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Equity Valuation Methods Flashcards

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

Read the first 7 Equity Valuation Methods flashcards as text

  1. In the H-model for dividend growth, 'H' represents:

    Answer: Half of the high-growth period length

    H is defined as half the length of the high-growth phase, reflecting the assumption that growth declines linearly from the high rate to the long-run rate.

  2. Which of the following is a key advantage of the free cash flow to equity (FCFE) model over the dividend discount model?

    Answer: FCFE can value firms that do not pay dividends

    FCFE represents cash available to equity holders regardless of dividend policy, making it applicable to non-dividend-paying companies where DDM cannot be used.

  3. The enterprise value (EV) of a company is best defined as:

    Answer: Market cap plus net debt plus minority interest plus preferred stock

    EV = market capitalization + total debt + minority interest + preferred stock − cash and equivalents, representing the total value to all capital providers.

  4. A company has FCFF of $10M, WACC of 9%, and a long-run growth rate of 3%. Its total debt is $50M and it has 5M shares outstanding. Intrinsic value per share is closest to:

    Answer: $23.33

    Firm value = FCFF/(WACC-g) = 10/(0.09-0.03) = $166.7M; equity value = 166.7 - 50 = $116.7M; per share = 116.7/5 = $23.33.

  5. Which situation most supports using an asset-based valuation approach over an income-based approach?

    Answer: A holding company whose value primarily lies in its investment portfolio

    Asset-based valuation is most relevant for holding companies, investment firms, or asset-heavy businesses where market or liquidation values of assets drive intrinsic worth.

  6. Tobin's Q ratio is calculated as:

    Answer: Market value of the firm divided by replacement cost of assets

    Tobin's Q = market value of total assets / replacement cost of total assets; a ratio above 1 suggests the market values the firm above its replacement cost.

  7. When performing a sum-of-the-parts (SOTP) valuation, an analyst most likely assigns different valuation multiples to each segment because:

    Answer: Different segments have different risk profiles and growth prospects

    SOTP recognizes that business segments in different industries carry different risks and growth rates, warranting sector-specific peer multiples for each division.