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Equity Investments - Equity Investments Section 2

Avatto > > CFA Level 1 > > PRACTICE QUESTIONS > > Equity Investments > > Equity Investments Section 2

71. If an investor changes his investment horizon from 10 years to 20 years, what will it do to the stock’s intrinsic value, keeping all other factors constant?

  • Option : C
  • Explanation : The intrinsic value of a security is independent of the investor’s holding period.
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72. Peter Lynch determines the intrinsic value of an equity security to be less than its current market value. Lynch believes that the equity is most likely:

  • Option : B
  • Explanation : Since the market value is more than intrinsic value the stock is overvalued.
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73. A decrease in the dividend payout ratio will most likely decrease the intrinsic value when using a(n):

  • Option : C
  • Explanation : A decrease in the dividend payout ratio will decrease the cash expected to be distributed to shareholders. The Dividend discount model is the present value of the cash expected to be distributed to shareholders. Therefore a decrease in the dividend payout ratio will decrease the intrinsic value in a present value model.
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74. An analyst is estimating intrinsic value of an equity security. To do so, he has constructed a model which projects cash flows over the next several years. Which of the following models is he most likely using?

  • Option : B
  • Explanation : Since he is evaluating future cash flows he is most likely using a presentvalue model.
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75. Free cash flow to equity is calculated as:

  • Option : C
  • Explanation : FCFE = CFO – FC Inv + Net borrowing.
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Equity Investments Section 2