STOCK VALUATION COMPREHENSIVE EXAM PREPARATION FULL PACKAGE

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STOCK VALUATION COMPREHENSIVE EXAM
PREPARATION FULL PACKAGE QUESTIONS
ANSWERS AND RATIONALES 2026-27 VERSION



Here is a comprehensive 100-question practice exam on Stock Valuation,
designed for Financial Accounting and Finance courses. The exam covers
Dividend Discount Models (DDM), Discounted Cash Flow (DCF), Relative
Valuation (Multiples), Preferred Stock, and Valuation Fundamentals. Answers
are in bold and explanations are in italics.



SECTION 1: FUNDAMENTALS OF VALUATION (Questions 1-15)

1. The intrinsic value of a stock is:
A) The current market price
B) The present value of all expected future cash flows
C) The book value per share
D) The liquidation value
Answer: B) The present value of all expected future cash flows
Intrinsic value is the true or "fair" value of a stock, calculated as the
present value of all expected future cash flows (dividends and future
sale price) discounted at the appropriate required rate of return.

2. The two components of total shareholder return are:
A) Capital gains and dividend yield
B) Earnings per share and price-earnings ratio

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C) Book value and market value
D) Operating income and net income
Answer: A) Capital gains and dividend yield
Total shareholder return consists of dividend yield (dividends received
divided by purchase price) and capital gains (increase in stock price).
This is the fundamental return equation for stock investors.

3. The required rate of return on a stock is:
A) The same as the risk-free rate
B) The minimum return investors expect to earn
C) The historical average return
D) The dividend yield
Answer: B) The minimum return investors expect to earn
The required rate of return is the minimum return investors demand
to invest in a stock, reflecting the stock's risk. It is calculated using
CAPM: R = Rf + β(Rm - Rf).

4. In the formula P₀ = D₁/(r-g), what does "g" represent?
A) The growth rate of earnings
B) The growth rate of dividends
C) The required rate of return
D) The inflation rate
Answer: B) The growth rate of dividends
In the Gordon Growth Model, "g" represents the expected constant

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growth rate of dividends. This is the perpetual growth rate used to
calculate the present value of future dividends.

5. The Gordon Growth Model assumes that dividends grow at:
A) A constant rate forever
B) A variable rate forever
C) A constant rate for a finite period
D) Zero growth
Answer: A) A constant rate forever
The Gordon Growth Model (also called the Constant Growth DDM)
assumes that dividends will grow at a constant rate indefinitely. This
is a restrictive assumption but provides a simple valuation
framework.

6. For the Gordon Growth Model to work, the growth rate "g" must
be:
A) Greater than the required return "r"
B) Less than the required return "r"
C) Equal to the required return "r"
D) Any value
Answer: B) Less than the required return "r"
The Gordon Growth Model requires that g < r for the present value
calculation to converge to a finite value. If g ≥ r, the model breaks
down (produces negative or infinite values).

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7. Which of the following is NOT an input to the Gordon Growth
Model?
A) Expected dividend next year
B) Required rate of return
C) Current earnings per share
D) Expected growth rate
Answer: C) Current earnings per share
The Gordon Growth Model uses expected dividend next year (D₁),
required rate of return (r), and growth rate (g). Current EPS is not
directly used, though it may be used to estimate the payout ratio and
growth rate.

8. The zero-growth DDM is a special case of the Gordon Growth
Model where:
A) g = 0
B) g = r
C) r = 0
D) D₁ = 0
Answer: A) g = 0
When the growth rate is zero, the Gordon Growth Model simplifies to
P₀ = D₀/r, which is the value of a perpetuity. This applies to preferred
stock with fixed dividends.

9. The sustainable growth rate is calculated as:
A) ROE × Retention Ratio