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Equity Securities Valuation Flashcards

7 cards from real CSC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Equity Securities Valuation flashcards as text

  1. A stock's required rate of return is 9% and it just paid a $2.00 dividend expected to grow at 5% forever. What is its intrinsic value using the Gordon Growth Model?

    Answer: $52.50

    V = D1 ÷ (r − g) = ($2.00 × 1.05) ÷ (0.09 − 0.05) = $2.10 ÷ 0.04 = $52.50.

  2. Which statement best describes the difference between 'relative valuation' and 'absolute valuation'?

    Answer: Absolute valuation estimates intrinsic worth from fundamentals; relative valuation benchmarks a stock against peers using multiples

    Absolute valuation (e.g., DDM, DCF) estimates stand-alone intrinsic value, while relative valuation compares multiples such as P/E to industry peers.

  3. What does a high return on equity (ROE) indicate when used in equity valuation?

    Answer: The company generates significant profit relative to shareholders' equity, often justifying a premium valuation

    A high ROE indicates efficient use of equity capital and typically supports higher P/B ratios and valuation premiums.

  4. An investor applies a P/E multiple of 18× to forecast EPS of $3.50. What is the target share price?

    Answer: $63.00

    Target price = P/E × EPS = 18 × $3.50 = $63.00.

  5. In equity analysis, what is the 'margin of safety'?

    Answer: The gap between a stock's intrinsic value and its current market price, providing a buffer against errors

    Margin of safety is the discount at which a stock trades below its estimated intrinsic value, cushioning the investor against misjudgment.

  6. Which factor would DECREASE the theoretical P/E ratio a stock should command, all else equal?

    Answer: An increase in financial risk and uncertainty

    Greater financial risk raises the required rate of return, which compresses the justified P/E multiple.

  7. When using comparable company multiples, why must an analyst adjust for differences in growth rates and risk?

    Answer: Differences in growth and risk cause multiples to differ; failing to adjust leads to inaccurate valuation conclusions

    A high-growth, low-risk peer commands a higher multiple than a low-growth, high-risk company, so raw multiple comparisons without adjustment are misleading.