Fundamental Analysis & Valuation Flashcards
7 cards from real CPT practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Fundamental Analysis & Valuation flashcards as text
In a sum-of-the-parts (SOTP) valuation, each business segment is valued separately primarily because:
Answer: Each segment may warrant a different valuation multiple based on its risk and growth profile
SOTP analysis reflects that different business lines have different growth rates, risk profiles, and industry comparables, so applying a single multiple to a conglomerate can misrepresent value.
When calculating enterprise value (EV), which of the following is SUBTRACTED from market capitalization?
Answer: Cash and cash equivalents
Cash is subtracted when computing EV because an acquirer would effectively receive that cash, reducing the true cost of acquiring the business (EV = Market Cap + Debt + Preferred + Minority Interest – Cash).
A company's PEG ratio is 0.6. Compared to the rule-of-thumb benchmark of 1.0, this stock appears:
Answer: Potentially undervalued relative to its earnings growth rate
A PEG ratio below 1.0 suggests the stock may be undervalued relative to its growth rate, as investors are paying less than one dollar of P/E for each percentage point of expected growth.
Which of the following best describes the concept of 'economic moat' in fundamental analysis?
Answer: A sustainable competitive advantage that protects long-term profitability
Coined by Warren Buffett, an economic moat refers to durable competitive advantages—like brand, switching costs, or network effects—that protect a company from competitors and sustain excess returns.
Days Sales Outstanding (DSO) increasing from 30 to 55 days over a year most likely indicates:
Answer: Customers are taking longer to pay, raising receivables quality concerns
Rising DSO means the company is waiting longer to collect cash from customers, which can signal deteriorating customer financial health, aggressive sales terms, or potential bad debt exposure.
In a leveraged buyout (LBO) analysis, the primary driver of equity returns is typically:
Answer: Both debt paydown and potential multiple expansion
LBO returns are driven by a combination of EBITDA growth, debt repayment from free cash flows (which increases equity value), and ideally multiple expansion at exit.
A company with a high return on invested capital (ROIC) that consistently exceeds its weighted average cost of capital (WACC) is:
Answer: Creating shareholder value by deploying capital profitably
When ROIC > WACC, each dollar of capital deployed earns more than its cost, meaning the company is creating economic value and generating returns above its investors' required return.