Equity Valuation: Application and Processes – Question Bank
LO.a: Define valuation and intrinsic value and explain sources of perceived mispricing.
1. Which of the following statements is most likely correct?
A. An investment is expected to yield abnormal positive returns when its market price is
higher than its intrinsic value.
B. When market prices accurately reflect all information, investors would be motivated to
incur the costs of information gathering.
C. Active management seeks to earn excess risk adjusted returns by way of investment
analysis.
2. “The value of an asset given a theoretically complete understanding of its investment
characteristics” is known as the: A. intrinsic value.
B. liquidation value.
C. market value.
3. Active managers try to identify mispricing which is the difference between: A. estimated
intrinsic value and intrinsic value.
B. unobservable intrinsic value and market price.
C. estimated intrinsic value and market price.
LO.b: Explain the going concern assumption and contrast a going concern value to a
liquidation value.
4. Which of the following statements is most likely accurate?
A. The going concern assumption implies that a business will continue its activities for at
least ten years.
B. The liquidation value of a company is the value of the company assigned by its
liquidators during bankruptcy.
C. Generally, the value of a company if it continues operation is different from its value if it
were to be dissolved immediately.
LO.c: Describe definitions of value and justify which definition of value is most relevant to
public company valuation.
5. “Fair market value” is most accurately described by which of the following statements? A.
The value at which the asset is traded in the market.
B. The price at which an asset changes hands between a willing buyer and a willing seller
when neither party is under compulsion to trade.
C. Value of an investment to a particular buyer based on his/her needs and expectations.
LO.d: Describe applications of equity valuation
6. Which rof rthe rfollowing rstatements ris rleast rlikely rcorrect? r
Copyright © IFT. All rights reserved. Page 1
, Equity Valuation: Application and Processes – Question Bank
A. Equity rvaluation ris rused rby ranalysts rto rextract rmarket rexpectations rreflected rin rstock
rprices. r
B. An rinvestment rbank rcan rutilize requity rvaluation rto roffer ra rfairness ropinion ron ra
rmerger. r
C. Equity rvaluation ris rnot rrelevant rwhen rdetermining rshare-based rcompensation. r r
r
LO.e: rDescribe rquestions rthat rshould rbe raddressed rin rconducting ran rindustry rand
rcompetitive ranalysis. r
r
7. Which rof rthe rfollowing ris ran rindication rof rpoor rearnings rquality? rA. rThe rcompany rdoes
rnot ruse roff-balance rsheet rfinancing. r r
B. The rcompany rreports roperating rand rnon-operating rincome rseparately. r
C. The rcompany rrecognizes rrevenue rwhen rorders rare rreceived rbut rholds rback rgoods rfor
rfuture rdelivery. r
r
8. Which rof rthe rfollowing rindicators rleast rlikely rrepresent rpoor rfinancial rreporting rquality?
rA. rNot rassuming rlong rdepreciable rlives rfor rassets. r
B. Using rspecial rpurpose rentities rto rremove rassets rfrom rthe rbalance rsheet. r
C. Capitalizing rexpenses rto rdelay rtheir rrecognition. r
r
9. Which rof rthe rfollowing rquestions rare rnot rrelevant rto runderstanding ra rcompany’s rbusiness
rmodel? r
A. How rprofitable rare rthe rindustries rin rwhich rthe rcompany roperates? r
B. What ris ran rappropriate rdiscount rrate rto ruse rin rvaluation rof rthe rcompany? rC. rWhat ris
rthe rcompany’s rcompetitive rstrategy? r
r
LO.f: rContrast rabsolute rand rrelative rvaluation rmodels rand rdescribe rexamples rof reach
rtype rof rmodel. r
r
10. Which rof rthe rfollowing ris ra rrelative rvaluation rmethod? r
A. Discounted rcash rflow rvaluation r
B. Asset rbased rvaluation r
C. Price rto rsales rvaluation r
r
LO.g: rDescribe rsum-of-the-parts rvaluation rand rconglomerate rdiscounts. r
r
11. In rwhich rof rthe rfollowing rscenarios ris rsum-of-parts rvaluation rmost ruseful? r
A. When ra rcompany rowns rdifferent rsubsidiaries rin rthe rsame rbusiness rsegment. r
B. When rthe rcompany ris rgoing rinto rliquidation rand rdissolving rits rindividual rbusiness
rsegments. r r
C. When rthe rcompany roperates rin rdifferent rbusiness rsegments reach rwith rits runique
rcharacteristics. r
r
12. Which rof rthe rfollowing ris rthe rleast rappropriate rrationale rfor rconglomerate rdiscounts? r
A. The rcompany’s rallocation rof rcapital rto rdifferent rbusiness rdivisions rmay rnot rmaximize
rshareholders’ rwealth. r r r
B. The rcompany rmay rhave rdiversified rin rorder rto rhide rpoor roperating rperformance. r
Copyright © IFT. All rights reserved. Page 2
LO.a: Define valuation and intrinsic value and explain sources of perceived mispricing.
1. Which of the following statements is most likely correct?
A. An investment is expected to yield abnormal positive returns when its market price is
higher than its intrinsic value.
B. When market prices accurately reflect all information, investors would be motivated to
incur the costs of information gathering.
C. Active management seeks to earn excess risk adjusted returns by way of investment
analysis.
2. “The value of an asset given a theoretically complete understanding of its investment
characteristics” is known as the: A. intrinsic value.
B. liquidation value.
C. market value.
3. Active managers try to identify mispricing which is the difference between: A. estimated
intrinsic value and intrinsic value.
B. unobservable intrinsic value and market price.
C. estimated intrinsic value and market price.
LO.b: Explain the going concern assumption and contrast a going concern value to a
liquidation value.
4. Which of the following statements is most likely accurate?
A. The going concern assumption implies that a business will continue its activities for at
least ten years.
B. The liquidation value of a company is the value of the company assigned by its
liquidators during bankruptcy.
C. Generally, the value of a company if it continues operation is different from its value if it
were to be dissolved immediately.
LO.c: Describe definitions of value and justify which definition of value is most relevant to
public company valuation.
5. “Fair market value” is most accurately described by which of the following statements? A.
The value at which the asset is traded in the market.
B. The price at which an asset changes hands between a willing buyer and a willing seller
when neither party is under compulsion to trade.
C. Value of an investment to a particular buyer based on his/her needs and expectations.
LO.d: Describe applications of equity valuation
6. Which rof rthe rfollowing rstatements ris rleast rlikely rcorrect? r
Copyright © IFT. All rights reserved. Page 1
, Equity Valuation: Application and Processes – Question Bank
A. Equity rvaluation ris rused rby ranalysts rto rextract rmarket rexpectations rreflected rin rstock
rprices. r
B. An rinvestment rbank rcan rutilize requity rvaluation rto roffer ra rfairness ropinion ron ra
rmerger. r
C. Equity rvaluation ris rnot rrelevant rwhen rdetermining rshare-based rcompensation. r r
r
LO.e: rDescribe rquestions rthat rshould rbe raddressed rin rconducting ran rindustry rand
rcompetitive ranalysis. r
r
7. Which rof rthe rfollowing ris ran rindication rof rpoor rearnings rquality? rA. rThe rcompany rdoes
rnot ruse roff-balance rsheet rfinancing. r r
B. The rcompany rreports roperating rand rnon-operating rincome rseparately. r
C. The rcompany rrecognizes rrevenue rwhen rorders rare rreceived rbut rholds rback rgoods rfor
rfuture rdelivery. r
r
8. Which rof rthe rfollowing rindicators rleast rlikely rrepresent rpoor rfinancial rreporting rquality?
rA. rNot rassuming rlong rdepreciable rlives rfor rassets. r
B. Using rspecial rpurpose rentities rto rremove rassets rfrom rthe rbalance rsheet. r
C. Capitalizing rexpenses rto rdelay rtheir rrecognition. r
r
9. Which rof rthe rfollowing rquestions rare rnot rrelevant rto runderstanding ra rcompany’s rbusiness
rmodel? r
A. How rprofitable rare rthe rindustries rin rwhich rthe rcompany roperates? r
B. What ris ran rappropriate rdiscount rrate rto ruse rin rvaluation rof rthe rcompany? rC. rWhat ris
rthe rcompany’s rcompetitive rstrategy? r
r
LO.f: rContrast rabsolute rand rrelative rvaluation rmodels rand rdescribe rexamples rof reach
rtype rof rmodel. r
r
10. Which rof rthe rfollowing ris ra rrelative rvaluation rmethod? r
A. Discounted rcash rflow rvaluation r
B. Asset rbased rvaluation r
C. Price rto rsales rvaluation r
r
LO.g: rDescribe rsum-of-the-parts rvaluation rand rconglomerate rdiscounts. r
r
11. In rwhich rof rthe rfollowing rscenarios ris rsum-of-parts rvaluation rmost ruseful? r
A. When ra rcompany rowns rdifferent rsubsidiaries rin rthe rsame rbusiness rsegment. r
B. When rthe rcompany ris rgoing rinto rliquidation rand rdissolving rits rindividual rbusiness
rsegments. r r
C. When rthe rcompany roperates rin rdifferent rbusiness rsegments reach rwith rits runique
rcharacteristics. r
r
12. Which rof rthe rfollowing ris rthe rleast rappropriate rrationale rfor rconglomerate rdiscounts? r
A. The rcompany’s rallocation rof rcapital rto rdifferent rbusiness rdivisions rmay rnot rmaximize
rshareholders’ rwealth. r r r
B. The rcompany rmay rhave rdiversified rin rorder rto rhide rpoor roperating rperformance. r
Copyright © IFT. All rights reserved. Page 2
