Learning Module 8 Equity Valuation: Concepts and Basic Tools

An analyst estimates a stock's intrinsic value at EUR 18.50 and the market price is EUR 15.00. All else equal, what is the most appropriate conclusion?

Which of the following is NOT one of the three major categories of equity valuation models described in Chapter 8?

The dividend discount model (DDM) values a share as the present value of expected future dividends. Which of the following equations represents the general DDM for infinite horizon?

A perpetual, non-callable preferred share pays an annual fixed dividend of USD 4.00. If an investor's required return is 8 percent, what is the intrinsic value?

Using the Gordon (constant growth) model, which condition among the following must hold for a valid intrinsic value?

An analyst estimates D0 = EUR 3.00, expects dividends to grow at g = 4% forever, and uses r = 9%. Using the Gordon model, what is V0?

Which valuation approach is most appropriate for a high-growth technology firm that currently pays no dividend but may pay dividends in the distant future?

FCFE is defined as CFO - FCInv + Net borrowing. Which of the following best represents why FCFE differs from CFO?

Which statement about dividend chronology is correct?

A company announces a regular cash dividend of USD 1.00 per share. All else equal, what immediate effect is expected on the share price on the ex-dividend date?

Which model gives a justified forward P/E formula of payout/(r - g) when combined with the Gordon model and dividing both sides by E1?

If a firm has high fixed costs and significant operating leverage, how would an increase in sales most likely affect operating income, assuming fixed costs are unchanged?

Which multiple is most useful when comparing companies that have different capital structures because it is capital-structure neutral?

A company reports EBITDA = 120 million, cash = 20 million, market debt = 200 million, preferred market value = 0, and market cap = 400 million. What is its enterprise value (EV)?

Which of the following statements about asset-based valuation is most consistent with the chapter?

An analyst uses the Gordon model with D1 = 2.00, r = 10%, g = 9.5%. What warning from the chapter applies here?

Which input method is commonly used to estimate the required rate of return for equity in discount models, as discussed in Chapter 8?

An analyst wants to compare P/E ratios across two firms but discovers one firm had a one-time impairment that depressed EPS in the trailing twelve months. What does Chapter 8 recommend?

Which of the following is the best reason an analyst might prefer EV/EBITDA over P/E when a company has negative net income but positive operating results?

An analyst uses a two-stage DDM with high growth gS for n years followed by constant growth gL thereafter. At what point is the terminal value calculated?

Which of the following best describes the present value of growth opportunities (PVGO) concept referenced in relation to the Gordon model?

Which factor, when increased, would tend to raise the justified forward P/E derived from the Gordon model, holding other inputs constant?

A utility company has stable cash flows and dividend payouts. Which valuation model does the chapter indicate is most appropriate?

Which of these is a key disadvantage of using simple price multiples (e.g., trailing P/E) as described in the chapter?

A company has D0 = USD 1.20, expected g = 6% for 3 years, then 3% forever; r = 10%. Using a two-stage DDM with n = 3 and assuming dividends grow at gS = 6% for years 1-3 and gL = 3% thereafter, which step is needed to compute terminal value V3?

Which of the following best explains why analysts sometimes prefer FCFE to DDM for valuation?

An analyst computes a firm's market EV/EBITDA at 8.5x while comparable peer median EV/EBITDA is 11.2x. Which initial inference aligns with Chapter 8's method of comparables?

Which of the following is a practical difficulty in using EV multiples mentioned in the chapter?

Which scenario best describes when asset-based valuation provides a useful baseline per the chapter?

For a firm with volatile net income due to cyclical business, which multiple does the chapter suggest may be more stable for cross-sectional comparison?

An analyst forecasts revenue for a firm and holds D/P (dividend payout ratio) constant at 60 percent and ROE at 12 percent. Using g = b * ROE from the chapter, what is the implied g?

Which type of preferred share embedded option would tend to increase the investor's value relative to a plain-vanilla preferred, according to the chapter?

Using the method of comparables, which two firm characteristics should be most closely matched when selecting comparable firms according to the chapter?

An analyst values a firm by using the Gordon model but wants to check sensitivity. Which two inputs are most critical to vary in a sensitivity analysis according to the chapter?

Which statement about share repurchases does the chapter make?

An analyst wants to value a bank. Which valuation approach does the chapter say often works well for financial institutions?

Which of the following best describes why analysts use multiple valuation models as recommended in the chapter?

Which of the following is true regarding stock splits and stock dividends according to the chapter?

Which of the following best summarizes how scenario analysis is used in forecasting as described in the chapter?

An analyst wants to use a multiplier model based on operating cash flow. Which multiple listed in the chapter corresponds to this approach?

Given the chapter's guidance, when valuing a diversified conglomerate with multiple distinct businesses, which approach is most recommended?

Which of the following best explains the concept of 'justified P/E' introduced in the chapter?

In Example 16 the chapter shows estimating market value of debt by discounting scheduled debt payments using yield curve + risk premium. What practical lesson does this illustrate?

Which type of company is most likely inappropriate for valuation via the Gordon constant-growth DDM according to the chapter?

Which of the following would most likely increase an observed trailing P/E ratio for a company, holding price constant?

A company pays D0 = 0. Assume analyst expects dividends to start at D5 = 2 and grow at 3% thereafter. Using chapter logic, how should the analyst value the stock today?

Which input change would, according to the chapter's justified P/E derivation, increase the justified P/E if payout is fixed?

Which of these is an advantage of using EV/EBITDA over P/E, per the chapter?

According to the chapter, which of the following best describes the relationship between dividend payout ratio and sustainable growth g = b * ROE?

Which concluding advice does Chapter 8 emphasize about model selection and use?