Equity Securities Valuation Flashcards
7 cards from real CSC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Equity Securities Valuation flashcards as text
A stock trades at $50 with earnings per share of $4. What is its price-to-earnings (P/E) ratio?
Answer: 12.5
P/E = Price ÷ EPS = $50 ÷ $4 = 12.5.
Which valuation approach estimates a stock's worth based on the present value of expected future dividends?
Answer: Dividend discount model
The dividend discount model (DDM) values a stock as the present value of all anticipated future dividends.
In the Gordon Growth Model, if the required return is 10% and the dividend growth rate is 4%, what is the dividend yield implied?
Answer: 6%
Dividend yield = Required return − Growth rate = 10% − 4% = 6%.
A company has a book value per share of $25 and trades at $75. What is its price-to-book (P/B) ratio?
Answer: 3.0
P/B = Market price ÷ Book value per share = $75 ÷ $25 = 3.0.
Which scenario would most likely lead an analyst to assign a higher P/E multiple to a stock?
Answer: Strong earnings growth prospects and low risk
Stocks with strong growth prospects and lower risk warrant higher P/E multiples because investors pay more for each dollar of earnings.
What does a P/B ratio below 1.0 generally suggest about a company?
Answer: The company may be undervalued or facing financial difficulties
A P/B below 1.0 means the stock trades below book value, signalling potential undervaluation or fundamental problems.
Which of the following best describes the 'intrinsic value' of a stock?
Answer: The estimated true value based on fundamentals and expected cash flows
Intrinsic value is the analyst's estimate of what a stock is really worth, derived from fundamental analysis of future cash flows.