ABV Exam Part 2 Questions & Answers
2024/2025
What is the Gordon Growth Model? - ANSWERSa model that uses the current dividend paid, the
expected growth rate of dividends, and the required return on equities to calculate the price of a stock
(Next Yr Div/(cost of equity - growth rate of div))
What is the excess earnings model? - ANSWERSUses 2 rates, one for Intangible, one for Tangible.
Tangible rate = Capitalized cash flow rate of return
When Should DCF be used? - ANSWERSThe company's performance is not currently at a normalized level
What is the difference between rates in Excess earnings method? - ANSWERSIntangibles tend to be
higher as they are riskier
What is the difference between DCF and CCF? - ANSWERSCCF is single-period, steady cash flows
What is the main different between Invested Capital and Direct Equity formulas? - ANSWERSInvested
Capital uses WACC, Direct uses equity discount rate
What is the formula for Excess earnings - ANSWERS((Earnings attributable to return on assets)/(Rate of
cap for earnings of net tangible assets))/((earnings in excess of return on assets)/(rate of cap for
intangible assets))
What are the differences between Cash Flow to Equity and Cash Flow to Invested Capital -
ANSWERSEquity subtracts repayments of debt and adds borrowings. Invested Capital does not and adds
Interest expense
What is the formula for Cash flow to invested capital - ANSWERSNormalize net income + interest + non-
cash items - incremental debt free QC + Anticipated Capital expenditures
2024/2025
What is the Gordon Growth Model? - ANSWERSa model that uses the current dividend paid, the
expected growth rate of dividends, and the required return on equities to calculate the price of a stock
(Next Yr Div/(cost of equity - growth rate of div))
What is the excess earnings model? - ANSWERSUses 2 rates, one for Intangible, one for Tangible.
Tangible rate = Capitalized cash flow rate of return
When Should DCF be used? - ANSWERSThe company's performance is not currently at a normalized level
What is the difference between rates in Excess earnings method? - ANSWERSIntangibles tend to be
higher as they are riskier
What is the difference between DCF and CCF? - ANSWERSCCF is single-period, steady cash flows
What is the main different between Invested Capital and Direct Equity formulas? - ANSWERSInvested
Capital uses WACC, Direct uses equity discount rate
What is the formula for Excess earnings - ANSWERS((Earnings attributable to return on assets)/(Rate of
cap for earnings of net tangible assets))/((earnings in excess of return on assets)/(rate of cap for
intangible assets))
What are the differences between Cash Flow to Equity and Cash Flow to Invested Capital -
ANSWERSEquity subtracts repayments of debt and adds borrowings. Invested Capital does not and adds
Interest expense
What is the formula for Cash flow to invested capital - ANSWERSNormalize net income + interest + non-
cash items - incremental debt free QC + Anticipated Capital expenditures
