Investment Advisor Securities Analysis and Valuation 1 — Questions and Answers
Question 1: A stock trades at $50 per share with earnings per share of $2.50. What is its price-to-earnings (P/E) ratio?
- 10
- 15
- 20 (Correct answer)
- 25
Correct answer: 20
The P/E ratio is calculated by dividing the stock price ($50) by EPS ($2.50), which equals 20.
Question 2: Which valuation method estimates a stock's intrinsic value by discounting its projected future cash flows back to the present?
- Comparable company analysis
- Discounted cash flow (DCF) analysis (Correct answer)
- Price-to-book ratio analysis
- Dividend yield analysis
Correct answer: Discounted cash flow (DCF) analysis
DCF analysis values a security by discounting its expected future cash flows at an appropriate discount rate to arrive at a present value.
Question 3: A bond with a face value of $1,000, a coupon rate of 6%, and a market price of $1,050 is said to be trading at:
- Par
- A discount
- A premium (Correct answer)
- Its intrinsic value
Correct answer: A premium
When a bond's market price exceeds its face (par) value, it is trading at a premium.
Question 4: According to the Dividend Discount Model (DDM), what is the primary driver of a stock's intrinsic value?
- Future earnings growth
- Present value of expected future dividends (Correct answer)
- Current book value of equity
- Price-to-earnings expansion
Correct answer: Present value of expected future dividends
The DDM calculates intrinsic value as the present value of all expected future dividends, discounted at the required rate of return.
Question 5: A stock's beta is 1.5. If the overall market rises by 10%, how much would this stock be expected to rise?
- 10%
- 15% (Correct answer)
- 1.5%
- 150%
Correct answer: 15%
Beta measures systematic risk relative to the market; a beta of 1.5 means the stock is expected to move 1.5 times the market's move, so 1.5 × 10% = 15%.
Question 6: Which technical analysis indicator compares the magnitude of recent gains to recent losses to identify overbought or oversold conditions?
- Moving Average Convergence Divergence (MACD)
- Relative Strength Index (RSI) (Correct answer)
- Bollinger Bands
- Fibonacci retracement
Correct answer: Relative Strength Index (RSI)
The RSI measures the speed and magnitude of price changes on a 0–100 scale; readings above 70 suggest overbought and below 30 suggest oversold conditions.
Question 7: A company has a price-to-book (P/B) ratio of 0.8. This most likely indicates the stock is trading:
- At a significant premium to its assets
- At exactly its book value
- Below its book value (Correct answer)
- Above its intrinsic value
Correct answer: Below its book value
A P/B ratio below 1.0 means the stock is priced below the company's net asset (book) value per share.
Investment Advisor Securities Analysis and Valuation 1
A stock trades at $50 per share with earnings per share of $2.50.
What is its price-to-earnings (P/E) ratio?