CFA Asset Valuation 2

Question 1

Which valuation approach estimates a firm's value by discounting its expected future free cash flows to the firm (FCFF) at the weighted average cost of capital?

Accepted Answer

FCFF discounted cash flow model

Answer

The FCFF DCF model discounts cash flows available to all capital providers at the WACC to arrive at total firm value.

Question 2

A stock has a required return of 10% and pays a dividend of $2 next year that is expected to grow at 5% forever. Using the Gordon Growth Model, what is the intrinsic value?

Accepted Answer

$40

Answer

V = D1 / (r − g) = $2 / (0.10 − 0.05) = $40.

Question 3

In the enterprise value (EV) calculation, which of the following is subtracted from EV to derive equity value?

Accepted Answer

Net debt

Answer

Equity value = EV − net debt (total debt minus cash and equivalents).

Question 4

Which method is most appropriate for valuing a company that has negative earnings but positive operating cash flows?

Accepted Answer

EV/EBITDA multiple

Answer

EV/EBITDA is useful when earnings are negative because EBITDA strips out non-cash and financing charges, often remaining positive.

Question 5

When using comparable company analysis, a valuation multiple is considered 'clean' primarily because it:

Accepted Answer

Is calculated from market prices reflecting current expectations

Answer

Market-derived multiples embed current investor expectations about growth and risk, making them timely and observable.

CFA Practice Test

CFA Practice Test

CFA Asset Valuation 2