CSC Equity Securities Valuation 4

Question 1

A stock's required rate of return is 9% and it just paid a $2.00 dividend expected to grow at 5% forever. What is its intrinsic value using the Gordon Growth Model?

Accepted Answer

$52.50

Answer

V = D1 ÷ (r − g) = ($2.00 × 1.05) ÷ (0.09 − 0.05) = $2.10 ÷ 0.04 = $52.50.

Question 2

Which statement best describes the difference between 'relative valuation' and 'absolute valuation'?

Accepted Answer

Absolute valuation estimates intrinsic worth from fundamentals; relative valuation benchmarks a stock against peers using multiples

Answer

Absolute valuation (e.g., DDM, DCF) estimates stand-alone intrinsic value, while relative valuation compares multiples such as P/E to industry peers.

Question 3

What does a high return on equity (ROE) indicate when used in equity valuation?

Accepted Answer

The company generates significant profit relative to shareholders' equity, often justifying a premium valuation

Answer

A high ROE indicates efficient use of equity capital and typically supports higher P/B ratios and valuation premiums.

Question 4

An investor applies a P/E multiple of 18× to forecast EPS of $3.50. What is the target share price?

Accepted Answer

$63.00

Answer

Target price = P/E × EPS = 18 × $3.50 = $63.00.

Question 5

In equity analysis, what is the 'margin of safety'?

Accepted Answer

The gap between a stock's intrinsic value and its current market price, providing a buffer against errors

Answer

Margin of safety is the discount at which a stock trades below its estimated intrinsic value, cushioning the investor against misjudgment.

CSC - Canadian Securities Course Practice Test

CSC - Canadian Securities Course Practice Test

CSC Equity Securities Valuation 4