Fundamental Analysis & Valuation Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fundamental Analysis & Valuation flashcards as text
In a DCF model, which assumption has the greatest sensitivity impact on the final valuation output?
Answer: Terminal growth rate
The terminal growth rate has the most leverage in a DCF because it drives terminal value, which typically represents 60–80% of total estimated intrinsic value.
A company reports GAAP earnings of $2.00/share but adjusted (non-GAAP) earnings of $3.50/share. A prudent fundamental analyst should:
Answer: Scrutinize which items are excluded to determine if adjustments are justified
Large GAAP-to-non-GAAP gaps require careful analysis; some exclusions (like stock comp or restructuring) may be recurring costs being obscured rather than one-time items.
Which macroeconomic indicator is considered the most comprehensive measure of economic output when conducting top-down fundamental analysis?
Answer: Gross Domestic Product (GDP)
GDP measures total economic output and is the broadest indicator of economic health, serving as the starting point in top-down analysis before drilling into sectors and individual companies.
A company's book value per share is $20, but it trades at $60. If ROE is 25% and the required return is 10%, which framework best explains this premium?
Answer: The residual income model, where excess returns justify a premium to book value
The residual income (RI) model shows that companies earning ROE well above their cost of equity deserve to trade at a significant premium to book value, as they create ongoing economic value.
When comparing two companies with identical revenue growth, which additional metric is most important for determining superior fundamental quality?
Answer: Gross margin stability and operating leverage profile
Gross margin stability and operating leverage determine whether revenue growth translates into earnings growth; a company with higher and stable margins converts growth into superior profitability.
A company announces a large share repurchase program. From a fundamental valuation perspective, buybacks create value for remaining shareholders only when:
Answer: Shares are repurchased below intrinsic value
Buybacks are value-accretive only when shares trade below intrinsic value; buying overvalued shares destroys value by paying more than what is received in return.
Which of the following best describes the 'margin of safety' principle in value investing?
Answer: Purchasing a security well below its estimated intrinsic value to cushion estimation errors
Margin of safety, popularized by Benjamin Graham, means buying at a meaningful discount to intrinsic value so that even if your valuation is wrong, there is a buffer before losses occur.