RIA Valuation & Analysis 2

Question 1

The Dividend Discount Model (DDM) values a stock based on:

Accepted Answer

The present value of expected future dividends

Answer

The DDM calculates stock intrinsic value as the present value of all expected future dividends, discounted at the required rate of return.

Question 2

Beta of 1.5 for a stock means:

Accepted Answer

The stock is 50% more volatile than the market (1.5x market sensitivity)

Answer

Beta measures systematic risk—a beta of 1.5 means the stock tends to move 1.5% for every 1% market move (more volatile than market).

Question 3

Credit rating agencies (Moody's, S&P) evaluate bonds based on:

Accepted Answer

The issuer's ability to repay principal and interest (credit risk)

Answer

Credit ratings assess the issuer's financial strength and ability to meet debt obligations—measuring default risk.

Question 4

Working capital is calculated as:

Accepted Answer

Current assets minus current liabilities

Answer

Working capital = Current Assets - Current Liabilities, measuring a company's short-term liquidity and operational efficiency.

Question 5

Relative valuation (comparable company analysis) determines value by:

Accepted Answer

Comparing valuation multiples (P/E, EV/EBITDA) to similar companies or transactions

Answer

Comparable analysis ('comps') values a company by applying peer group valuation multiples (P/E, EV/EBITDA) to the target company's metrics.

(RIA) Registered Investment Advisor Practice Test