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Equity Investments Flashcards

6 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. The Gordon Growth Model (Dividend Discount Model) assumes which of the following conditions?

    Answer: Dividends grow at a constant rate indefinitely

    The Gordon Growth Model requires dividends to grow at a constant rate g in perpetuity, with the required return r greater than g.

  2. Which equity valuation multiple is most appropriate when comparing companies with different capital structures?

    Answer: EV/EBITDA

    EV/EBITDA is capital structure-neutral because enterprise value and EBITDA are both pre-debt measures, making it the best cross-company multiple when leverage differs.

  3. A company has an ROE of 15% and a dividend payout ratio of 40%. Its sustainable growth rate is:

    Answer: 9%

    Sustainable growth rate = ROE × retention ratio = 15% × (1 – 0.40) = 15% × 0.60 = 9%.

  4. A stock trading at a P/E of 25 with an earnings growth rate of 20% has a PEG ratio of:

    Answer: 1.25

    PEG ratio = P/E ÷ earnings growth rate = 25 ÷ 20 = 1.25; a PEG below 1 is often considered undervalued relative to growth.

  5. In the context of the CFA curriculum, free cash flow to equity (FCFE) is best described as:

    Answer: Cash flow available to equity holders after meeting all financial obligations and capex needs

    FCFE = CFO – Capex + net borrowing, representing cash available to equity holders after all obligations including debt service.

  6. Which of the following best describes a market that is weak-form efficient?

    Answer: Past prices cannot be used to predict future prices

    Weak-form efficiency means all historical price and volume information is already reflected in current prices, so technical analysis cannot generate consistent excess returns.