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 company has a payout ratio of 60%, ROE of 15%, and investors require an 11% return. Using the Gordon Growth Model, what is the implied dividend growth rate?
Answer: 6.0%
Growth rate g = Retention ratio × ROE = (1 − 0.60) × 15% = 0.40 × 15% = 6.0%.
What is the primary weakness of using P/E ratios for cross-border equity comparison?
Answer: Differences in accounting standards and tax regimes distort earnings, making cross-border P/E comparisons unreliable
Different GAAP/IFRS applications, tax laws, and reporting conventions make earnings — and therefore P/E ratios — difficult to compare across countries.
Which of the following best defines 'free cash flow to equity' (FCFE) used in equity valuation?
Answer: Cash available to equity holders after operating expenses, capital expenditures, and net debt repayments
FCFE is the cash remaining for equity shareholders after funding operations, capital spending, and net debt obligations.
A preferred share pays a fixed annual dividend of $3.00 and investors require a 6% return. What is its theoretical value?
Answer: $50.00
Value of perpetual preferred = Dividend ÷ Required return = $3.00 ÷ 0.06 = $50.00.
In a discounted cash flow (DCF) model for equities, what does the 'terminal value' represent?
Answer: The value of all cash flows beyond the explicit forecast horizon, captured in a single figure
Terminal value aggregates the present value of all cash flows after the detailed forecast period, typically using a perpetuity growth formula.
Why might two analysts using the same valuation model arrive at different intrinsic values for the same stock?
Answer: Different assumptions about growth rates, discount rates, or future earnings lead to divergent estimates
Valuation models are highly sensitive to input assumptions; varying growth or discount rate estimates produces materially different intrinsic value outcomes.
Which of the following would cause a stock's calculated intrinsic value to INCREASE under the dividend discount model?
Answer: A decrease in the required rate of return
Lowering the required return shrinks the denominator (r − g) in the DDM formula, increasing the calculated present value.