CFA Asset Valuation 3

Question 1

In a two-stage dividend discount model, the terminal value at the end of Stage 1 is calculated using:

Accepted Answer

The Gordon Growth Model applied to Stage 2 dividends

Answer

The terminal value applies the constant-growth Gordon model to the first dividend of Stage 2, then discounts it back.

Question 2

Which of the following best describes the concept of a 'margin of safety' in value investing?

Accepted Answer

Purchasing an asset at a price significantly below its intrinsic value

Answer

Margin of safety is the discount between market price and intrinsic value, providing a buffer against estimation errors.

Question 3

Residual income for equity valuation is defined as net income minus:

Accepted Answer

The equity charge (beginning book value × cost of equity)

Answer

Residual income = Net income − (r_e × BV_equity_{t-1}), representing value created above the required return on equity.

Question 4

When the required rate of return equals the growth rate in the Gordon Growth Model, the stock value is:

Accepted Answer

Undefined because the denominator equals zero

Answer

The denominator (k − g) becomes zero, making the formula undefined and implying infinite value, which is economically impossible.

Question 5

Which of the following is an example of an asset-based valuation approach?

Accepted Answer

Estimating net asset value by marking assets to fair value

Answer

Asset-based valuation estimates equity value as fair value of assets minus fair value of liabilities, yielding NAV.

CFA Practice Test