CFAI 2024 EQ M8

1. An analyst estimates the intrinsic value of a stock to be in the range of €17.85 to €21.45. The current market price of the stock is €24.35. This stock is most likely:

• 1. overvalued

• 1. undervalued

• 1. fairly valued

1. In asset-based valuation models, the intrinsic value of a common share of stock is based on the

• 1. estimated market value of the company’s assets

• 1. estimated market value of the company’s assets plus liabilities

• 1. estimated market value of the company’s assets minus liabilities

1. Which of the following is most likely used in a present value model?

• 1. Enterprise value

• 1. Price to free cash flow

• 1. Free cash flow to equity

1. Book value is least likely to be considered when using

• 1. a multiplier model

• 1. an asset-based valuation model

• 1. a present value model

1. An analyst is attempting to calculate the intrinsic value of a company and has gathered the following company data: EBITDA, total market value, and market value of cash and short-term investments, liabilities, and preferred shares. The analyst is least likely to use:

• 1. a multiplier model

• 1. a discounted cash flow model

• 1. an asset-based valuation model

An analyst who bases the calculation of intrinsic value on dividend-paying capacity rather than expected dividends will most likely use the

• 1. dividend discount model

• 1. free cash flow to equity model

• 1. cash flow from operations model

An investor expects to purchase shares of common stock today and sell them after two years. The investor has estimated dividends for the next two years, D1 and D2, and the selling price of the stock two years from now, P2. According to the dividend discount model, the intrinsic value of the stock today is the present value of:

• 1. next year’s dividend, D1

• 1. future expected dividends, D1 and D2

• 1. future expected dividends and price—D1, D2 and P2

In the free cash flow to equity (FCFE) model, the intrinsic value of a share of stock is calculated as:

• 1. the present value of future expected FCFE

• 1. the present value of future expected FCFE plus net borrowing

• 1. the present value of future expected FCFE minus fixed capital investment

With respect to present value models, which of the following statements is most accurate?

• 1. Present value models can be used only if a stock pays a dividend

• 1. Present value models can be used only if a stock pays a dividend or is expected to pay a dividend

• 1. Present value models can be used for stocks that currently pay a dividend, are expected to pay a dividend, or are not expected to pay a dividend.

11. Two analysts estimating the value of a non-convertible, non-callable, perpetual preferred stock with a constant dividend arrive at different estimated values. The most likely reason for the difference is that the analysts used different:

• 1. time horizons

• 1. required rates of return

• 1. estimated dividend growth rates