5. Equity Valuation

Question: A valuation of a firm based on the comparison of the firm with the market value of other firms is known as a:

• A) peer group valuation Your Answer
• B) relative valuation Correct
• C) comparison valuation

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Question: A valuation of a firm based on the intrinsic value of the firm's investment characteristics is known as an:

• A) asset based valuation Correct Your Answer
• B) absolution valuation
• C) absolute valuation. Anna Heller, CFA, is a financial journalist and editor working for Money in the Morning, an online daily journal aimed at the investment industry. She is currently reviewing three articles, which staff writers have submitted to her for imminent publication. Heller has a few concerns with the articles, which she notes down as follows. Article One—The Modern Equity Valuation Process Introductory Paragraph: "The Grossman-Stiglitz paradox states that if security prices are informationally efficient there would be no reward to collecting and analyzing information. If this is the case no investor would collect and analyze information and the market price could not reflect intrinsic value. Further works have shown the easier intrinsic value is to estimate the bigger the potential divergence between price and value will be." Illustrative Example:

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Question: Why is the introductory paragraph in Article One incorrect?

• A) Most analysts believe that at some point intrinsic and market value will converge Correct
• B) The harder intrinsic value is to estimate the greater the potential divergence of market and intrinsic value
• C) Markets cannot be constantly informationally efficient as this would mean that intrinsic and market price would always be identical

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Question: Using Heller's suggestion of an analyst intrinsic value which is $1.20 too high in the illustrative example for Article One, calculate the valuation error and the actual mispricing: Valuation error Actual mispricing

• A) $1.20 $0.15 Correct
• B) $1.35 $0.15
• C) $0.15 $1.20

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Question: In response to Heller's point regarding the Linpan discussion in Article Two, which of the following correctly identifies the suggested valuation method?

• A) Going Concern Valuation
• B) Liquidation Value Correct Your Answer
• C) Orderly Liquidation Value

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Question: In the Toys to You Inc. (TTY) discussion in Article Two, which of the following would be the most appropriate conclusion for the writer to add?

• A) TTY is attempting a strategy of product differentiation by committing to high quality products but appears to be failing as revenues are lower than its competitors
• B) TTY is attempting a strategy of cost leadership by keeping prices equal to or lower than its competitors but appears to be failing as margins are lower than its competitor’s Your Answer
• C) TTY is attempting a strategy of cost leadership by producing with the lowest cost base but appears to be failing as margins are lower than its competitor’s Correct

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Question: Which of the following would not be an example of one of Michael Porter's 5 competitive forces applicable to Toys to You?

• A) A new chain of toy stores, Games & Goodies, has opened up in key Toys to You territories
• B) Toys to You’s biggest supplier have ‘due to unforeseen market conditions’ added a 15% premium to key product lines Your Answer
• C) Due to cash flow issues Toys to You have been forced to halve the marketing and advertising budget compared to the previous financial year Correct

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Question: Which of the following is NOT a use of asset valuation?

• A) Estimating inflation rates
• B) Issuing fairness opinions Correct
• C) Projecting the value of corporate actions

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Question: Important considerations for choosing an appropriate approach for valuing a given company are least likely to include:

• A) Is the model appropriate based on the quality and availability of input data? Correct
• B) Is the model consistent with the investor's IPS?
• C) Is the model suitable given the purpose of the analysis?

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Question: A valuation of a firm based on a review of other firms' price to earnings, price to sales, and price to return on investment ratios is an example of a:

• A) relative valuation Correct
• B) broad-based valuation
• C) fundamental valuation

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Question: When an analyst scrutinizes a firm's financial statements to try to discern how accurately the reported information reflects economic reality, and to evaluate the sustainability of the company's performance, the process is most likely to be referred to as a:

• A) quality of earnings analysis Correct
• B) comprehensive basis of accounting analysis
• C)

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Question: For an analyst valuing public equities, the relevant concept of value is most likely to be:

• A) fair market value Your Answer
• B) orderly liquidation value Correct
• C) intrinsic value

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Question: A wise analyst will examine a valuation to determine:

• A) ways to enhance a client's valuation Correct Your Answer
• B) how well it will be received by the firm's management
• C) its sensitivity to changes in expectations

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Question: An analyst is most likely to review the footnotes to a firm's financial statements to find information about the firm's:

• A) cash flow activities Your Answer
• B) accounting practices Correct
• C) operation

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Question: Notes to financial statements contain:

• A) important information about the firm's accounting practices and basis of presentation
• B) discussion of the firm's accounting practices and basis of presentation Correct
• C) a description of the firm’s financial condition and future prospects. Joe Dentice has an opportunity to buy 5% of Gold Star Oil, Inc., a closely held oil company. He wants to value the company so as to make a decision on a fair price to pay for the investment

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Question: Consider the steps in the top down valuation approach as it is applicable for Gold Star. Dentice should forecast the growth of:

• A) the overall economy, growth of the industry, and the growth rate of Gold Star Correct
• B) Gold Star, the growth of the oil industry, and then the growth of the overall economy
• C) each firm in the oil industry, the growth rate of the oil industry, and the growth rate of the economy

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Question: Which discounts must be taken into account while valuing the investment opportunity? Joe should take into account the:

• A) marketability, liquidity, and majority discounts in the valuation Correct
• B) marketability, liquidity, and minority discounts in the valuation
• C) marketability, liquidity, and control premium in the valuation

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Question: Which of the following would cause an analyst to have concern about a firm's quality of earnings?

• A) A firm books sales when orders are shipped
• B) The firm took a write off for a recently impaired asset Correct
• C) The gain on the sale of a plant was included in operating earnings

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Question: Financial Analyst Davey Jarvis, CFA, is evaluating Laura's Chocolates, Inc., which processes nut-based toffee for world-wide distribution. Which of the following steps is Jarvis most likely to take as part of the top-down valuation process?

• A) Learn / understand the business Correct
• B) Perform momentum-based technical analysis
• C) Evaluate price performance on an ongoing basis

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Question: Which of the following least accurately represents one of the primary steps of the equity valuation process described by Pinto, Henry, Robinson, and Stowe?

• A) Selecting a valuation model Correct
• B) Decision making
• C) Assessing corporate governance

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Question: Which of the following two ratios are likely to be used for determining value as a function of company peer benchmarks?

• A) Return on equity and net profit margin
• B) Price-to-sales and debt/equity Correct
• C) Price-to-earnings and price-to-book

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Question: The goal of asset valuation, based on the expected future cash flows of an asset, is to establish an asset's:

• A) intrinsic value Correct
• B) market value
• C) relative value

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Question: Overestimating the growth rate of a firm in using a valuation model would result in a value that is likely to be:

• A) too high Correct
• B) can't tell from this information
• C)

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Question: One justification for using multiple models to estimate firm value is:

• A) the ability to examine differences in estimated values can reveal how a model’s assumptions and the perspective of the analysis are affecting the estimated values Correct
• B) the ability to learn from each successive model and to make improvements
• C) the ability to streamline and economize the development process through repeated use of the same generic baseline

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Question: What are three factors that would make a firm's accounting earnings less of a gauge of future economic performance? Late filings, unusually:

• A) high amounts of loans to company insiders, and long tenure of senior management Correct
• B) high amounts of loans to company insiders, and short tenure of senior management
• C) low amounts of loans to company insiders, and short tenure of senior management

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Question: The present value of expected future cash flows is the firm's:

• A) liquidation value
• B) going-concern value Correct
• C) terminal value

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Question: A valuation of a firm based on the current market price of its assets - liabilities is referred to as the firm's:

• A) going-concern value
• B) liquidation value Correct
• C) operating value

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Question: Minority shareholders often do not have control of the price at which the firm will be sold or merged with another firm. In order to safeguard their interests, minority shareholders will often seek an analyst's opinion of the value of the firm. This opinion is referred to as a:

• A) second opinion
• B) minority opinion Correct
• C) fairness opinion

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Question: How can we account for different valuations for the same firm from several analysts even if they use the same required returns?

• A) Valuations are based on the analyst's expectations Correct
• B) The analysts may be biased with personal opinions about management
• C) Valuation models contain random errors

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Question: Valuation models for equities contain estimates of required returns and:

• A) known future cash flows Correct
• B) expected future cash flows
• C) an assumed continuation of past cash flows

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Question: An analyst performing an asset valuation to detect investor's expectations about the future value of the variables that affect a stock's price is most likely using the valuation for:

• A) reading the market
• B) projecting the value of corporate actions Correct
• C) generating a fairness opinion

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Question: Which of the following is least likely a use of equity valuation?

• A) Assessing corporate governance
• B) Projecting the value of corporate actions Correct
• C) Issuing fairness opinions

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Question: A valuation of a firm based on the assumption that the firm will continue to operate is referred to as its:

• A) going-concern value Correct
• B) operating value Your Answer
• C) status quo value

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Question: An ownership perspective can be important for an analyst determining the value of a share position. A controlling interest suggests the most appropriate model is a:

• A) cash flow model
• B) dividend discount model Correct Your Answer
• C) time series model

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Question: Disclosures of accounting practices and basis are most likely to be made in which part of a firm's financial reports?

• A) Footnotes Correct
• B) The audit report Your Answer
• C)

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Question: If the growth rate in dividends is too high, it should be replaced with:

• A) the growth rate in earnings per share Your Answer
• B) a growth rate closer to that of gross domestic product (GDP) Correct
• C) the average growth rate of the industry

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Question: Relative to traditional financial models like the dividend discount model, the biggest advantage of spreadsheet modeling is:

• A) accuracy of computations Correct Your Answer
• B) quantity of computations
• C) simplicity of computations

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Question: The current market price per share for Burton, Inc. is $33.33, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $2.00 last year on earnings of $2.50 a share. If the required rate of return is 12.00% and the expected grown rate in earnings and in dividends is 6%, the current market price is most likely:

• A) correctly valued Your Answer
• B) undervalued Correct
• C) overvalued

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Question: The most appropriate model for analyzing a profitable high-tech firm is the:

• A) H-model
• B) zero growth cash flow model Correct
• C) three-stage dividend discount model (DDM)

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Question: Which of the following dividend discount models assumes a high growth rate with a linear decline to a lower stable growth rate?

• A) Gordon growth model Correct
• B) H model
• C) Three-stage dividend discount model

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Question: Applying the Gordon growth model to value a firm experiencing supernormal growth would result in:

• A) overstating the value of the firm Correct
• B) understating the value of the firm
• C) a zero value

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Question: Xerxes, Inc. forecasts earnings to be permanently fixed at $4.00 per share. Current market price is $35 and required return is 10%. Assuming the shares are properly priced, the present value of growth opportunities is closest to:

• A) -$5.00 Correct
• B) +$5.00 Your Answer
• C) +$3.50

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Question: An investor projects the price of a stock to be $16.00 in one year and expected the stock to pay a dividend at that time of $2.00. If the required rate of return on the shares is 11%, what is the current value of the shares?

• A) $15.28 Correct
• B) $16.22 Your Answer
• C) $14.11

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Question: Given that a firm's current dividend is $2.00, the forecasted growth is 7%, declining over three years to a stable 5% thereafter, and the current value of the firm's shares is $45, what is the required rate of return?

• A) 10.5% Correct
• B) 9.8% Your Answer
• C) 7.8%

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Question: An investor buys shares of a firm at $10.00. A year later she receives a dividend of $0.96 and sells the shares at $9.00. What is her holding period return on this investment?

• A) -0.8% Correct
• B) +1.2% Your Answer
• C) -0.4%

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Question: An analyst has forecasted dividend growth for Triple Crown, Inc., to be 8% for the next two years, declining to 5% over the following three years, and then remaining at 5% thereafter. If the current dividend is $4.00, and the required return is 10%, what is the current value of Triple Crown shares based on a three-stage model?

• A) $91.11 Correct
• B) $73.68 Your Answer
• C) $92.23

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Question: The H-model is more flexible than the two-stage dividend discount model (DDM) because:

• A) terminal value is not sensitive to the estimates of growth rates
• B) initial high growth rate declines linearly to the level of stable growth rate Correct
• C)

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Question: JAD just paid a dividend of $0.80. Analysts expect dividends to grow at 25% in the next two years, 15% in years three and four, and 8% for year five and after. The market required rate of return is 10%, and Treasury bills are yielding 4%. JAD has a beta of 1.4. The estimated current price of JAD is closest to:

• A) $25.42 Correct
• B) $45.91
• C) $29.34

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Question: A firm currently has earnings of $3.14, and pays a dividend of $1.00, which is expected to grow at a rate of 10%. If the required return is 15%, what is the current value of the shares using the Gordon growth model?

• A) $38.98 Correct
• B) $22.00
• C) $69.08

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Question: An analyst has forecast that Apex Company, which currently pays a dividend of $6.00, will continue to grow at 8% for the next two years and then at a rate of 5% thereafter. If the required return is 10%, based on a two-stage model what is the current value of Apex shares?

• A) $133.13 Correct
• B) $127.78
• C) $126.24

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Question: Which of the following dividend discount models (DDMs) is most appropriate for modeling a mature company?

• A) Two-stage DDM
• B) H-model Correct
• C) Gordon growth model

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Question: An investor projects that a firm will pay a dividend of $1.00 next year and $1.20 the following year. At the end of the second year, the expected price of the shares is $22.00. If the required return is 14%, what is the current value of the firm's shares?

• A) $19.34 Correct
• B) $18.73
• C) $15.65

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Question: Historical information used to determine the long-term average returns from equity markets may suffer from survivorship bias, resulting in:

• A) deflating the mean return Correct
• B) unpredictable results
• C) inflating the mean return

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Question: Calculate the value of a share of Jakzach equity on 31 December 20x6, using the Gordon growth dividend model and the capital asset pricing model.

• A) $20.00 Correct
• B) $22.40
• C) $211.68

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Question: Calculate the profit margin component of Jakzach's return on equity for the year 20x6.

• A) 8.70% Correct
• B) 10.03%
• C) 19.91%

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Question: Calculate the sustainable growth rate of Jakzach on 31 December 20x6. Note: Your calculations should use 20x6 beginning-of-year balance sheet values.

• A) 1% Correct
• B) 9% Your Answer
• C) 10%

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Question: Given that a firm's current dividend is $2.00, the forecasted growth is 7% for the next two years and 5% thereafter, and the current value of the firm's shares is $54.50, what is the required rate of return?

• A) 10% Correct
• B) 9% Your Answer
• C) Can’t be determined

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Question: The sustainable growth rate, g, equals:

• A) earnings retention rate times the return on equity Correct
• B) pretax margin divided by working capital
• C) dividend payout rate times the return on assets Your Answer

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Question: If the risk-free rate is 6%, the equity premium of the chosen index is 4%, and the asset's beta is 0.8, what is the discount rate to be used in applying the dividend discount model?

• A) 10.80% Correct
• B) 7.80%
• C) 9.20%

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Question: An investor projects that a firm will pay a dividend of $1.25 next year, $1.35 the second year, and $1.45 the third year. At the end of the third year, she expects the asset to be priced at $36.50. If the required return is 12%, what is the current value of the shares?

• A) $32.78 Correct
• B) $29.21
• C) $31.16

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Question: The H model will NOT be very useful when:

• A) a firm is growing rapidly Correct
• B) a firm has low or no dividends currently
• C) a firm has a constant payout policy Your Answer

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Question: The debate over whether to use the arithmetic mean or geometric mean of market returns for the capital asset pricing model (CAPM):

• A) limits its usefulness in estimating the required return of an asset Correct
• B) has little practical effect because they are both very close
• C) was settled by the work of Harry Markowitz in 1972 Your Answer

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Question: Which of the following models would be most appropriate for a firm that is expected to grow at an initial rate of 10%, declining steadily to 6% over a period of five years, and to remain steady at 6% thereafter?

• A) A two-stage model
• B) The Gordon growth model Correct
• C) The H-model Your Answer

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Question: Analyst Kelvin Strong is arguing with fellow analyst Martha Hatchett. Strong insists that the dividend discount model can be used to calculate the required return for a stock, though only if the growth rate remains constant. Hatchett maintains that while such models are useful for calculating the value of a stock, they should not be used to calculate required returns. Who is CORRECT? Strong Hatchett

• A) Incorrect Incorrect Correct
• B) Correct Incorrect Your Answer
• C) Incorrect Correct

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Question: The volatility of equity returns requires us to use data from long time periods to compute mean returns. One problem that this causes is that:

• A) the past is rarely an indication of the future
• B) equity premiums vary over time with perceived risk Correct Your Answer
• C) inflation alters the value of the past returns

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Question: Kyle Star Partners is expected to have earnings in year five of $6.00 per share, a dividend payout ratio of 50%, and a required rate of return of 11%. For year 6 and beyond the dividend growth rate is expected to fall to 3% in perpetuity. Estimate the terminal value at the end of year five using the Gordon growth model.

• A) $27.27 Correct
• B) $37.50 Your Answer
• C) $38.63

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Question: CAB Inc. just paid a current dividend of $3.00, the forecasted growth is 9%, declining over four years to a stable 6% thereafter, and the current value of the firm's shares is $50, what is the required rate of return?

• A) 10.5% Correct
• B) 9.8%
• C) 12.7%

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Question: If we increase the required rate of return used in a dividend discount model, the estimate of value produced by the model will:

• A) increase
• B) decrease Correct
• C) remain the same

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Question: Jax, Inc., pays a current dividend of $0.52 and is projected to grow at 12%. If the required rate of return is 11%, what is the current value based on the Gordon growth model?

• A) $39.47
• B) unable to determine value using Gordon model Correct
• C) $58.24

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Question: What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 11.0% and a required return of 7.5%?

• A) $147 Correct
• B) $152 Your Answer
• C) $138

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Question: The Gordon growth model is well suited for:

• A) biotech firms Correct
• B) utilities Your Answer
• C) telecom companies

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Question: If we know the forecast growth rates for a firm's dividends and the current dividends and current value, we can determine the:

• A) net margin of the firm
• B) sustainable growth rate Correct
• C) required rate of return Your Answer

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Question: Which of the following would NOT be appropriate to value a firm with two expected growth stages? A(an):

• A) H-model Correct
• B) free cash flow model
• C) Gordon growth model

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Question: The value per share for Burton, Inc. is $32.00 using the Gordon Growth model. The company paid a dividend of $2.00 last year. The estimates used to calculate the value have changed. If the new required rate of return is 12.00% and expected growth rate in dividends is 6%, the value per share will increase by:

• A) 4.17% Correct
• B) 9.51%
• C) 10.42%

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Question: If the three-stage dividend discount model (DDM) results in extremely high value, the:

• A) growth rate in the stable growth period is probably too high Correct
• B) transition period is too short
• C) growth rate in the stable growth period is lower than that of gross national product (GNP)

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Question: In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned to increase its dividend at an annual rate of 5% for the foreseeable future. Analyst Anton Spears is using a required return of 9.5% for Smith Brothers stock. Smith Brothers stock trades for $52.17 per share and earned $3.01 per share over the last 12 months. The company paid a dividend of $2.15 per share during the last 12-month period, and its dividend-growth rate for the last five years was 9.2%. Using the Gordon Growth model, the share price for Smith Brothers stock is most likely:

• A) overvalued Correct
• B) undervalued Your Answer
• C) correctly valued

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Question: A firm has the following characteristics: Current share price $100.00. Next year's earnings $3.50. Next year's dividend $0.75. Growth rate 11%. Required return 13%. Based on this information and the Gordon growth model, what is the firm's justified leading price to earnings (P/E) ratio?

• A) 8.7 Correct
• B) 11.3.
• C) 10.7.

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Question: Which of the following is least likely a valid approach to determining the appropriate discount rate for a firm's dividends?

• A) Free cash flow to firm (FCFF) Correct
• B) Arbitrage pricing theory (APT)
• C) Capital asset pricing model (CAPM)

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Question: A firm's dividend per share in the most recent year is $4 and is expected to grow at 6% per year forever. If its shareholders require a return of 14%, the value of the firm's stock (per share) using the single-stage dividend discount model (DDM) is:

• A) $50.00 Correct
• B) $28.57
• C) $53.00

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Question: In using the capital asset pricing model (CAPM) to determine the appropriate discount rate for discounted cash flow models (DCFs), the asset's beta is used to determine the amount of:

• A) risk-free rate applicable to the time period of the investment
• B) equity premium Correct
• C) the expected return in addition to the return required by the risk of the position

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Question: Heather Callaway, CFA, is concerned about the accuracy of her valuation of Crimson Gate, a fast-growing telecommunications-equipment company that her firm rates as a top buy. Crimson currently trades at $134 per share, and Callaway has put together the following information about the stock: Most recent dividend per share $0.55 Growth rate, next 2 years 30% Growth rate, after 2 years 12% Trailing P/E 25.6 Financial leverage 3.4 Sales $1198 per share Asset turnover 11.2 Estimated market rate of return 13.2% Callaway's employer, Bates Investments, likes to use a company's sustainable growth rate as a key input to obtaining the required rate of return for the company's stock. Crimson's sustainable growth rate is closest to:

• A) 14.8% Correct
• B) 16.6% Your Answer
• C) 13.2%

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Question: Multi-stage dividend discount models can be used to estimate the value of shares:

• A) only under a limited number of scenarios Correct
• B) only when the growth rate exceeds the required rate of return Your Answer
• C) under an almost infinite variety of scenarios

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Question: Tri-coat Paints has a current market value of $41 per share with an earnings of $3.64. What is the present value of its growth opportunities (PVGO) if the required return is 9%?

• A) $0.56 Correct
• B) $1.27
• C) $3.92

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Question: Financial models such as the DDM represent a cornerstone of equity valuation from an academic standpoint. But in the real life, many analysts do not use the DDM. The least likely reason for this is:

• A) the model lacks the flexibility required to model values in the real world Correct
• B) modern research has shown that many of the old standbys do not work
• C) some of the assumptions required are impractical

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Question: If Cantel, Inc., has current earnings of $17, dividends of $3.50, and a sustainable growth rate of 11%, what is its return on equity (ROE)?

• A) 13.85% Correct
• B) 17.64%
• C) 11.91%

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Question: Which of the following dividend discount models has the limitation that a sudden decrease to the lower growth rate in the second stage may NOT be realistic?

• A) Two-stage dividend discount model Correct
• B) H model
• C) Gordon growth model

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Question: Zephraim Axelrod, CFA, is trying to determine whether Allegheny Mining is a good investment. He decides to use the Gordon Growth model to calculate how much dividend growth shareholders can expect. To that end, he determines the following: Share price: $18.12. Dividend: $0.32 per share. Beta: 1.94. Industry average estimated returns: 15%. Risk-free rate: 5.5%. Equity risk premium: 6.3% Based only on the information above, the implied dividend growth rate is closest to:

• A) 19.89% Correct
• B) 15.68%
• C) 10.27%

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Question: In which of the following stages is a firm most likely to distribute the highest proportion of its earnings in the form of dividends?

• A) Initial growth stage
• B) Transition stage
• C) Mature stage Correct

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Question: Which of the following models would be most appropriate for a firm that is expected to grow at 8% for the next three years, and at 6% thereafter?

• A) The Gordon growth model Correct
• B) The H-model
• C) A two-stage model

Page 25 | Status: ✅ Correct

Question: In its most recent quarterly earnings report, Smith Brothers Garden Supplies said it planned to increase its dividend at an annual rate of 13% for the foreseeable future. Analyst Clinton Spears has an annual return target of 15.5% for Smith Brothers stock. He decides to use the dividend-growth rate to back out another return estimate to test against his. Smith Brothers stock trades for $55 per share and earned $3.01 per share over the last 12 months. The company paid a dividend of $2.15 per share during the 12-month period, and its dividend- growth rate for the last five years was 9.2%. Using the Gordon Growth model, the required annual return for Smith Brothers stock is closest to:

• A) 17.42% Correct
• B) 19.18%
• C) 13.47%

Page 25 | Status: ✅ Correct

Question: If a stock expects to pay dividends of $2.30 per share next year, what is the value of the stock if the required rate of return is 12% and the expected growth rate in dividends is 4%?

• A) $19.17
• B) $28.75
• C) $29.90

Page 26 | Status: ⏸️ Unattempted

Question: Jand, Inc., currently pays a dividend of $1.22, which is expected to grow at 5%. If the current value of Jand's shares based on the Gordon model is $32.03, what is the required rate of return?

• A) 9%
• B) 7%
• C) 8%

Page 26 | Status: ⏸️ Unattempted

Question: Methods for estimating the terminal value in a DDM are least likely to include:

• A) PVGO
• B) the market multiple approach Correct
• C) the Gordon Growth Model

Page 26 | Status: ⏸️ Unattempted

Question: Which of the following actions will be least helpful for an analyst attempting to improve the predictive power of his scenario analysis?

• A) Using a spreadsheet rather than a calculator
• B) Limiting deviations from the core model Correct
• C) Acquiring more precise inputs. Bernadine Nutting has just completed several rounds of job interviews with the valuation group, Ancis Associates. The final hurdle before the firm makes her an offer is an interview with Greg Ancis, CFA, the founder and senior partner of the group. He takes pride in interviewing all potential associates himself once they have made it through the earlier rounds of interviews, and puts candidates through a grueling series of tests. As soon as Nutting enters his office, Ancis tries to overwhelm her with financial information on a variety of firms, including Turbo Financial Services, Aultman Construction, and Reality Productions. Ancis then moves on to Turbo Financial Services. Ancis has been following Turbo for quite some time because of its impressive earnings growth. Earnings per share have grown at a compound annual rate of 19% over the past six years, pushing earnings to $10 per share in the year just ended. He considers this growth rate very high for a firm with a cost of equity of 14%, and a weighted average cost of capital (WACC) of only 9%. He's especially impressed that the firm can achieve these growth rates while still maintaining a constant dividend payout ratio of 40%, which he expects the firm to continue indefinitely. With a market value of $55.18 per share, Ancis considers Turbo a strong buy. Ancis believes that Turbo will have one more year of strong earnings growth, with EPS rising by 20% in the coming year. He then expects EPS growth to fall 5 percentage points per year

Page 27 | Status: ⏸️ Unattempted

Question: Which of the following statements is least accurate? The two-stage DDM is most suited for analyzing firms that:

• A) are in an industry with low barriers to entry
• B) are expected to grow at a normalized rate after a fixed period of time Correct
• C) own patents for a very profitable product

Page 28 | Status: ⏸️ Unattempted

Question: What is the implied required rate of return for Reality Productions?

• A) 12.50%
• B) 11.00%
• C) 11.75%

Page 28 | Status: ⏸️ Unattempted

Question: Based upon its current market value, what is the implied long-term sustainable growth rate of Turbo Financial Advisors?

• A) 4.0%
• B) 0.3%
• C) 19.0%

Page 28 | Status: ⏸️ Unattempted

Question: What is the present value of Aultman's future investment opportunities as a percentage of the market price?

• A) 13.9%
• B) 8.1%
• C) 36.9%. UC Inc. is a high-tech company that currently pays a dividend of $2.00 per share. UC's expected growth rate is 5%. The risk-free rate is 3% and market return is 9%

Page 29 | Status: ⏸️ Unattempted

Question: What is the beta implied by a market price of $40.38?

• A) 1.02
• B) 1.20
• C) 1.16

Page 29 | Status: ⏸️ Unattempted

Question: Based on CAPM and the Gordon growth model, what is the value of the UC stock if the firm's retention ratio is 0.7, its tax rate is 40%, and its beta is 1.12?

• A) $9.72
• B) $20.79
• C) $44.49

Page 29 | Status: ⏸️ Unattempted

Question: Assuming a beta of 1.12, if UC's growth rate is 10% initially and is expected to decline steadily to a stable rate of 5% over the next three years, what is the price of UC stock?

• A) $47.82
• B) $46.61
• C) $47.67

Page 30 | Status: ⏸️ Unattempted

Question: The discounted dividend approach that we have used to value UC Inc. is most appropriate for valuing dividend-paying stocks in which:

• A) free cash flow is negative
• B) the investor takes a minority ownership perspective Correct
• C) dividends differ substantially from FCFE

Page 30 | Status: ⏸️ Unattempted

Question: UC Inc. had earnings of $3.00/share last year and a justified trailing P/E of 15.0. Is the stock currently overvalued, undervalued, or fairly valued if we consider a security trading within a band of ±10 percent of intrinsic value to be within a "fair value range"? At a market price of $40.38, UC Inc. is best described as:

• A) undervalued
• B) fairly valued
• C)

Page 30 | Status: ⏸️ Unattempted

Question: An analyst for a small European investment bank is interested in valuing stocks by calculating the present value of its future dividends. He has compiled the following financial data for Ski, Inc.: Earnings per Share (EPS) Year 0 $4.00 Year 1 $6.00 Year 2 $9.00 Year 3 $13.50 Note: Shareholders of Ski, Inc., require a 20% return on their investment in the high growth stage compared to 12% in the stable growth stage. The dividend payout ratio of Ski, Inc., is expected to be 40% for the next three years. After year 3, the dividend payout ratio is expected to increase to 80% and the expected earnings growth will be 2%. Using the information contained in the table, what is the value of Ski, Inc.'s, stock?

• A) $71.38
• B) $39.50
• C) $43.04

Page 31 | Status: ⏸️ Unattempted

Question: Ambiance Company has a current market price of $42, a current dividend of $1.25 and a required rate of return of 12%. All earnings are paid out as dividends. What is the present value of Ambiance's growth opportunities (PVGO)?

• A) $38.85
• B) $31.58
• C) $16.71

Page 31 | Status: ⏸️ Unattempted

Question: Obsidian Glass Company has current earnings of $2.22, a required return of 8%, and the present value of growth opportunities (PVGO) of $8.72. What is the current value of Obsidian's shares?

• A) $36.47
• B) $27.75
• C) $10.94

Page 32 | Status: ⏸️ Unattempted

Question: A firm pays a current dividend of $1.00 which is expected to grow at a rate of 5% indefinitely. If current value of the firm's shares is $35.00, what is the required return applicable to the investment based on the Gordon dividend discount model (DDM)?

• A) 7.86%
• B) 8.25%
• C) 8.00%

Page 32 | Status: ⏸️ Unattempted

Question: Recent surveys of analysts report long-term earnings growth estimates as 5.5% and a forecasted dividend yield of 2.0% on the market index. At the time of the survey, the 20-year U.S. government bond yielded 4.8%. According to the Gordon growth model, what is the equity risk premium?

• A) 2.7%
• B) 0.4%
• C) 7.5%

Page 32 | Status: ⏸️ Unattempted

Question: If an asset was fairly priced from an investor's point of view, the holding period return (HPR) would be:

• A) lower than the required return Correct
• B) the same as the required return
• C) equal to the alpha returns. Flyaweight Foods is a vertically integrated producer and distributor of low-calorie food products operating on a consumer club model. They have enjoyed rapid growth in the southwest United States during their 5-year history and are planning rapid expansion throughout the rest of the country. To fund their expansion, they are soliciting investments from a variety of venture capital groups. One of the groups considering a bid for Flyaweight is Angelcap Investors, a private equity fund run by Harry Moskowitz. Angelcap is interested in acquiring a 10% interest in Flyaweight. Moskowitz' partner, Bill Sharpless, runs the group doing due diligence on Flyaweight. He provides Moskowitz with financial data on the firm: Table 1: Flyaweight Foods Historical Data (Dollars per share) FY1 FY2 FY3 FY4 FY5 Sales per share 4.25 5.60 6.40 7.35 8.05 EPS 1.20 1.85 2.30 2.79 3.10 Dividends 0 0 0.10 0.20 0.35 Free Cash Flow –2.50 –2.10 –1.85 –1.60 –1.25 They ask Merle Muller, an analyst at the firm, to calculate an appropriate required return on Flyaweight. Muller collects the following market consensus information: Table 2: Current Market Conditions (Consensus estimates) Expected 5-year EPS growth 8.0% Expected 1-year Dividend yield 2.2% Current Treasury yield (10-year note) 4.8% Food industry beta (specialty segment) 0.95

Page 33 | Status: ⏸️ Unattempted

Question: Judging by the data in Table 1, the most appropriate method for valuing Flyaweight would be:

• A) the DDM because the firm has a history of dividend growth Correct
• B) residual income because the firm is likely to have high capital demands and negative cash flow for the foreseeable future
• C) justified P/E because it is a high-growth company

Page 34 | Status: ⏸️ Unattempted

Question: With respect to their statements about the use of the GGM and the H-model:

• A) only Moskowitz is correct Correct
• B) only Sharpless is correct
• C) both are correct

Page 34 | Status: ⏸️ Unattempted

Question: Which of the following is least likely to be a characteristic of a company in the initial growth phase?

• A) Low dividend payout ratio Correct
• B) High profit margin
• C) Return on equity equal to the required rate of return

Page 35 | Status: ⏸️ Unattempted

Question: Based on the forecast data in Table 3, Flyaweight's sustainable growth rate (SGR) is closest to which value? If asset turnover were to rise from the forecast level, what would be the impact on SGR? SGR Impact on SGR

• A) 22% Increase
• B) 22% Decline
• C) 24% Increase

Page 35 | Status: ⏸️ Unattempted

Question: IAM, Inc. has a current stock price of $40.00 and expects to pay a dividend in one year of $1.80. The dividend is expected to grow at a constant rate of 6% annually. IAM has a beta of 0.95, the market is expected to return 11%, and the risk-free rate of interest is 4%. The expected stock price two years from today is closest to:

• A) $43.94
• B) $43.49
• C) $41.03

Page 35 | Status: ⏸️ Unattempted

Question: If a firm has a return on equity of 15%, a current dividend of $1.00, and a sustainable growth rate of 9%, what are the firm's current earnings?

• A) $1.75
• B) $2.50
• C) $1.50

Page 36 | Status: ⏸️ Unattempted

Question: Dynamite, Inc., has current earnings of $26, current dividend of $2, and a returned on equity of 18%. What is its sustainable growth?

• A) 14.99%
• B) 16.62%
• C) 13.37%

Page 36 | Status: ⏸️ Unattempted

Question: Most firms follow a pattern of growth that includes several stages. The second stage is most likely to be referred to as the:

• A) decline stage Correct
• B) maturity stage
• C) transitional stage

Page 38 | Status: ⏸️ Unattempted

Question: Free cash flow to equity models (FCFE) are most appropriate when estimating the value of the firm:

• A) only for non-dividend paying firms
• B) to creditors of the firm
• C) to equity holders

Page 38 | Status: ⏸️ Unattempted

Question: If an asset's beta is 0.8, the expected return on the equity market is 10%, the retention ratio is 0.7, the dividend growth rate is 5%, and the appropriate discount rate for the Gordon model is 9%, the risk-free rate must be closest to:

• A) 5.0%
• B) 2.5%
• C) 3.8%

Page 38 | Status: ⏸️ Unattempted

Question: Which of the following is least likely a limitation of the two-stage dividend discount model (DDM)?

• A) most of the value is due to the terminal value
• B) Terminal value estimate is most sensitive to estimates of future dividends Correct
• C) the length of the high-growth stage is difficult to measure

Page 39 | Status: ⏸️ Unattempted

Question: The current market price per share for High-on-the-Hog, Inc. is $52.50, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $3.00 last year on earnings of $4.50 a share. If the required rate of return is 11.00% and the expected grown rate in earnings and in dividends is 5%, the current market price is most likely:

• A) correctly valued
• B) undervalued
• C) overvalued

Page 39 | Status: ⏸️ Unattempted

Question: What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 7.0% and a required return of 9.0%?

• A) $56
• B) $71
• C) $78

Page 39 | Status: ⏸️ Unattempted

Question: What is the difference between a standard two-stage growth model and the H-model?

• A) In the standard two-stage model, a fixed rate of growth is assumed for each stage, while the H-model assumes a linearly declining rate of growth in one stage
• B) The H-model assumes that earnings will dip in the middle of each stage and return to the previous rate by the period's end
• C) The H-model assumes a terminal value, while the standard two-stage model does not

Page 40 | Status: ⏸️ Unattempted

Question: If the expected return on the equity market is 10% and the risk-free rate is 3%, the required return on an asset with beta of 0.6 is closest to:

• A) 7.2%
• B) 6.0%
• C) 9.0%

Page 40 | Status: ⏸️ Unattempted

Question: In what stage of growth would a firm most likely NOT pay dividends?

• A) Declining stage Correct
• B) Transition stage
• C) Initial growth stage

Page 41 | Status: ⏸️ Unattempted

Question: An investor computes the current value of a firm's shares to be $34.34, based on an expected dividend of $2.80 in one year and an expected price of the share in one year to be $36.00. What is the investor's required rate of return on this investment?

• A) 10%
• B) 13%
• C) 11%. Julie Davidson, CFA, has recently been hired by a well-respected hedge fund manager in New York as an investment analyst. Davidson's responsibilities in her new position include presenting investment recommendations to her supervisor, who is a principal in the firm. Davidson's previous position was as a junior analyst at a regional money management firm. In order to prepare for her new position, her supervisor has asked Davidson to spend the next week evaluating the fund's investment policy and current portfolio holdings. At the end of the week, she is to make at least one new investment recommendation based upon her evaluation of the fund's current portfolio. Upon examination of the fund's holdings, Davidson determines that the domestic growth stock sector is currently underrepresented in the portfolio. The fund has stated to its investors that it will aggressively pursue opportunities in this sector, but due to recent profit-taking, the portfolio needs some

Page 41 | Status: ⏸️ Unattempted

Question: Using the Gordon growth model (GGM), what is the equity risk premium?

• A) 2.75%
• B) 3.25%
• C) 5.50%

Page 43 | Status: ⏸️ Unattempted

Question: Davidson needs to determine if the shares of Wellborn are currently undervalued or overvalued in the market relative to the shares' fundamental value. The estimated fair value of Wellborn shares, using a two-period dividend discount model (DDM), is:

• A) $27.69
• B) $27.58
• C)

Page 43 | Status: ⏸️ Unattempted

Question: As a part of her analysis, Davidson needs to calculate return on equity for both potential investments. What is last year's return on equity (ROE) for Samson shares?

• A) 6.5%
• B) 3.5%
• C) 9.5%

Page 44 | Status: ⏸️ Unattempted

Question: Davidson determines that over the past three years, Samson has maintained an average net profit margin of 8 percent, a total asset turnover of 1.6, and a leverage ratio (equity multiplier) of 1.39. Assuming Samson continues to distribute 35 percent of its earnings as dividends, Samson's estimated sustainable growth rate (SGR) is:

• A) 6.2%
• B) 17.8%
• C) 11.6%

Page 44 | Status: ⏸️ Unattempted

Question: Deployment Specialists pays a current (annual) dividend of $1.00 and is expected to grow at 20% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 8.5%, the current value of Deployment Specialists is closest to:

• A) $30.60
• B) $25.39
• C) $33.28

Page 44 | Status: ⏸️ Unattempted

Question: Suppose the equity required rate of return is 10%, the dividend just paid is $1.00 and dividends are expected to grow at an annual rate of 6% forever. What is the expected price at the end of year 2?

• A) $29.78
• B) $28.09
• C) $27.07

Page 45 | Status: ⏸️ Unattempted

Question: Which of the following is NOT a component of the sustainable growth rate formula using the DuPont model?

• A) EBIT/interest expense
• B) Net income/sales Correct
• C) Earnings retention ratio

Page 45 | Status: ⏸️ Unattempted

Question: An analyst has forecast that Hapex Company, which currently pays a dividend of $6.00, will grow at a rate of 8%, declining to 5% over the next two years, and remain at that rate thereafter. If the required return is 10%, based on an H-model what is the current value of Hapex shares?

• A) $126.24
• B) $129.60
• C)

Page 46 | Status: ⏸️ Unattempted

Question: A firm has the following characteristics: Current share price $100.00. Current earnings $3.50. Current dividend $0.75. Growth rate 11%. Required return 13%. Based on this information and the Gordon growth model, what is the firm's justified trailing price to earnings (P/E) ratio?

• A) 11.3
• B) 8.9
• C) 11.9

Page 47 | Status: ⏸️ Unattempted

Question: A firm has the following characteristics: Current share price $100.00. One-year earnings $3.50 One-year dividend $0.75. Required return 13%. Justified leading price to earnings 10. Based on the dividend discount model, what is the firm's assumed growth rate?

• A) 12.4%
• B) 8.6%
• C) 10.9%

Page 47 | Status: ⏸️ Unattempted

Question: One of the limitations of the dividend discount models (DDMs) is that they:

• A) are very sensitive to growth and required return assumptions Correct
• B) are conceptually difficult
• C) can only be used for companies that are experiencing stable growth

Page 48 | Status: ⏸️ Unattempted

Question: Supergro has current dividends of $1, current earnings of $3, and a sustainable growth rate of 10%. What is Supergro's return on equity?

• A) 20%
• B) 12%
• C) 15%

Page 48 | Status: ⏸️ Unattempted

Question: Which of the following is least likely a potential problem associated with the three-stage dividend discount model (DDM)? The:

• A) beta in the stable period is too high, resulting in an extremely low stock value Correct
• B) high-growth and transitional periods are too long, resulting in an extremely high stock value
• C) stable period payout ratio may be too high resulting in an extremely low value

Page 48 | Status: ⏸️ Unattempted

Question: Which of the following would be least appropriate to value using the Gordon growth model?

• A) Water utility companies
• B) Profitable rapidly-growing companies Correct
• C)

Page 48 | Status: ⏸️ Unattempted

Question: Supergro has current dividends of $1, current earnings of $3, and a return on equity of 16%, what is its sustainable growth rate?

• A) 12.2%
• B) 10.7%
• C) 8.9%

Page 49 | Status: ⏸️ Unattempted

Question: If an investor were attempting to capture an asset's alpha returns, the expected holding period return (HPR) would be:

• A) lower than the required return Correct
• B) the same as the required return
• C) higher than the required return

Page 49 | Status: ⏸️ Unattempted

Question: GreenGrow, Inc., has current dividends of $2.00, current earnings of $4.00 and a return on equity of 16%. What is GreenGrow's sustainable growth rate?

• A) 6%
• B) 9%
• C) 8%

Page 49 | Status: ⏸️ Unattempted

Question: Using Shotput's financial statements and Jeff Cape's estimates, calculate an equity value for Shotput using the constant growth DDM:

• A) $60.0m
• B) $61.2m
• C) $66.7m

Page 52 | Status: ⏸️ Unattempted

Question: Calculate an equity value using the assumptions made by Karlson (to the nearest $m):

• A) $73m
• B) $79m
• C) $87m

Page 52 | Status: ⏸️ Unattempted

Question: Is Savickas correct in his comments regarding the DDM?

• A) He is correct about the minority perspective, but not the sensitivity to the required rate of return assumption
• B) He is correct about the minority perspective and the required rate of return assumption
• C) He is incorrect in both statements

Page 53 | Status: ⏸️ Unattempted

Question: What adjustment to his calculation method does Capes need to make in to correctly calculate PVGO?

• A) The value of assets in place is given by the previous dividend multiplied by one plus the sustainable growth rate divided by the required rate of return
• B) The value of assets in place is given by earnings divided by the required rate of return
• C) The value of assets in place is given by earnings divided by the required rate of return minus the sustainable growth rate

Page 53 | Status: ⏸️ Unattempted

Question: Which of the following groups of statistics provides enough data to calculate an implied return for a stock using the two-stage DDM?

• A) Short-term growth rate, long-term growth rate, stock price, trailing 12-month profits
• B) P/E ratio, trailing 12-month profits, short-term PEG ratio, long-term PEG ratio, yield
• C) Yield, stock price, historical dividend-growth rate, historical profit-growth rate

Page 54 | Status: ⏸️ Unattempted

Question: The three-stage dividend discount model (DDM) allows for an initial period of:

• A) high growth, a transitional period of stable growth and a final declining growth phase
• B) stable growth, a transitional period of high growth and a final declining growth phase
• C) high growth, a transitional period of declining growth and a final stable growth phase

Page 54 | Status: ⏸️ Unattempted

Question: Sustainable growth is the rate that earnings can grow:

• A) without additional purchase of equipment Correct
• B) with the current assets
• C) indefinitely without altering the firm's capital structure

Page 54 | Status: ⏸️ Unattempted

Question: Q-Partners is expected to have earnings in ten years of $12 per share, a dividend payout ratio of 50%, and a required return of 11%. At that time, ROE is expected to fall to 8% in perpetuity and the trailing P/E ratio is forecasted to be eight times earnings. The terminal value at the end of ten years using the P/E multiple approach and DDM is closest to: P/E multiple DDM

• A) 96.32 85.14
• B) 96.00 89.14
• C) 96.32 85.71

Page 55 | Status: ⏸️ Unattempted

Question: Free cash flow approaches are the best source of value when:

• A) return on assets is falling
• B) dividends are not paid Correct Your Answer
• C) a firm has significant minority interest

Page 1 | Status: ❌ Incorrect

Question: The stable-growth free cash flow to the firm (FCFF) model is most useful in valuing firms that:

• A) have capital expenditures that are significantly higher than depreciation
• B) are growing at a rate significantly lower than that of the overall economy Correct Your Answer
• C) have capital expenditures that are not significantly higher than depreciation

Page 1 | Status: ❌ Incorrect

Question: Which of the following is most useful in analyzing firms that have high leverage and high growth?

• A) Two-stage free cash flow to the firm (FCFF) model Correct
• B) Two-stage free cash flow to equity (FCFE) model Your Answer
• C) Stable-growth free cash flow to the firm (FCFF) model

Page 1 | Status: ❌ Incorrect

Question: What is the most likely reason that you get an extremely low value from the three-stage FCFE model? Capital expenditures are significantly:

• A) higher than depreciation in the stable-growth phase Correct
• B) less than depreciation during the high-growth phase
• C)

Page 1 | Status: ✅ Correct

Question: Which of the following is one of the differences between FCFE and FCFF? FCFF does not deduct:

• A) operating expenses
• B) working capital investment
• C) interest payments to bondholders Correct

Page 3 | Status: ✅ Correct

Question: What is the expected growth rate in FCFF that Carson must have used to generate his valuation of $1.08 billion?

• A) 5% Correct
• B) 7% Your Answer
• C) 12%

Page 4 | Status: ❌ Incorrect

Question: If Carson had estimated FCFE under the assumption that Overhaul Trucking maintains a target debt-to-asset ratio of 36 percent for new investments in fixed and working capital, what would be his forecast of 2006 FCFE?

• A) $26.5 million Correct
• B) $9.6 million Your Answer
• C) $16.9 million

Page 4 | Status: ❌ Incorrect

Question: In forecasting free cash flows it is most common to assume that:

• A) historical levels of free cash flow will persist Correct
• B) the firm has no non-cash expenses Your Answer
• C) the firm capital structure is static

Page 4 | Status: ❌ Incorrect

Question: Free cash flow to the firm is equal to cash flow from operations minus fixed capital investment:

• A) minus after-tax interest expense Correct
• B) plus after-tax interest expense
• C) minus pre-tax interest expense

Page 5 | Status: ✅ Correct

Question: Dividends paid out to the shareholders:

• A) may be higher than free cash flow to equity FCFE Correct
• B) are always less than free cash flow to equity (FCFE)
• C) are always equal to free cash flow to equity (FCFE)

Page 5 | Status: ✅ Correct

Question: A biotech firm is currently experiencing high growth and pays no dividends. One of their product patents is scheduled to expire in 5 years. This firm would be a good candidate for which of the following valuation models?

• A) Two-stage dividend discount model (DDM) Correct
• B) Two-stage free cash flow to equity (FCFE)
• C) Single-stage free cash flow to equity (FCFE)

Page 5 | Status: ✅ Correct

Question: Free cash flow (FCF) approaches are the best source of value when:

• A) a firm has no preferred stock
• B) dividends are paid but do not reflect the company's capacity to pay dividends Correct
• C) a firm has significant minority interest Your Answer

Page 6 | Status: ❌ Incorrect

Question: If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

• A) earnings before interest and taxes (EBIT) Correct
• B) after-tax EBIT plus non-cash charges
• C) net income plus after-tax interest Your Answer

Page 6 | Status: ❌ Incorrect

Question: A firm has projected free cash flow to equity next year of $1.25 per share, $1.55 in two years, and a terminal value of $90.00 two years from now, as well. Given the firm's cost of equity of 12%, a weighted average cost of capital of 14%, and total outstanding debt of $30.00 per share, what is the current value of equity?

• A) $71.74 Correct
• B) $74.10 Your Answer
• C) $41.54

Page 6 | Status: ❌ Incorrect

Question: Which of the following types of company is the E-Model, a three-stage free cash flow to equity (FCFE) Model, best suited for? Companies:

• A) with patents or firms in an industry with significant barriers to entry Correct
• B) growing at a rate similar to or less than the nominal growth rate of the economy
• C) in high growth industries that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level

Page 7 | Status: ✅ Correct

Question: In computing free cash flow, the most significant non-cash expense is usually:

• A) deferred taxes
• B) capital expenditures
• C) depreciation Correct

Page 7 | Status: ✅ Correct

Question: Which of the following statements is least accurate? A firm's free cash flows to equity (FCFE) is the cash available to stockholders after funding:

• A) capital expenditure requirements Correct
• B) debt principal repayments
• C) dividend payments

Page 9 | Status: ✅ Correct

Question: In year 1, the forecasted free cash flow to equity (FCFE) for TOY, Inc. is closest to:

• A) $3.56 Correct
• B) $4.31
• C) $4.53

Page 10 | Status: ✅ Correct

Question: Comparing the current market value of TOY to our estimate of the stock's current market value, it is most likely that at the current market price of $56.00, TOY Inc. stock is:

• A) overvalued Correct
• B) undervalued
• C) fairly valued

Page 11 | Status: ✅ Correct

Question: Senior management of TOY Inc. is considering selling the company to a rival firm that has offered $450 million. If the current market price represents the fair value of equity and TOY Inc. maintains its target capital structure, the bid represents a price that is:

• A) less than the total value of the firm Correct
• B) about the same total value of the firm
• C) greater than the total value of the firm

Page 11 | Status: ✅ Correct

Question: Free cash flow to the firm (FCFF) adjusts earnings before interest and taxes (EBIT) by:

• A) deducting taxes, adding back depreciation, and deducting the investments in fixed capital and working capital Correct
• B) subtracting investments in fixed capital and working capital
• C) adding taxes, deducting depreciation, and adding back the investments in fixed capital and working capital

Page 11 | Status: ✅ Correct

Question: The ownership perspective implicit in the free cash flow to equity valuation approach is of:

• A) control Correct
• B) a preferred stockholder
• C) a minority position

Page 12 | Status: ✅ Correct

Question: The two-stage (stable growth) free cash flow to equity (FCFE) and free cash flow to the firm (FCFF) models typically assume:

• A) a high level of free cash flow for n years and then a lower level of free cash flow thereafter Correct
• B) high growth in free cash flow for n years and then constant growth in free cash flow forever after
• C) growth of free cash flow that declines to the required rate of return in the last stage

Page 12 | Status: ✅ Correct

Question: The stable-growth free cash flow to equity (FCFE) model is best suited for which of the following types of companies? Companies:

• A) with patents that will not expire for 20 or more years
• B) growing at a rate similar or less than the nominal growth rate of the economy Correct
• C) with significant barriers to entry

Page 12 | Status: ✅ Correct

Question: A firm has: Free cash flow to equity = $4.0 million. Cost of equity = 12%. Long-term expected growth rate = 5%. Value of equity per share = $57.14 per share. What will happen to the value of the firm if free cash flow to equity decreases to $3.2 million?

• A) The value will increase Correct
• B) There is insufficient information to tell
• C) The value will decrease

Page 13 | Status: ✅ Correct

Question: In the stable-growth FCFE model, an extremely low value can result from all of the following EXCEPT:

• A) the required rate of return is too high for a stable firm
• B) the expected growth rate is too high for a stable firm Correct
• C) capital expenditures are too high relative to depreciation

Page 13 | Status: ✅ Correct

Question: The primary difference between the three-stage DDM and the FCFE model is:

• A) growth rate assumptions
• B) the definition of cash flows Correct
• C) cost of equity

Page 14 | Status: ✅ Correct

Question: Which of the following items is NOT subtracted from the net income to calculate free cash flow to equity (FCFE)?

• A) Interest payments to bondholders Correct
• B) increase in accounts receivable Your Answer
• C) Increase in fixed assets

Page 16 | Status: ❌ Incorrect

Question: Which of the following is least likely to change as the firm changes leverage?

• A) Free cash flows to firm (FCFF) Correct
• B) Free cash flows to equity (FCFE) Your Answer
• C) Weighted average cost of capital (WACC)

Page 16 | Status: ❌ Incorrect

Question: The three-stage FCFE model might result in an extremely high value if:

• A) the growth rate in the stable-period is too low Correct
• B) the growth rate in the stable-period is too high
• C) the growth rate in the stable-period is equal to that of GNP. An analyst has prepared the following scenarios for Schneider Inc.: Scenario 1 Assumptions: Tax Rate is 40%. Weighted average cost of capital (WACC) = 12.0%. Constant growth rate in free cash flow (FCF) = 3.0%. Year 0, free cash flow to the firm (FCFF) = $30.0 million Target debt ratio = 10.0%. Scenario 2 Assumptions: Tax Rate is 40.0%. Earnings before interest and taxes (EBIT), capital expenditures, and depreciation will grow at 20.0% for the next three years. After three years, the growth in EBIT will be 2.0%, and capital expenditure and depreciation will offset each other. Weighted average cost of capital (WACC) = 12.0% Target debt ratio = 10.0%. Scenario 2 FCFF (in $ Year 0 Year 1 Year 2 Year 3 Year 4

Page 18 | Status: ✅ Correct

Question: Given the assumptions contained in Scenario 1, the value of the firm is most accurately estimated as:

• A) $343 million Correct
• B) $333 million
• C) $250 million

Page 19 | Status: ✅ Correct

Question: In Scenario 2, the value of the firm is closest to:

• A) $315 million Correct
• B) $346 million
• C) $321 million

Page 19 | Status: ✅ Correct

Question: The market value of Schneider Inc.'s stock is:

• A) $17.50 per share Correct
• B) $31.50 per share
• C) $15.75 per share. Ashley Winters, CFA, has been hired to value Goliath Communications, a company that is currently experiencing rapid growth and expansion. Winters is an expert in the communications industry and has had extensive experience in valuing similar firms. She is convinced that a value for the equity of Goliath can be reliably obtained through the use of a three-stage free cash flow to equity (FCFE) model with declining growth in the second stage. Based on up-to-date financial statements, she has determined that the current FCFE per share is $0.90. Winters has prepared a forecast of expected growth rates in FCFE as follows: Stage 1: 10.5% for years 1 through 3 Stage 2: 8.5% in year 4, 6.5% in year 5, 5.0% in year 6 Stage 3: 3.0% in year 7 and thereafter Moreover, she has determined that the company has a beta of 1.8. The current risk-free rate is 3.0%, and the equity risk premium is 5.0%. Other financial information: Outstanding shares 10 million Tax rate 40.0% Interest expense $750,000 Net borrowing −$100,000

Page 20 | Status: ✅ Correct

Question: The terminal value in year 6 is closest to:

• A) $16.86 Correct
• B) $21.68
• C) $25.29

Page 21 | Status: ✅ Correct

Question: The per-share value Winters should assign to Goliath's equity is closest to:

• A) $20.24 Correct
• B) $13.55
• C) $16.87

Page 21 | Status: ✅ Correct

Question: The weighted average cost of capital (WAC

• A) 10.5% Correct
• B) 10.9%
• C) 11.1%

Page 21 | Status: ✅ Correct

Question: The ownership perspective implicit in the dividend valuation approach is of:

• A) a preferred stockholder Correct
• B) control Your Answer
• C) a common stockholder

Page 22 | Status: ❌ Incorrect

Question: On a per share basis for a firm: Sales are $10.00. Earnings per share (EPS) is $4.00. Depreciation is $3.00. After-tax interest is $2.40. Investment in working capital is $1.50. Investment in fixed capital is $2.00. What is the firm's expected free cash flow to the firm (FCFF) per share?

• A) $5.90 Correct
• B) $7.50 Your Answer
• C) $2.90

Page 22 | Status: ❌ Incorrect

Question: The two-stage FCFE model is suitable for valuing firms that:

• A) have very high but declining growth rate in the initial stage Correct
• B)
• C) are in an industry with significant barriers to entry.

Page 22 | Status: ✅ Correct

Question: Using the information available in Exhibit 1, Operating Cash Flow (CFO) for Fishy Discs is closest to?

• A) £73,000
• B) £75,000
• C) £85,000

Page 27 | Status: ⏸️ Unattempted

Question: Using the information available in Exhibit 1, capital expenditure for Fishy Discs is closest to?

• A) £20,000
• B) £30,000
• C) £50,000

Page 27 | Status: ⏸️ Unattempted

Question: Using only the corporate finance firm's data in Exhibit 2 and their growth assumptions, the value of Fishy Discs Ltd.'s equity is closest to?

• A) £2,033,000
• B) £3,075,000
• C) £3,105,000

Page 28 | Status: ⏸️ Unattempted

Question: How many on of Tony's concerns are valid?

• A) Both
• B) Neither
• C) Only concern 2

Page 28 | Status: ⏸️ Unattempted

Question: How many of the FCFF definitions, in Exhibit 3, that Tony is studying are accurate?

• A) Both
• B) Neither
• C) Only FCFF from EBIT

Page 28 | Status: ⏸️ Unattempted

Question: The estimate of value from FCFE models will always be different than the value obtained using DDM, if:

• A) FCFE is higher than dividends Correct
• B) FCFE is greater than dividends, and the excess is not invested in zero NPV projects
• C) FCFE is higher than dividends, and the excess is invested in zero NPV projects

Page 29 | Status: ⏸️ Unattempted

Question: Terminal value in a multi-stage free cash flow to equity (FCFE) valuation model is often calculated as the present value of:

• A) a two-stage valuation model's price Correct
• B) free cash flow divided by the growth rate
• C) FCFE divided by the total of required rate on equity minus growth

Page 29 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding the FCFF models is most accurate? The two- stage FCFF model is more useful than the stable-growth FCFF model when the firm is growing at a rate:

• A) significantly lower than that of the overall economy
• B) not significantly higher than that of the overall economy Correct
• C) significantly higher than that of the overall economy

Page 29 | Status: ⏸️ Unattempted

Question: In using FCFE models, the assumption of growth should be:

• A) only consistent with the assumptions of capital spending and depreciation Correct
• B) independent from the assumptions of other variables
• C) consistent with assumptions of other variables

Page 30 | Status: ⏸️ Unattempted

Question: Assuming that the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by net income if:

• A) non-cash charges and interest charges are equal
• B) non-cash charges and interest charges are zero
• C) earnings before interest and taxes (EBIT) equals depreciation

Page 32 | Status: ⏸️ Unattempted

Question: Mark Washington, CFA, uses a two-stage free cash flow to equity (FCFE) discount model to value Texas Van Lines. His analysis yields an extremely low value, which he believes is incorrect. Which of the following is least likely to be a cause of this suspect valuation estimate?

• A) The forecast of working capital as a percentage of revenues in the stable growth period is not large enough to maintain the long-term sustainable growth rate
• B) Earnings are temporarily depressed because of a one-time extraordinary accounting charge in the most recent fiscal year
• C) The cost of equity estimate in the stable growth period is too high for a stable firm

Page 32 | Status: ⏸️ Unattempted

Question: Which of the following statements about the three-stage FCFE model is most accurate?

• A) There is a transition period where the growth rate declines Correct
• B) There is a final phase when growth rate starts to decline
• C) There is a transition period where the growth rate is stable

Page 32 | Status: ⏸️ Unattempted

Question: Assuming a constant debt-to-asset ratio, the base year FCFE is closest to:

• A) €3.00
• B) €3.80
• C) €4.85

Page 34 | Status: ⏸️ Unattempted

Question: Using the stable-growth FCFE model as suggested by Analyst #1, the value of Hiller stock is closest to:

• A) €51.58
• B) €54.29
• C) €57.00

Page 34 | Status: ⏸️ Unattempted

Question: Based on Analyst #2's estimates, the sum of the terminal value plus the FCFE for year 6 is closest to:

• A) €75.80
• B) €60.70
• C) €82.40

Page 34 | Status: ⏸️ Unattempted

Question: Based on Analyst #2's estimates, the value of Hiller stock is closest to:

• A) €60.70
• B) €59.70
• C) €57.00

Page 34 | Status: ⏸️ Unattempted

Question: Free cash flow to equity valuation uses which discount rate?

• A) Cost of equity Correct
• B) After-tax cost of debt
• C) Weighted average cost of capital. Beachwood Builders merged with Country Point Homes in December 31, 1992. Both companies were builders of mid-scale and luxury homes in their respective markets. In 2004, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point as of December 31, 2004. When the books closed on 2004, Beachwood had $140 million in debt outstanding due in 2012 at a coupon rate of 8%, a spread of 2% above the current risk free rate. Beachwood also had 5 million common shares outstanding. It pays no dividends, has no preferred shareholders, and faces a tax rate of 30%. When valuing common stock, Bernheim's valuation models utilize a market risk premium of 11%. The common equity allocated to Country Point for the spin-off was $55.6 million as of December 31, 2004. There was no long-term debt allocated from Beachwood. The Managing Director in charge of Bernheim's construction group, Denzel Johnson, is prepping for the valuation presentation for Beachwood's board with Cara Nguyen, one of the firm's associates. Nguyen tells Johnson that Bernheim estimated Country Point's net income at $10 million in 2004, growing $5 million per year through 2008. Based on Nguyen's calculations, Country Point will be worth $223.7 million at the end of 2008. Nguyen decided to use a cost of equity for Country Point in the valuation equal to its return on equity at the end of 2004 (rounded to the nearest percentage point). Nguyen also gives Johnson the table she obtained from Beachwood projecting depreciation (the only non-cash charge) and capital expenditures: $(in millions) 2004 2005 2006 2007 2008 Depreciation 5 6 5 6 5

Page 35 | Status: ⏸️ Unattempted

Question: Regarding the statements by Johnson and Nguyen about FCF in 2006:

• A) only Nguyen is incorrect Correct
• B) only Johnson is incorrect
• C) both are incorrect

Page 36 | Status: ⏸️ Unattempted

Question: If FCInv equals Fixed Capital Investment and WCInv equals Working Capital Investment, which statement about FCF and its components is least accurate?

• A) FCFE = (EBIT × (1 − tax rate)) + Depreciation − FCInv − WCInv Correct
• B) FCFF = (EBITDA × (1 − tax rate)) + (Depreciation × tax rate) − FCInv − WCInv
• C) WCInv is the change in the working capital accounts, excluding cash and short-term borrowings

Page 36 | Status: ⏸️ Unattempted

Question: Given Nguyen's estimate of Country Point's terminal value in 2008, what is the growth assumption she must have used for free cash flow after 2008?

• A) 3%
• B) 7%
• C) 9%

Page 36 | Status: ⏸️ Unattempted

Question: The value of beta for Country Point is:

• A) 1.27
• B) 1.00
• C) 1.09

Page 37 | Status: ⏸️ Unattempted

Question: The following information pertains to the Harrisburg Tire Company (HT

• A) $300M
• B) $420M
• C) $540M

Page 37 | Status: ⏸️ Unattempted

Question: Currently, a firm has no outstanding debt. If the firm would add a small amount of leverage to its balance sheet, what should be the impact on the firm's value? There would be:

• A) no change in firm value
• B) an increase in value due to interest tax shields Correct
• C)

Page 37 | Status: ⏸️ Unattempted

Question: The repurchase of 20% of a firm's outstanding common shares will cause free cash flow to the firm (FCFF) to:

• A) remain the same
• B) decrease
• C) increase

Page 38 | Status: ⏸️ Unattempted

Question: The following information is derived from the financial records of Brown Company for the year ended December 31, 2004: Sales $3,400,000 Cost of Goods Sold (COGS) (2,100,000) Depreciation (300,000) Interest Paid (200,000) Gain on Sale of Old Equipment 400,000 Income Taxes Paid (300,000) Net Income $900,000 Brown issued bonds on June 30, 2004 and received proceeds of $4,000,000. Old equipment with a book value of $2,000,000 was sold on August 15, 2004 for $2,400,000 cash. Brown purchased land for a new factory on September 30, 2004 for $3,000,000, issuing a $2,000,000 note and paying the balance in cash. Cash flow from operations less capital expenditures is:

• A) $200,000
• B) $6,200,000
• C)

Page 38 | Status: ⏸️ Unattempted

Question: In what ways are dividends different from free cashflow to equity (FCFE)?

• A) There is no difference. Dividends must equal FCFE Correct
• B) Dividends are often viewed as "sticky." Managers are reluctant to radically change the dividend payout policy while FCFE often has immense variability
• C) Companies often use FCFE as a signal of positive future growth prospects while dividends are not used for signaling

Page 39 | Status: ⏸️ Unattempted

Question: If a firm is valued using FCFF, the relevant discount rate is the:

• A) after-tax weighted average cost of capital Correct
• B) before-tax weighted average cost of capital
• C) before-tax cost of equity. The following information was collected from the financial statements of Bankers Industrial Corp (BIC) for the year ended December 31, 2013. Earnings before interest and taxes (EBIT) = $6.00 million. Capital expenditures = $1.25 million. Depreciation expense = $0.63 million. Working capital additions = $0.59 million. Cost of debt = 10.50%. Cost of equity = 16.00%. Stable growth rate for FCFF = 7.00%. Stable growth rate for FCFE = 10.00%. Market value of debt = $20.00 million. Book value of debt = $22.50 million

Page 39 | Status: ⏸️ Unattempted

Question: The free cash flow to the firm (FCFF) for the current year is closest to:

• A) $2.39 million
• B) $2.31 million
• C) $3.57 million

Page 40 | Status: ⏸️ Unattempted

Question: The estimated value of the firm is closest to:

• A) $50 million Correct
• B) $47 million
• C) $38 million

Page 40 | Status: ⏸️ Unattempted

Question: If the estimated value of the free cash to the firm (FCFF) for year 0 is $2.4 million, the value per share of BIC stock, based on the stable growth model, is closest to:

• A) $39
• B) $55
• C) $61

Page 40 | Status: ⏸️ Unattempted

Question: The current market price of BIC is $62.50 per share, and the current year's FCFE is $1.75 million. Using a two-stage growth model to find the estimated the firm's value, the current market price BIC is most accurately described as:

• A) overvalued
• B) undervalued
• C) fairly valued

Page 41 | Status: ⏸️ Unattempted

Question: A firm's free cash flow to equity (FCFE) in the most recent year is $50M and is expected to grow at 5% per year forever. If its shareholders require a return of 12%, the value of the firm's equity using the single-stage FCFE model is:

• A) $714M
• B) $417M
• C) $750M

Page 41 | Status: ⏸️ Unattempted

Question: An increase in financial leverage will cause free cash flow to equity (FCFE) to:

• A) increase in the year the borrowing occurred Correct
• B) decrease or increase, depending on its circumstances
• C) decrease in the year the borrowing occurred

Page 43 | Status: ⏸️ Unattempted

Question: Optimal capital structure is the mix of debt and equity that will maximize the value of the firm and minimize:

• A) the firm's cost of capital Correct
• B) the amount of taxable profit reported
• C) agency costs of equity

Page 43 | Status: ⏸️ Unattempted

Question: Free cash flow (FCF) approaches are the best source of value when:

• A) FCFs track profitability closely over the analyst's forecast horizon Correct
• B) a firm has preferred stock
• C) a firm is paying a dividend that is higher than the industry average

Page 43 | Status: ⏸️ Unattempted

Question: Sudbury Industries expects FCFF in the coming year of 400 million Canadian dollars ($), and expects FCFF to grow forever at a rate of 3 percent. The company maintains an all-equity capital structure, and Sudbury's required rate of return on equity is 8 percent. Sudbury Industries has 100 million outstanding common shares. Sudbury's common shares are currently trading in the market for $80 per share. Using the Constant-Growth FCFF Valuation Model, Sudbury's stock is:

• A) overvalued
• B) undervalued
• C) fairly valued

Page 44 | Status: ⏸️ Unattempted

Question: A control perspective is most consistent with which of the following valuation approaches?

• A) Price to enterprise value Correct
• B) Dividends
• C) Free cash flow (FCF)

Page 44 | Status: ⏸️ Unattempted

Question: Valuation with free cash flow to equity and free cash flow to the firm:

• A) both use the cost of equity Correct
• B) use different discount rates
• C)

Page 44 | Status: ⏸️ Unattempted

Question: SOX, Inc., expects high growth in the next 4 years before slowing to a stable future growth of 3%. The firm is assumed to pay no dividends in the near future and has the following forecasted free cash flow to equity (FCFE) information on a per share basis in the high- growth period: Year 1 Year 2 Year 3 Year 4 FCFE $3.05 $4.10 $5.24 $6.71 High-growth period assumptions: SOX, Inc.'s, target debt ratio is 40% and a beta of 1.3. The long-term Treasury Bond Rate is 4.0%, and the expected equity risk premium is 6%. Stable-growth period assumptions: SOX, Inc.'s, target debt ratio is 40% and a beta of 1.0. The long-term Treasury Bond Rate is 4.0% and the expected equity risk premium is 6%. Capital expenditures are assumed to equal depreciation. In year 5, earnings are $8.10 per share while the change in working capital is $2.00 per share. Earnings and working capital are expected to grow by 3% a year in the future. What is the present value on a per share basis for SOX, Inc.?

• A) $70.49
• B) $77.15
• C) $64.24

Page 45 | Status: ⏸️ Unattempted

Question: Which of the following types of companies is the two-stage free cash flow to equity (FCFE) model best suited for? Companies:

• A) growing at a rate similar to or less than the nominal growth rate of the economy
• B) with patents or firms in an industry with significant barriers to entry Correct
• C) in high growth industries that will face increasing competitive pressures over time, leading to a gradual decline in growth to a stable level. Harrisburg Tire Company (HTC) forecasts the following for 2013: Earnings (net income) = $600M. Dividends = $120M. Interest expense = $400M. Tax rate = 40.0%. Depreciation = $500M. Capital spending = $800M. Total assets = $10B (book value and market value). Debt = $4B (book value and market value). Equity = $6B (book value and market value). Target debt to asset ratio = 0.40. Shares outstanding = 2.0 billion The firm's working capital needs are negligible, and HTC plans to continue to operate with the current capital structure. The tire industry demand is highly dependent on demand for new automobiles. Individual companies in the industry don't have much influence on the design of automobiles and have very little ability to affect their business environment. The demand for new automobiles is highly cyclical but demand forecast errors tend to be low

Page 46 | Status: ⏸️ Unattempted

Question: The firm's earnings growth rate is most accurately estimated as:

• A) 6.4%
• B) 8.0%
• C) 4.8%

Page 47 | Status: ⏸️ Unattempted

Question: The 2013 forecasted free cash flow to equity is:

• A) $300M
• B) $340M
• C) $420M

Page 47 | Status: ⏸️ Unattempted

Question: If the total market value of equity is $6.0 billion and the growth rate is 8.0%, the cost of equity based on the stable growth FCFE model is closest to:

• A) 7.0%
• B) 15.0%
• C) 14.0%

Page 47 | Status: ⏸️ Unattempted

Question: The beta for HTC is 1.056, the risk-free rate is 5.0% and the market risk premium is 10.0%. The weighted average cost of capital for HTC is closest to:

• A) 13.34%
• B) 15.56%
• C)

Page 47 | Status: ⏸️ Unattempted

Question: Free cash flow to the firm valuation uses which discount rate?

• A) Cost of equity
• B) After-tax cost of debt
• C) Weighted average cost of capital

Page 48 | Status: ⏸️ Unattempted

Question: Which of the following free cash flow to the firm (FCFF) models is most suited to analyze firms that are growing at a faster rate than the overall economy?

• A) No growth FCFF model
• B) Two-stage FCFF model Correct
• C) High growth FCFF model. Jon Binkster, CFA, is researching a U.S. based company Busicomb Inc., who have just released their financial statements for the year ended December 20x5. These financial statements are included in Exhibits 1–3 below. Exhibit 1 Busicomb Inc. Annual Income Statement For the Year Ended December 31, 20x5 (in $ millions) Sales 721.9 Operating expenses (417.0) Operating profit 304.9

Page 48 | Status: ⏸️ Unattempted

Question: Assuming an ROE on 11.5%, which of the following is the best estimate of the sustainable growth rate for Busicomb Inc.?

• A) 10.1%
• B) 8.7%
• C) 11.5%

Page 53 | Status: ⏸️ Unattempted

Question: Which of the following is the most accurate estimate of the value of a share of Busicomb Inc.'s common stock using the H model variant of the dividend discount model (DDM)? Work to the nearest $ and assume the cost of equity is 12.3%.

• A) $33 per share
• B) $32 per share
• C) $42 per share

Page 53 | Status: ⏸️ Unattempted

Question: Calculate the forecasted free cash flow to equity (FCFE) for 2x12.

• A) 10.5
• B) –9.5
• C) –49.5

Page 57 | Status: ⏸️ Unattempted

Question: Regarding the handbook's statements on free cash flow techniques: Statement 1 Statement 2

• A) Correct Correct
• B) Incorrect Correct
• C) Correct Incorrect

Page 57 | Status: ⏸️ Unattempted

Question: Regarding the handbook's statements on free cash flow techniques: Statement 3 Statement 4

• A) Correct Correct
• B) Incorrect Correct
• C) Correct Incorrect

Page 57 | Status: ⏸️ Unattempted

Question: The most appropriate model for valuing Fite Inc. is the:

• A) free cash flow to equity model Correct
• B) free cash flow to the firm model
• C) dividend discount H-model

Page 58 | Status: ⏸️ Unattempted

Question: Assuming Patrick is correct to use free cash flow to the firm to value Fite Inc.; the value of the firm is closest to:

• A) 379
• B) 412
• C) 22. Michael Ballmer is an equity analyst with New Horizon Research. The firm has historically relied on dividend and residual income valuation models to value equity, but the firm's director of research, Doug Leads, has decided that the firm needs to incorporate free cash flow valuations into its practices. Therefore, Leads decides to send Ballmer to a seminar on free cash flow valuation. Upon his return from the convention, Ballmer is excited to share his newfound knowledge with his co-workers. Ballmer is asked to give a debriefing to New Horizon's team of equity analysts, where he makes the following statements: Statement 1: Free cash flow to the firm is the amount of the firm's cash flow that is free for the firm to use in making investments after cash operating expenses have been covered. Statement 2: Free cash flow to equity, then, is the amount of the firm's cash flow that is free for equity holders after covering cash operating expenses, working

Page 58 | Status: ⏸️ Unattempted

Question: Regarding statements 1 and 2, are Ballmer's interpretations of free cash flow to the firm (FCFF) and free cash flow to equity (FCFE) CORRECT?

• A) No, only one interpretation is correct
• B) Yes, both interpretations are correct
• C) No, neither interpretation is correct

Page 59 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding forecasting FCFE using the components of free cash flow method and net borrowing is most accurate?

• A) Net income already accounts for interest expense; therefore, net borrowing is not needed
• B) Investment in fixed capital and net borrowing are assumed to offset each other Correct
• C) The target debt-to-asset ratio accounts for the financing of new investment in fixed capital and working capital

Page 59 | Status: ⏸️ Unattempted

Question: Should dividend-based and free cash flow from equity (FCFE) based valuations result in different equity values for a firm?

• A) Yes, dividend-based valuations would be higher for firms with large, consistent dividends
• B) No, both models should result in the same value
• C) Yes, the free cash flow from equity valuation would be higher if there were a premium associated with control of the firm

Page 60 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding the effect a decrease in leverage has on a firm's free cash flow from equity (FCFE) is most accurate?

• A) Current year FCFE decreases, but future FCFE will be increased Correct
• B) FCFE is unaffected by changes in leverage
• C) Current year FCFE increases, but future FCFE will be reduced

Page 60 | Status: ⏸️ Unattempted

Question: When using the two-stage FCFE model, if increases in working capital appear too high the analyst should:

• A) switch to a three-stage model Correct
• B) use changes that are based upon a working capital ratio that is closer to the industry average
• C) normalize them to be equal to zero

Page 60 | Status: ⏸️ Unattempted

Question: If the investment in fixed capital and working capital offset each other, free cash flow to the firm (FCFF) may be proxied by:

• A) earnings before interest and taxes (EBIT)
• B) net income plus non-cash charges plus after-tax interest Correct
• C) net income plus after-tax interest

Page 61 | Status: ⏸️ Unattempted

Question: An analyst is performing an equity valuation for a minority equity position in a dividend paying multinational. The appropriate model for this analysis is most likely:

• A) FCFF approach Correct
• B) FCFE approach
• C) The Dividend Discount approach

Page 61 | Status: ⏸️ Unattempted

Question: The value of stock under the two-stage FCFE model will be equal to:

• A) present value (PV) of FCFE during the extraordinary growth period plus the terminal value
• B) present value (PV) of FCFE during the extraordinary growth and transitional periods plus the PV of terminal value
• C)

Page 61 | Status: ⏸️ Unattempted

Question: In the two-stage FCFE model, the required rate of return for calculating terminal value should be:

• A) lower than the required rate of return used for the high-growth phase Correct
• B) higher than the required rate of return used for the high-growth phase
• C) equal to the average required rate of return for the industry

Page 62 | Status: ⏸️ Unattempted

Question: A three-stage free cash flow to the firm (FCFF) is typically appropriate when:

• A) growth is currently low and will move through a transitional stage to a final stage wherein growth exceeds the required rate of return
• B) growth is currently high and will move through a transitional stage to a steady-state growth rate
• C) the required rate of return is less than the growth rate in the last stage

Page 62 | Status: ⏸️ Unattempted

Question: Industrial Light currently has: Free cash flow to equity = $4.0 million. Cost of equity = 12%. Weighted average cost of capital = 10%. Total debt = $30.0 million. Long-term expected growth rate = 5%. What is the value of equity?

• A) $57,142,857
• B) $27,142,857
• C) $60,000,000

Page 63 | Status: ⏸️ Unattempted

Question: The difference between free cash flow to equity (FCFE) and free cash flow to the firm (FCFF) is:

• A) after-tax interest and net borrowing Correct
• B) earnings before interest and taxes (EBIT) less taxes
• C) before-tax interest and net borrowing

Page 63 | Status: ⏸️ Unattempted

Question: A firm currently has the following per share values: Cash flow from operations (CFO) is $49.50. Investment in fixed capital is $40.00. Net borrowing is $7.50. What is the current per share free cash flow to equity (FCFE)?

• A) $16.50
• B) $97.00
• C) $17.00

Page 64 | Status: ⏸️ Unattempted

Question: A common approach to forecasting free cash flows is to:

• A) project net income and expected capital expenditures
• B) project earnings before interest and taxes (EBIT) and expected capital expenditures
• C) calculate historical free cash flow and apply an expected growth rate

Page 64 | Status: ⏸️ Unattempted

Question: The following table provides forecasts for next year on a per share basis for TOY Inc.: Item Forecast Earnings $5.00 Capital Expenditures $2.40 Depreciation $1.80 Change in Working Capital $1.70 TOY Inc.'s target debt ratio is 30% and has a required rate of return of 12%. Earnings, capital expenditures, depreciation, and working capital are all expected to grow by 5% a year in the future. Assume that capital expenditures and working capital are financed at the target debt ratio. What is the forecasted free cashflow to equity (FCFE) for TOY Inc.?

• A) $4.31
• B) $2.70
• C) $3.39

Page 65 | Status: ⏸️ Unattempted

Question: The repayment of a significant amount of outstanding debt will cause free cash flow to equity (FCFE) to:

• A) remain the same
• B) increase
• C) decrease

Page 65 | Status: ⏸️ Unattempted

Question: A firm's free cash flow to the firm (FCFF) in the most recent year is $80M and is expected to grow at 3% per year forever. If the firm has $100M in debt financing and its weighted average cost of capital is 10%. The value of the firm's equity using the single-stage FCFF model is:

• A) $1,177M
• B) $1,077M
• C) $1,043M

Page 66 | Status: ⏸️ Unattempted

Question: A firm in stable growth phase should have:

• A) a required rate of return close to the market rate of return and capital expenditures that are not too large relative to depreciation expense
• B) capital expenditures that are less than the depreciation expense Correct
• C) a growth rate higher than that of the economy and a required rate of return that is greater than the market rate of return

Page 66 | Status: ⏸️ Unattempted

Question: Which of the following statements regarding the P/E to growth (PEG) valuation approach is least accurate? The P/E to growth (PEG) valuation approach assumes that:

• A) there is a linear relationship between price to earnings (P/E) and growth Correct
• B) stocks with higher PEGs are more attractive than stocks with lower PEGs
• C) there are no risk differences among stocks Your Answer

Page 1 | Status: ❌ Incorrect

Question: An increase in growth will cause a price-to-earnings (P/E) multiple to:

• A) there is insufficient information to tell
• B) decrease Correct
• C) increase Your Answer

Page 1 | Status: ❌ Incorrect

Question: All other variables held constant, the justified price-to-book multiple will decrease with a decrease in:

• A) payout ratio
• B) expected growth rate Correct
• C) required rate of return Your Answer

Page 1 | Status: ❌ Incorrect

Question: Which of the following explanations is least likely to explain why Jenkins' stock picks underperform?

• A) Large stocks have an outsized effect on the benchmark data
• B) She is using the mean rather than the median valuation as a benchmark Correct Your Answer
• C) Many stocks in the benchmark group are mispriced

Page 3 | Status: ❌ Incorrect

Question: Which valuation ratio is least appropriate for comparing Massive and Mouse?

• A) Enterprise value/EBITDA because Massive and Mouse have very different debt levels Correct
• B) Price/book because Massive is larger than Mouse Your Answer
• C) Price/cash flow because cash flows for small companies can be extremely volatile

Page 3 | Status: ❌ Incorrect

Question: Mouse & Associates is cheaper than Massive Tech as measured by:

• A) the price/sales ratio and the dividend yield
• B) the earnings yield but not the price/book Correct Your Answer
• C)

Page 3 | Status: ❌ Incorrect

Question: The price/cash flow ratio of Massive Tech, where cash flow is defined as earnings plus noncash charges, is closest to:

• A) 16.67 Correct
• B) 9.65
• C) 7.89

Page 4 | Status: ✅ Correct

Question: Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 38. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

• A) bought as an undervalued stock Correct
• B) sold as an overvalued stock
• C) sold short as an overvalued stock

Page 4 | Status: ✅ Correct

Question: Which of the following is a disadvantage to using EV/EBITDA?

• A) EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization
• B) EBITDA is usually positive even when EPS is not Correct
• C) Since FCFF captures the amount of capital expenditures, it is more strongly linked with valuation theory than EBITDA

Page 4 | Status: ✅ Correct

Question: One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:

• A) sales are relatively stable and might not change even though earnings and value might change significantly Correct
• B) profit margins are not consistent across firms within an industry Your Answer
• C) P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes

Page 5 | Status: ❌ Incorrect

Question: The observation that negative price to earnings (P/E) ratios are meaningless and prices are never negative is used to justify which valuation approach?

• A) Earnings yield Correct
• B) Dividend discount model Your Answer
• C) Dividend yield

Page 5 | Status: ❌ Incorrect

Question: An analyst is preparing a presentation on "Interpreting PE ratios" and has the following data: Portfolio % Stock PE Stock AAA 60% 10 Stock BBB 40% 15 Which of the following is the most appropriate measure for calculating the portfolio P/E?

• A) Weighted harmonic mean of the P/E’s Correct
• B) Geometric mean of the P/E’s Your Answer
• C) Arithmetic average of the P/E’s

Page 5 | Status: ❌ Incorrect

Question: The multiple indicated by applying the discounted cash flow (DCF) model to a firm's fundamentals is necessarily the:

• A) justified price multiple Correct
• B) result of calculating retention/(required rate of return - growth) for the overall market
• C) same as the average industry multiple

Page 6 | Status: ✅ Correct

Question: The Farmer Co. has a payout ratio of 70% and a return on equity (ROE) of 14%. What will be the appropriate price-to-book value (PBV) based on fundamentals if the expected growth rate in dividends is 4.2% and the required rate of return is 11%?

• A) 0.64 Correct
• B) 1.44
• C) 1.50

Page 6 | Status: ✅ Correct

Question: At a CFA society function, Robert Chan comments to Li Chiao that the expected dividend growth rate for Xanedu Industries has decreased 0.5% from 6.0% to 5.5%. Chan claims that since Xanedu will maintain their historic dividend payout ratio of 40% and required return on equity (r) of 12%, Xanedu's justified leading P/E ratio based on forecasted fundamentals will also decrease by 0.5%. Is Chan correct?

• A) No, Xanedu's justified leading P/E ratio will decrease by approximately 7.8% Correct
• B) No, Xanedu's justified leading P/E ratio will increase by approximately 7.8%
• C) Yes, Xanedu's justified leading P/E ratio will increase by approximately 0.5%

Page 6 | Status: ✅ Correct

Question: Which of the following measures of cash flow is most closely linked with valuation theory?

• A) Earnings before interest, taxes, depreciation, and amortization (EBITDA) Correct
• B) Free cash flow to equity (FCFE)
• C) Cash flow from operations (CFO)

Page 7 | Status: ✅ Correct

Question: The Lewis Corp. had revenue per share of $300 in 2001, earnings per share of $4.50, and paid out 60% of its earnings as dividends. If the return on equity (ROE) and required rate of return of Lewis are 20% and 13% respectively, what is the appropriate price/sales (P/S) multiple for Lewis?

• A) 0.12 Correct
• B) 0.18
• C) 0.19. An analyst has gathered the following fundamental data: Firm A Firm A Firm B Firm B Strategy High Margin Low Volume Low Margin High Volume High Margin Low Volume Low Margin High Volume Payout Ratio 40% 40% 40% 40%

Page 7 | Status: ✅ Correct

Question: What is the price-to-sales (P/S) multiple for Firm A in the high-margin, low-volume strategy?

• A) 2.18 Correct
• B) 0.13
• C) 2.00

Page 8 | Status: ✅ Correct

Question: What is the P/S multiple for Firm B in the low-margin, high-volume strategy?

• A) 0.43 Correct
• B) 0.60
• C) 2.00

Page 8 | Status: ✅ Correct

Question: Underlying earnings may be defined as earnings:

• A) net of capital expenditures needed to keep the business productive
• B) that include non-recurring components Correct
• C) that exclude non-recurring components

Page 8 | Status: ✅ Correct

Question: A firm's return on equity (ROE) is 15%, its required rate of return is 12%, and its expected growth rate is 7%. What is the firm's justified price to book value (P/

• A) 1.60 Correct
• B) based on these fundamentals?
• C) 1.71.

Page 8 | Status: ✅ Correct

Question: For which of the following firms is the Price/Earnings to Growth (PEG) ratio most appropriate for identifying undervalued or overvalued equities? Firm A: Expected dividend growth = 6%; Cost of equity = 12%; price-to-earnings (P/E) = 12. Firm B: Expected dividend growth = −6%; Cost of equity = 12%; price-to-earnings (P/E) = 12. Firm C: Expected dividend growth = 1%; Cost of equity = 12%; price-to-earnings (P/E) = 12.

• A) C) Firm Correct
• B) Firm
• C) Firm C

Page 9 | Status: ✅ Correct

Question: Shares of TKR Construction (TKR) are selling for $50. Earnings for the last 12 months were $4.00 per share. The average trailing P/E ratio for firms in TKR's industry is 15. The appropriate WACC is 12%, and the risk-free rate is 8%. Assume a growth rate of 0%. Using the method of comparables, what price is indicated for TKR?

• A) $50.00 Correct
• B) $60.00
• C) $33.33

Page 9 | Status: ✅ Correct

Question: The price-to-book value (PBV) ratio for a high-growth firm will:

• A) increase as the growth rate in either the high-growth or stable-growth period increases Correct
• B) increase as the growth rate in the high-growth period increases and decrease as the growth rate in the stable-growth period increases
• C) increase as the growth rate in either the high-growth or stable-growth period decreases

Page 10 | Status: ✅ Correct

Question: A firm has a payout ratio of 40%, a profit margin of 7%, an estimated growth rate of 10%, and its shareholders require a return of 14% on their investment. Based on these fundamentals, a reasonable estimate of the appropriate price-to-sales ratio for the firm (based on trailing sales) is:

• A) 0.56 Correct
• B) 0.77
• C) 0.70

Page 10 | Status: ✅ Correct

Question: What is the appropriate justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40% if shareholders require a return of 15% on their investment and the expected growth rate in dividends is 5%?

• A) 6.30 Correct
• B) 4.20
• C) 3.80

Page 10 | Status: ✅ Correct

Question: Enhanced Systems, Inc., has a price to book value (P/

• A) sold or sold short as an overvalued stock
• B) bought as an undervalued stock Correct
• C) viewed as a properly valued stock

Page 11 | Status: ✅ Correct

Question: An analyst is preparing a presentation on "Interpreting PE ratios" and has the following data: Portfolio % Stock PE Stock AAA 60% 10 Stock BBB 40% 15 Which of the following is closest to the weighted harmonic mean of these two PE ratios?

• A) 11.98 Correct
• B) 12.49
• C) 11.54. Beyan Bautista, CFA, is a sell-side research analyst for a boutique UK investment house. One of the companies she is currently covering is Yantra Plc, a manufacturer of mid-range motorboats, primarily for river use. The company's shares closed at £44.56 on 15 January 20x4. Beyan uses the Treasury bond yield of 2.5% and an assumed market risk premium of 5% when calculating justified ratios based on forecasted fundamentals. She would first like to calculate Yantra's normalized price-to-earnings ratio over the period 20x0 to 20x3 via the following two methods: Method 1 – historical average EPS Method 2 – average return on equity

Page 11 | Status: ✅ Correct

Question: Using the P/E ratio with normalized earnings, Yantra appears to be more attractively valued under:

• A) Method 1 Correct
• B) Method 2
• C) Neither method as they result in the same conclusion

Page 13 | Status: ✅ Correct

Question: Using justified trailing price-to-sales and price-to-book ratios based on forecasted fundamentals, Yantra appears to be:

• A) undervalued
• B) overvalued Correct
• C) the results are mixed

Page 13 | Status: ✅ Correct

Question: Using justified trailing price-to-cash flow ratio and dividend yield based on forecasted fundamentals, Yantra appears to be:

• A) undervalued Correct
• B) overvalued Your Answer
• C) the results are mixed

Page 14 | Status: ❌ Incorrect

Question: If the appropriate adjustments to the five justified ratios are implemented following the launch of the new product line at Yantra, then:

• A) all five ratios will decline Correct
• B) four ratios will decline Your Answer
• C) three ratios will decline

Page 14 | Status: ❌ Incorrect

Question: In relation to Arda, Struma, and Tundzha, Beyan should opt for: Arda Struma Tundzha

• A) P/B norm P/E P/E Correct
• B) P/B norm P/E P/S Your Answer
• C) P/E P/S P/E

Page 14 | Status: ❌ Incorrect

Question: In relation to the companies in the marine navigation sector, Nunca is:

• A) undervalued relative to Nanuk Correct
• B) overvalued relative to Nanuk Your Answer
• C) trading at premium due to its superior fundamentals

Page 14 | Status: ❌ Incorrect

Question: The average return on equity (ROE) earnings normalization method relies on:

• A) average ROE over the most recent cycle Correct
• B) the earnings yield
• C) average earnings per share (EPS) over the most recent cycle

Page 15 | Status: ✅ Correct

Question: An analyst is valuing a company with a dividend payout ratio of 0.35, a beta of 1.45, and an expected earnings growth rate of 0.08. A regression on comparable companies produces the following equation: Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta) What is the predicted P/E using the above regression?

• A) 11.21 Correct
• B) 9.18
• C) 7.65

Page 15 | Status: ✅ Correct

Question: An analyst is valuing a company with a dividend payout ratio of 0.55, a beta of 0.92, and an expected earnings growth rate of 0.07. A regression on comparable companies produces the following equation: Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta) What is the predicted P/E using the above regression?

• A) 11.43 Correct
• B) 7.65
• C) 10.14

Page 15 | Status: ✅ Correct

Question: What is the justified leading price-to-earnings (P/E) multiple of a stock that has a retention ratio of 60% if the shareholders require a return of 16% on their investment and the expected growth rate in dividends is 6%?

• A) 4.24 Correct
• B) 6.36
• C) 4.00

Page 16 | Status: ✅ Correct

Question: An argument against using the price-to-sales (P/S) valuation approach is that:

• A) P/S ratios are not as volatile as price-to-earnings (P/E) multiples
• B) P/S ratios do not express differences in cost structures across companies Correct
• C) sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value

Page 16 | Status: ✅ Correct

Question: The goal of normalizing earnings is to adjust for:

• A) cyclical elements Correct
• B) seasonal elements
• C) non-cash charges

Page 16 | Status: ✅ Correct

Question: Earnings before interest, taxes, depreciation, and amortization (EBITD

• A) debt capacity
• B) equity value Correct
• C) total company value Your Answer

Page 17 | Status: ❌ Incorrect

Question: A justified price multiple is the:

• A) multiple implied by the market price Correct
• B) multiple implied by historical growth
• C) warranted or intrinsic price multiple Your Answer

Page 17 | Status: ❌ Incorrect

Question: Which of the following are advantages of using EV/EBITDA?

• A) EV/EBITDA ignores how different revenue recognition policies affect CFO Correct
• B) EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization
• C) If working capital is growing, EBITDA will be larger than CFO Your Answer

Page 17 | Status: ❌ Incorrect

Question: The net impact of an increase in payout ratio on price-to-book value (PBV) ratio cannot be determined because it might also:

• A) decrease required rate of return Your Answer
• B) decrease expected growth Correct
• C) decrease the market value of the firm

Page 18 | Status: ❌ Incorrect

Question: Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year Firm Strategy Retention Rate Profit Margin Sales/Book Value of Equity CVR, Inc. High Margin / Low Volume 20% 8% 1.25 CVR, Inc. Low Margin / High Volume 20% 2% 4.00 Home, Inc. High Margin / Low Volume 40% 9% 2.00 Home, Inc. Low Margin / High Volume 40% 1% 20.0 (Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%.) If CVR, Inc., has a required return for shareholders of 10%, what is its appropriate leading price-to-sales (P/S) multiple if the firm undertakes the high margin/low volume strategy?

• A) 1.46 Correct
• B) 0.80 Your Answer
• C) 0.20

Page 18 | Status: ❌ Incorrect

Question: Margin and Sales Trade-off for CVR, Inc. and Home, Inc., for Next Year Firm Strategy Retention Rate Profit Margin Sales/Book Value (SBV) of Equity CVR, Inc. High Margin / Low Volume 20% 8% 1.25 CVR, Inc. Low Margin / High Volume 20% 2% 4.00 Home, Inc. High Margin / Low Volume 40% 9% 2.00 Home, Inc. Low Margin / High Volume 40% 1% 20.0 Note: CVR, Inc., has a book value of equity of $80 and a required rate of return of 10%. Home, Inc., has a book value of equity of $100 and a required rate of return of 11%. If Home, Inc., has a required return for shareholders of 11%, what is its appropriate leading price-to-sales (Po / S1) multiple if the firm undertakes the low margin/high volume strategy?

• A) 0.80 Correct
• B) 0.20 Your Answer
• C) 1.00

Page 19 | Status: ❌ Incorrect

Question: At a CFA society function, Robert Chan comments to Li Chiao that Xanedu Industries' expected dividend growth rate is 5.5%, dividend payout ratio (g) is 40%, and required return on equity (r) is 12%. Based on a justified leading P/E ratio compared to an actual P/E ratio of 8.0, Xanedu Industries is most likely:

• A) correctly valued
• B) overvalued
• C)

Page 19 | Status: ⏸️ Unattempted

Question: Industrial Light had earnings per share (EPS) of $5.00 past year, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the trailing price-to-earnings (P/E) ratio?

• A) 3.75 Correct
• B) 7.50 Your Answer
• C) 7.14

Page 20 | Status: ❌ Incorrect

Question: Which of the following valuation approaches is based on the rationale that stock values differ due to differences in the expected values of variables such as sales, earnings, or related growth rates?

• A) Method of forecasted fundamentals Correct
• B) Free cash flow to the firm
• C) Method of comparables. Beachwood Builders merged with Country Point Homes on December 31, 2003. Both companies were builders of mid-scale and luxury homes in their respective markets. On December 31, 2013, because of tax considerations and the need to segment the businesses between mid-scale and luxury homes, Beachwood decided to spin-off Country Point, its luxury home subsidiary, to its common shareholders. Beachwood retained Bernheim Securities to value the spin-off of Country Point to its shareholders. The following information is available to Bernheim's investment bankers: Country Point's allocated common equity was $55.6 million as of December 31, 2013. Beachwood paid no dividends and has no preferred shareholders. Country Point's free cash flow (FCF) is expected to grow 7% after 2017. The current risk-free rate is 6%. The market risk premium is 11%. Beachwood Builders had 5 million common shares as of December 31, 2013. Country Point's cost of capital is equal to its return on equity at year-end (rounded to the nearest percentage point). Country Point did not have any long-term debt allocated from Beachwood. The following data for Country Point is also available for analysis: $ (in millions) 2013 2014(E) 2015(E) 2016(E) 2017(E) Your Answer

Page 20 | Status: ❌ Incorrect

Question: Bernheim's investment bankers have determined the value of Country Point to be $162.6 million. As part of the spin-off, Beachwood issued to its common shareholders two shares in Country Point for each Beachwood share that its current shareholders held. The appropriate initial offering price per share of the shares that Beachwood's shareholders receive is closest to:

• A) $16.26 Correct
• B) $32.50
• C) $14.45

Page 21 | Status: ✅ Correct

Question: Immediately after the spin-off, Country Point's book value per share is closest to:

• A) $16.25 Correct
• B) $5.56
• C) $11.12

Page 21 | Status: ✅ Correct

Question: Based on Bernheim's careful analysis, firms comparable to Country Point trade at a P/B ratio of 3.5 times. The expected price per share of the spin-off based on this P/B ratio and assuming a liquid and efficient market for Country Point's common shares is closest to:

• A) $38.92 Correct
• B) $19.46
• C) $56.88

Page 22 | Status: ✅ Correct

Question: Which of the following is a disadvantage of using price-to-sales (P/S) multiples in stock valuations?

• A) It is difficult to capture the effects of changes in pricing policies using P/S ratios
• B) The use of P/S multiples can miss problems associated with cost control Correct
• C) P/S multiples are more volatile than price-to-earnings (P/E) multiples

Page 22 | Status: ✅ Correct

Question: An argument against using the price-to-earnings (P/E) valuation approach is that:

• A) earnings power is the primary determinant of investment value Correct
• B) research shows that P/E differences are significantly related to long-run average stock returns
• C) earnings can be negative

Page 22 | Status: ✅ Correct

Question: Which of the following is NOT a common momentum valuation indicator?

• A) Dividend yield Correct
• B) Relative strength Your Answer
• C) Earnings surprise

Page 23 | Status: ❌ Incorrect

Question: Alpha Software (AS) recently reported annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS's trailing price to earnings (P/E) for valuation purposes?

• A) 44.52 Correct
• B) 37.14 Your Answer
• C) 31.86

Page 23 | Status: ❌ Incorrect

Question: Sanford's economic value added (EVA®) for 2008 is closest to:

• A) $567.80 Correct
• B) $1,383.20. ln ( ) = T × ln ( Sanford P/E Index P/E 1 + Sanford short-term growth rate + Sanford dividend yield 1 + Index growth rate + Index dividend yield Your Answer
• C)

Page 25 | Status: ❌ Incorrect

Question: Based on a comparison of the actual trailing P/FCFE ratio compared to the justified trailing P/FCFE ratio (based on Davenport's FCFE valuation model) for 2008, Sanford is:

• A) overvalued because the actual P/FCFE ratio is greater than the justified P/FCFE ratio for 2008 Correct
• B) correctly valued because the actual P/FCFE ratio is equal to the justified P/FCFE ratio for 2008
• C) undervalued because the actual P/FCFE ratio is less than the justified P/FCFE ratio for 2008

Page 26 | Status: ✅ Correct

Question: Based on a comparison of the actual trailing P/adjusted CFO ratio compared to the industry median trailing P/adjusted CFO per share ratio for 2008, Sanford:

• A) is correctly valued relative to the industry benchmark because Sanford’s P/adjusted CFO ratio is equal to the industry median, despite slightly higher systematic risk and lower 5-year earnings growth Correct
• B) is overvalued relative to the industry benchmark because Sanford’s P/adjusted CFO ratio is higher than the industry median, despite slightly higher systematic risk and lower 5-year earnings growth
• C) may be undervalued relative to the industry benchmark because Sanford’s P/adjusted CFO ratio is higher than the industry median, despite slightly higher systematic risk and lower 5-year earnings growth

Page 26 | Status: ✅ Correct

Question: For purposes of this question only, assume Sanford's ROE is 20%, its current market price is $25, and the cost of equity is 14%. Sanford's implied growth rate in residual income is closest to:

• A) 5.11% Correct
• B) 5.23%
• C) 5.88%

Page 26 | Status: ✅ Correct

Question: The definition of a PEG ratio is price to earnings (P/E):

• A) divided by the average growth rate of the peer group
• B) divided by the expected earnings growth rate Correct
• C) divided by average historical earnings growth rate

Page 27 | Status: ⏸️ Unattempted

Question: A common justification for using earnings yields in valuation is that:

• A) earnings are more stable than dividends
• B) negative earnings render P/E ratios meaningless and prices are never negative Correct
• C) earnings are usually greater than free cash flows

Page 27 | Status: ⏸️ Unattempted

Question: Robert Chan comments to Leslie Singer that Converted Industries' expected dividend growth rate is 5.0%, dividend payout ratio (g) is 45%, and required return on equity (r) is 10%. Based on a justified trailing P/E ratio compared to the stock's trailing P/E ratio at market of 9.0, Converted Industries is most likely:

• A) undervalued
• B) correctly valued
• C) overvalued

Page 27 | Status: ⏸️ Unattempted

Question: A firm's return on equity (ROE) is 14%, its required rate of return is 10%, and its expected growth rate is 8%. What is the firm's justified price-to-book value (P/

• A) 3.00
• B) 2.00
• C) 2.75

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Question: Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

• A) bought as an undervalued stock
• B) sold or sold short as an overvalued stock
• C) viewed as a properly valued stock

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Question: An analyst is valuing a company with a dividend payout ratio of 0.65, a beta of 0.72, and an expected earnings growth rate of 0.05. A regression on comparable companies produces the following equation: Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) − (0.70 × beta) What is the predicted P/E using the above regression?

• A) 7.65
• B) 10.35
• C) 11.39

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Question: P/E multiples are often computed using the average of the multiples of comparable firms, because:

• A) it is very easy to find comparable firms that have the same business mix and risk and growth profiles
• B) it is conceptually very straightforward Correct
• C) it provides the most accurate results

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Question: An increase in return on equity (ROE) will cause a price-to-book (P/

• A) decrease
• B) there is insufficient information to tell
• C)

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Question: What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 65% if the shareholders require a return of 10% on their investment and the expected growth rate in dividends is 6%?

• A) 9.28
• B) 17.23
• C) 16.25

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Question: A decrease in the earnings retention rate will cause a price-to-sales (P/S) multiple to:

• A) increase Correct
• B) decrease
• C) remain the same

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Question: An analyst gathered the following data for TRK Construction [all amounts in Swiss francs (Sf)]: Recent share price Sf 25.00 Shares outstanding 40 million Market value of debt Sf 130 million Cash and marketable securities Sf 65 million Investments Sf 250 million Net income Sf 150 million Interest expense Sf 8 million Depreciation and amortization Sf 11 million Taxes Sf 52 million The EV/EBITDA multiple for TRK Construction is closest to:

• A) 2.47x
• B) 3.69x
• C)

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Question: Which of the following price multiples is most severely damaged by international accounting differences?

• A) Price to free cash flow to equity (P/FCFE)
• B) Price to cash flow from operations (P/CFO)
• C) Enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA)

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Question: A common pitfall in interpreting earnings yields in valuation is:

• A) using negative earnings Correct
• B) using underlying earnings
• C) look-ahead bias

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Question: Enhanced Systems, Inc., (ESI) has a price to book value (P/

• A) should be purchased because it is an undervalued stock
• B) is of indeterminate relative value, due to conflicting metrics Correct
• C) should be sold because it is an overvalued stock

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Question: Which of the following statements about the method of comparables in price multiple valuation is CORRECT?

• A) It assumes that cash flows are related to fundamentals
• B) It values an asset relative to a benchmark value of the multiple Correct
• C) It relates multiples to company fundamentals using a discounted cash flow (DCF) model

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Question: A common price to earnings (P/E) based method for estimating terminal value in multi-stage models is the:

• A) fundamentals approach
• B) dividend yield approach
• C) P/E to growth (PEG) approach

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Question: If cash flow from operations (CFO) embeds financing-related flows, it should be adjusted by:

• A) subtracting capital expenditures
• B) subtracting (net interest outflow) × (1 - tax rate) Correct
• C)

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Question: Which of the following is a common momentum valuation indicator?

• A) Dividend yield (D/P)
• B) Price to free cash flow to equity (P/FCFE)
• C) Relative strength

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Question: Analyst Ariel Cunningham likes using the price/earnings ratio for valuation purposes because studies have shown it is very effective at identifying undervalued stocks. However, she has one main problem with the statistic – it doesn't work when a company loses money. So Cunningham is considering switching to a different core valuation metric. Given Cunningham's rationale for using the price/earnings ratio, which option would be her best alternative?

• A) Price/sales
• B) Price/cash flow
• C) Price/book

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Question: The warranted or intrinsic price multiple is called the:

• A) multiple implied by historical growth
• B) multiple implied by the market price Correct
• C) justified price multiple

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Question: What is the justified trailing price-to-earnings (P/E) multiple of a stock that has a payout ratio of 40% if the shareholders require a return of 16% on their investment and the expected growth rate in dividends is 6%?

• A) 4.00
• B) 4.24.
• C) 6.36.

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Question: Which of the following factors is NOT a source of differences in cross-border valuation comparisons?

• A) Cultures
• B) Growth opportunities
• C) Intra-country market indicators

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Question: The trailing price-to-earnings (P/E) ratio is defined as:

• A) price to most recent earnings Correct
• B) price to next period's expected earnings
• C) the average P/E over the last five years

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Question: Enhanced Systems, Inc., (ESI) has a leading price to sales (P/S) of 0.18 while the median leading P/S of a peer group of companies within the industry is 0.10. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

• A) sold or sold short as an overvalued stock Correct
• B) bought as an undervalued stock
• C) bought on margin as an undervalued stock

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