CSC Equity Securities Valuation 5

Question 1

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?

Accepted Answer

6.0%

Answer

Growth rate g = Retention ratio × ROE = (1 − 0.60) × 15% = 0.40 × 15% = 6.0%.

Question 2

What is the primary weakness of using P/E ratios for cross-border equity comparison?

Accepted Answer

Differences in accounting standards and tax regimes distort earnings, making cross-border P/E comparisons unreliable

Answer

Different GAAP/IFRS applications, tax laws, and reporting conventions make earnings — and therefore P/E ratios — difficult to compare across countries.

Question 3

Which of the following best defines 'free cash flow to equity' (FCFE) used in equity valuation?

Accepted Answer

Cash available to equity holders after operating expenses, capital expenditures, and net debt repayments

Answer

FCFE is the cash remaining for equity shareholders after funding operations, capital spending, and net debt obligations.

Question 4

A preferred share pays a fixed annual dividend of $3.00 and investors require a 6% return. What is its theoretical value?

Accepted Answer

$50.00

Answer

Value of perpetual preferred = Dividend ÷ Required return = $3.00 ÷ 0.06 = $50.00.

Question 5

In a discounted cash flow (DCF) model for equities, what does the 'terminal value' represent?

Accepted Answer

The value of all cash flows beyond the explicit forecast horizon, captured in a single figure

Answer

Terminal value aggregates the present value of all cash flows after the detailed forecast period, typically using a perpetuity growth formula.

CSC - Canadian Securities Course Practice Test

CSC - Canadian Securities Course Practice Test

CSC Equity Securities Valuation 5