Investment Analysis Flashcards
7 cards from real CIM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Investment Analysis flashcards as text
A stock is expected to pay a dividend of $2.00 next year, dividends grow at a constant 5%, and the required return is 10%. What is its intrinsic value under the Gordon Growth Model?
Answer: $40.00
Value = D1 / (r − g) = $2.00 / (0.10 − 0.05) = $40.00.
A firm has a 40% payout ratio, a 12% required return, and a 4% long-term growth rate. What is its justified forward P/E?
Answer: 5.0
Justified forward P/E = payout / (r − g) = 0.40 / 0.08 = 5.0.
When valuing a company using free cash flow to the firm (FCFF), which discount rate is appropriate?
Answer: Weighted average cost of capital
FCFF belongs to all capital providers, so it is discounted at the WACC.
A company earns a 15% ROE and pays out 60% of earnings as dividends. What is its sustainable growth rate?
Answer: 6%
g = ROE × retention ratio = 15% × 0.40 = 6%.
A firm has a 5% net profit margin, asset turnover of 1.2, and an equity multiplier of 2.0. What is its ROE using DuPont analysis?
Answer: 12%
ROE = 5% × 1.2 × 2.0 = 12%.
A stock trades at a P/E of 20 and its expected earnings growth rate is 10%. What is its PEG ratio?
Answer: 2.0
PEG = P/E ÷ growth rate (in percent) = 20 / 10 = 2.0.
Why is EV/EBITDA often preferred over P/E when comparing companies with very different levels of debt?
Answer: It is capital-structure neutral because it uses enterprise value and pre-interest earnings
EV includes debt and EBITDA is before interest, so leverage differences are neutralized.