CFA Equity Valuation Methods 3

Question 1

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

Accepted Answer

Half of the high-growth period length

Answer

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.

Question 2

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

Accepted Answer

FCFE can value firms that do not pay dividends

Answer

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

Question 3

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

Accepted Answer

Market cap plus net debt plus minority interest plus preferred stock

Answer

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

Question 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:

Accepted Answer

$23.33

Answer

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.

Question 5

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

Accepted Answer

A holding company whose value primarily lies in its investment portfolio

Answer

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.

CFA Practice Test

CFA Practice Test

CFA Equity Valuation Methods 3