount to the indicated value because the shares cannot be readily converted to cash in a public market. This adjustment is best described as a:

An analyst considers applying the Gordon Growth Model to value several companies. The model is least appropriate when applied to a company where:

The following financial data are available for Vantage Logistics: net income = $60 million, interest expense = $15 million, tax rate = 30%, depreciation and amortization = $20 million, capital expenditures = $25 million, and increase in net working capital = $8 million. FCFF for the period is closest to:

An analyst observes that Pinnacle Software trades at a P/E ratio significantly above 1/r, where r is the required rate of return. Based on the franchise P/E framework, this premium above the no-growth P/E is most likely attributable to:

A research analyst argues that EV/EBITDA is a superior cross-company valuation metric compared to the price-to-earnings (P/E) ratio. Which of the following best supports this view?

In residual income valuation, an analyst must make an assumption about continuing residual income beyond the explicit forecast horizon. Which assumption is most consistent with the long-run economic expectation of perfect competition?

An equity analyst is deciding between a two-stage and three-stage dividend discount model for a technology company currently in rapid expansion. Regarding the three-stage DDM, which of the following best describes the role of the second stage?

A senior analyst calculates FCFF = $75 million for Atlas Energy. Additional data: interest expense = $10 million, tax rate = 35%, and net borrowing for the year = $12 million. FCFE for Atlas Energy is closest to:

An analyst is assigned to value an early-stage biotechnology firm with three consecutive years of negative net income but strong and growing revenues. Which valuation multiple is most appropriate as the primary valuation tool?

A valuation specialist is preparing an appraisal of a privately held regional bank using three approaches. Which of the following best describes the income approach to private company valuation?

An equity analyst applies Porter's Five Forces to the specialty chemicals industry and concludes that barriers to entry are high and buyer bargaining power is low. Relative to industries with weaker competitive positions, the most direct implication for equity valuation of specialty chemicals companies is:

Northgate Corp. has an ROE of 18%, a dividend payout ratio of 35%, a required rate of return of 14%, and is expected to pay D₁ = $2.00. Using the sustainable growth rate to estimate g and applying the Gordon Growth Model, Northgate's intrinsic value per share is closest to:

A transaction analysis reveals that acquirers have historically paid a control premium of 25% for comparable private companies. The implied discount for lack of control (DLOC) that a minority interest holder would face is closest to:

An analyst is choosing between residual income (RI) valuation and the dividend discount model (DDM) to value a high-growth technology company that reinvests all earnings and pays no dividends. The residual income model is most advantageous in this context because:

Creston Retail has a current stock price of $45.00. Trailing twelve-month EPS is $3.00, and consensus analyst forecasts estimate next year's EPS at $3.50. Which of the following correctly states the trailing and leading P/E ratios?

An analyst must select a valuation model for SynPath Genomics, a company currently in the growth stage of its industry life cycle with rapidly expanding revenues and above-market earnings growth expected to decline to a stable rate over the next decade. The most appropriate valuation approach is:

Seagate Holdings has a beginning book value per share of $20.00, ROE = 14%, required return on equity = 10%, and long-run growth rate = 5%. Using the residual income model, the intrinsic value per share of Seagate Holdings is closest to:

A valuation analyst applies the guideline public company method under the market approach to value a 15% minority stake in a private distribution company. After deriving an indicated value using public comparable multiples, which of the following adjustments is most appropriate?

An analyst models Vexford Industries using a single-stage FCFF model: FCFF₁ = $50 million, WACC = 10%, and terminal growth rate = 4%, yielding a base firm value of $833 million. She then evaluates two scenarios: (1) WACC increases to 11%; (2) long-run growth rate increases to 5%. Which of the following correctly compares the impact of the two changes on firm value?

An analyst is comparing the reliability of price-to-book (P/B) multiples across a set of companies in different industries. For which of the following company types is the P/B ratio least reliable as a primary valuation metric?

An analyst applies the H-model to value Delphi Consumer Brands. The following data are provided: D₀ = $2.00, current short-run growth rate (g_S) = 16%, long-run stable growth rate (g_L) = 4%, H = 4 (representing a transition half-life of 4 years), and required rate of return = 10%. Using the H-model formula P₀ = D₀[(1 + g_L) + H(g_S − g_L)] / (r − g_L), the intrinsic value per share is closest to: