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56 multiple-choice questions and 19 flashcards on Equity Valuation, about 14% of the CFA Level II bank. Every one carries a written rationale.
Equity Valuation is one of 10 chapters in CoStudy's CFA Level II bank, and it holds 56 of the bank's 401 multiple-choice questions — roughly 14% of the total. That proportion is not arbitrary: chapters follow the certifying body's published exam outline, and the number of questions in each is set by that domain's published weight, so the share of your practice time this chapter takes matches the share of the real exam it accounts for.
Studying by chapter is worth doing once you have a diagnostic score. A single overall percentage tells you whether you are close; it does not tell you which domain is dragging. Working a weak chapter in isolation, and re-testing it in isolation, is the fastest way to move a score that has stalled — and it is why the mock exams in CoStudy report by domain rather than as one number.
8 questions drawn from this chapter, with the full rationale shown — the controlling principle behind the right answer, and why each wrong option tempts and fails.
A 2-stage Dividend Discount Model (DDM) is appropriate when:
Answer: D — The company has high growth
A) EV/EBITDA capital-neutral multiple — related concept, not the definition. B) Discount for lack of marketability — related concept, not the definition. C) Control premium for majority stake — related concept, not the definition. D) Correct — this identifies The company has high growth temporarily before.
In valuing a private firm using the guideline public company method, an analyst should:
Answer: D — Adjust multiples for differences in size, growth, profitability, and risk relative to the guideline public companies
A) EV/EBITDA neutralizes capital-structure differences but doesn't itself address size/growth/risk differences versus guideline firms. B) A marketability discount is typically applied afterward for the private firm's lack of a ready market, not the core guideline-company adjustment. C) A control premium applies only if valuing a controlling interest, a separate adjustment. D) Correct — the guideline public company method requires adjusting observed multiples for differences in size, growth, profitability, and risk between the subject firm and the public guideline companies.
A private company is valued using the guideline public company method. Adjustments typically applied include all EXCEPT:
Answer: D — Addition of an option-pricing
A) EV/EBITDA capital-neutral multiple — related concept, not the definition. B) Discount for lack of marketability — related concept, not the definition. C) Control premium for majority stake — related concept, not the definition. D) Correct — this identifies Addition of an option-pricing adjustment for tradability.
A stock has ROE of 16%, a sustainable growth rate of 6%, and a required return on equity of 12%. Using the Gordon growth model, the justified trailing P/B multiple is CLOSEST to:
Answer: B — 1.67
A) Uses ROE/(r − g) = 0.16/0.06 without netting the growth rate out of the numerator, omitting the required (ROE − g) term. B) Correct — justified P/B = (ROE − g)/(r − g) = (0.16 − 0.06)/(0.12 − 0.06) = 0.10/0.06 ≈ 1.67. C) Inverts the ratio, computing (r − g)/(ROE − g) instead of (ROE − g)/(r − g). D) Uses (ROE − g)/r = 0.10/0.12 instead of (ROE − g)/(r − g), forgetting to subtract g from the denominator.
A pro-rata, as-if-freely-traded (marketable minority) value of a 10% stake in a private company is $2,400,000. Applying a discount for lack of marketability (DLOM) of 30% to reflect the illiquidity of the private shares, the estimated nonmarketable minority value of the stake is CLOSEST to:
Answer: A — $1,680,000
A) Correct — nonmarketable minority value = $2,400,000 × (1 − 0.30) = $1,680,000. B) Fails to apply the DLOM at all, using the marketable minority value unadjusted despite the private shares' illiquidity. C) Adds the 30% factor instead of subtracting it, incorrectly increasing rather than discounting the value. D) Applies an additional minority discount on top of the DLOM ($2,400,000 × 0.70 × 0.85), double-counting a minority-interest adjustment that is already embedded in the $2,400,000 base value.
Forecast year-1 FCFE = $50M; growing at 25% for 3 more years, then 4% perpetually. Cost of equity = 10%. Terminal value at end of year 4 is approximately:
Answer: D — $50 × (1.25)³ × (1.04) / (0.10 − 0.04) per calc
A) $55.00 per calc approx (rounded) ≈ value est. — off-by-percent numeric trap. B) $45.00 per calc approx (rounded) ≈ value est. — off-by-percent numeric trap. C) $60.00 per calc approx (rounded) ≈ value est. — off-by-percent numeric trap. D) Correct — the computed value is $50 × (1.25)³ × (1.04) / (0.10 − 0.04).
Corporate financial decisions: pecking order theory:
Answer: C — Firms prefer internal financing
A) Empire-building agency behavior — related concept, not the definition. B) Constant payout dividend policy — related concept, not the definition. C) Correct — this identifies Firms prefer internal financing. D) Carve-out partial IPO structure — related concept, not the definition.
A firm's FCFF is $400M, target debt-to-capital is 30%, after-tax cost of debt 4.5%, cost of equity 12%, and steady-state growth 3%. WACC and firm value are approximately:
Answer: A — WACC = 9.75% in this context
A) Correct — this identifies WACC = 9.75% in this context. B) FCFF discounted at firm WACC — wrong discount rate for the cash flow. C) Discount for lack of control — related concept, not the definition. D) Multistage DDM growth phases — wrong DDM stage assumption.
4 cards from the 19 in this chapter.
What is the difference between trailing and leading P/E?
Trailing: price / past 12 months EPS. Leading (forward): price / next 12 months EPS. Leading reflects expectations; trailing is realized.
In a vignette: company under price-to-sales scrutiny. Strength of P/S?
Sales harder to manipulate than earnings; useful for cyclical or unprofitable firms. Weakness: ignores cost structure, leverage; comparable across margin levels misleading.
Why use EV/EBITDA over P/E?
Capital-structure neutral, ignores D&A differences (across firms with different asset bases), captures debt. Better for cross-company / cross-border comparisons.
What is the H-model?
Two-stage DDM with linear decline from initial growth (gₛ) to terminal (gₗ) over 2H years. P = D₀(1+gₗ)/(r−gₗ) + D₀H(gₛ−gₗ)/(r−gₗ).
These are a sample. The full Equity Valuation chapter runs 75 items with per-chapter progress tracking, on the web and in the iOS app.
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