CFA Equity Investments

Question 1

The Gordon Growth Model (Dividend Discount Model) assumes which of the following conditions?

Accepted Answer

Dividends grow at a constant rate indefinitely

Answer

The Gordon Growth Model requires dividends to grow at a constant rate g in perpetuity, with the required return r greater than g.

Question 2

Which equity valuation multiple is most appropriate when comparing companies with different capital structures?

Accepted Answer

EV/EBITDA

Answer

EV/EBITDA is capital structure-neutral because enterprise value and EBITDA are both pre-debt measures, making it the best cross-company multiple when leverage differs.

Question 3

A company has an ROE of 15% and a dividend payout ratio of 40%. Its sustainable growth rate is:

Accepted Answer

9%

Answer

Sustainable growth rate = ROE × retention ratio = 15% × (1 – 0.40) = 15% × 0.60 = 9%.

Question 4

A stock trading at a P/E of 25 with an earnings growth rate of 20% has a PEG ratio of:

Accepted Answer

1.25

Answer

PEG ratio = P/E ÷ earnings growth rate = 25 ÷ 20 = 1.25; a PEG below 1 is often considered undervalued relative to growth.

Question 5

In the context of the CFA curriculum, free cash flow to equity (FCFE) is best described as:

Accepted Answer

Cash flow available to equity holders after meeting all financial obligations and capex needs

Answer

FCFE = CFO – Capex + net borrowing, representing cash available to equity holders after all obligations including debt service.

CFA Practice Test

CFA Practice Test

CFA Equity Investments