CIM Equity Securities & Valuation 1

Question 1

Which valuation model discounts future dividends to determine the intrinsic value of a stock?

Accepted Answer

Dividend Discount Model

Answer

The Dividend Discount Model (DDM) values a stock by discounting expected future dividends at the required rate of return.

Question 2

A stock has an expected dividend of $2.50, a required return of 10%, and a constant growth rate of 4%. What is its intrinsic value using the Gordon Growth Model?

Accepted Answer

$41.67

Answer

Using Gordon Growth Model: V = D1 / (r - g) = $2.50 / (0.10 - 0.04) = $2.50 / 0.06 = $41.67.

Question 3

Which of the following best describes the Price-to-Book (P/B) ratio?

Accepted Answer

Market price divided by book value per share

Answer

The P/B ratio compares a company's market price to its book value per share, indicating how much investors pay relative to net assets.

Question 4

What does a high Price-to-Earnings (P/E) ratio typically indicate about investor expectations?

Accepted Answer

Investors expect high future earnings growth

Answer

A high P/E ratio generally indicates that investors are willing to pay a premium, expecting strong future earnings growth from the company.

Question 5

In a Discounted Cash Flow (DCF) analysis, which discount rate is most commonly used to value an entire firm?

Accepted Answer

Weighted Average Cost of Capital (WACC)

Answer

WACC reflects the blended cost of all capital sources (debt and equity) and is used to discount free cash flows to the firm in a DCF valuation.

CIM - Chartered Investment Manager Practice Test

CIM - Chartered Investment Manager Practice Test

CIM Equity Securities & Valuation 1