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Free Questions › CFA › Equity
Free CFA Equity Practice Questions & Answers
400 exam-style Equity questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 331
EV/EBITDA is unusable when:
Select an option first.
Correct answer: A — EBITDA is negative
Explanation: Why correct: Negative EBITDA → meaningless multiple. B/C/D: Do not invalidate the multiple.
Question 332
P/CF is preferred over P/E when:
Select an option first.
Correct answer: A — Earnings are volatile
Explanation: Why correct: Cash flow smoother than earnings. B: Negative CF makes P/CF unusable. C/D: Irrelevant.
Question 333
All multiples ultimately rely on:
Select an option first.
Correct answer: A — Discounted cash flow logic
Explanation: Why correct: Multiples are shortcuts derived from DCF fundamentals. B/C/D: Not the underlying driver. 📍 INDUSTRY & COMPANY ANALYSIS — 30 MCQs WITH FULL EXPLANATIONS
Question 334
Supplier power increases when:
Select an option first.
Correct answer: C — Inputs are critical and differentiated
Explanation: Why correct: Unique, critical inputs → suppliers can charge more. A/B/D: Reduce supplier power.
Question 335
Industry Life‑Cycle – Growth Stage The growth stage is characterized by:
Select an option first.
Correct answer: B — High reinvestment and rapid demand expansion
Explanation: Why correct: Growth stage = rapid demand + heavy reinvestment. A/D: Decline or shakeout stage. C: Mature stage.
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Question 336
Industry Life‑Cycle – Mature Stage A mature industry typically exhibits:
Select an option first.
Correct answer: B — High competitive rivalry
Explanation: Why correct: Mature industries → slow growth → firms compete on price. A: Pricing power usually low. C: Cash flows positive. D: Failure rates high in early stages.
Question 337
Buyer power increases when:
Select an option first.
Correct answer: C — Buyers can backward integrate
Explanation: Why correct: Backward integration → buyers threaten to produce themselves. A/B/D: Reduce buyer power.
Question 338
A firm with high market share and low cost structure most likely has:
Select an option first.
Correct answer: B — Strong competitive position
Explanation: Why correct: High share + low cost → strong position. A/C/D: Opposite.
Question 339
The strongest determinant of industry profitability is:
Select an option first.
Correct answer: B — Strength of competitive forces
Explanation: Why correct: Porter’s forces determine profitability. A: Only one force. C/D: Not primary drivers.
Question 340
Industry Life‑Cycle – Shakeout Stage Shakeout stage is characterized by:
Select an option first.
Correct answer: B — Excess capacity and consolidation
Explanation: Why correct: Shakeout = overcapacity + firm exits. A: Growth stage. C: Mature stage. D: Rivalry high.
Question 341
A firm with high operating leverage is most vulnerable when:
Select an option first.
Correct answer: B — Demand decreases
Explanation: Why correct: High fixed costs → revenue declines → profit collapses. A/C/D: Improve profitability.
Question 342
Early indicator of disruption risk:
Select an option first.
Correct answer: C — High profit margins
Explanation: Why correct: High margins attract disruptors. A/B: Reduce disruption risk. D: Low R&D may cause decline but not necessarily disruption.
Question 343
A control premium is most justified when the acquirer can:
Select an option first.
Correct answer: C — Improve operating efficiency
Explanation: Why correct: Control is valuable when it enables operational improvements that increase cash flows. A/B: Possible but not primary drivers of value. D: Tax benefits rarely arise solely from control.
Question 344
Method (GPCM) is:
Select an option first.
Correct answer: A — Lack of comparable firms
Explanation: Why correct: Private firms often lack true public comparables. B: Liquidity is an advantage. C: Public comps rely on public info. D: Multiples always available.
Question 345
Private company discount rates are typically:
Select an option first.
Correct answer: B — Higher due to company‑specific risk
Explanation: Why correct: Private firms face higher uncertainty → higher discount rates. A/C/D: Incorrect.
Question 346
DLOM is often estimated using:
Select an option first.
Correct answer: B — Restricted stock studies
Explanation: Why correct: Restricted stock trades provide real‑world illiquidity discounts. A/C/D: Not used for DLOM.
Question 347
Private company multiples are typically:
Select an option first.
Correct answer: B — Lower due to illiquidity
Explanation: Why correct: Illiquidity → lower multiples. A/C/D: Incorrect.
Question 348
Control premiums may be overstated when:
Select an option first.
Correct answer: A — Synergies are uncertain
Explanation: Why correct: If synergies fail to materialize → premium overstated. B/C/D: Not primary drivers.
Question 349
Private company discount rates include:
Select an option first.
Correct answer: C — Company‑specific risk premium
Explanation: Why correct: Private firms have unique risks → add CSRP. A/B/D: Partial.
Question 350
Transaction multiples are typically:
Select an option first.
Correct answer: B — Higher due to control premiums
Explanation: Why correct: Transactions reflect control → higher multiples. A: Opposite. C/D: Incorrect.
Question 351
Market approach typically yields:
Select an option first.
Correct answer: B — Minority value
Explanation: Why correct: Public multiples reflect minority trading prices. A: GTM gives control value. C/D: Not market approach.
Question 352
Forecasting private company cash flows is harder because:
Select an option first.
Correct answer: B — They have less disclosure
Explanation: Why correct: Limited disclosure → higher uncertainty. A/C/D: Opposite.
Question 353
Private company valuation ultimately requires:
Select an option first.
Correct answer: A — Adjusting for control and marketability
Explanation: Why correct: Control and marketability are the two defining adjustments. B/C/D: Too narrow.
Question 354
Multiples vs DCF – value trap A stock trades at a P/E far below peers. DCF analysis using conservative assumptions yields a value close to the current price. Which is most likely?
Select an option first.
Correct answer: B — The stock is a value trap
Explanation: Why correct: If DCF (fundamental) supports the low price, the low multiple likely reflects genuine deterioration, i.e., a value trap. A: A value opportunity would show DCF value above price. C: Overestimating growth would push DCF above price, not match it. D: Efficiency status is not implied by this single observation.
Question 355
EV/EBITDA vs P/E – leverage and taxes You compare two firms in different countries with very different tax regimes and leverage levels. Which multiple is conceptually more appropriate?
Select an option first.
Correct answer: C — EV/EBITDA
Explanation: Why correct: EV/EBITDA is pre‑interest and pre‑tax, making it more robust across differing leverage and tax environments. A: P/E is heavily affected by taxes and leverage. B: P/B is more about ROE vs r, not directly about tax/leverage comparability. D: P/S ignores profitability and capital structure.
Question 356
PEG ratio – cross‑firm comparison You compare two firms: - Firm A: P/E = 18, growth = 9% - Firm B: P/E = 24, growth = 12% Which statement is most accurate?
Select an option first.
Correct answer: C — Both have identical PEG and are equally valued on growth‑adjusted basis
Explanation: Why correct: PEG_A = 18/9 = 2; PEG_B = 24/12 = 2 → same growth‑adjusted valuation. A/B: Each claims one is cheaper; both are wrong because PEGs are equal. D: PEG is perfectly computable with positive P/E.
Question 357
Private company – control vs minority value You value a private firm using public trading multiples of comparable companies. The resulting value is best interpreted as:
Select an option first.
Correct answer: B — Minority, marketable value
Explanation: Why correct: Public trading multiples reflect minority, marketable interests; applying them to a private firm yields a minority, marketable value before DLOM/DLOC. A: Control requires transaction multiples or explicit control adjustments. C/D: Marketability and control discounts/premiums haven’t yet been applied.
Question 358
EV/EBITDA and working capital A capital‑intensive firm with large seasonal working capital swings is valued using EV/EBITDA. Which is the main risk?
Select an option first.
Correct answer: B — EV/EBITDA will overstate value because it ignores working capital needs
Explanation: Why correct: EBITDA excludes working capital changes; for a firm with large WC needs, EV/EBITDA can overstate sustainable cash flow and value. A: Depreciation omission is an issue, but WC omission is more critical here. C: Capital intensity and WC needs directly affect the reliability of EBITDA. D: Multiples are shortcuts, not universally superior.
Question 359
P/E and earnings quality Two firms have identical P/E ratios, but Firm A has highly volatile, low‑quality earnings, while Firm B has stable, high‑quality earnings. Which is most likely?
Select an option first.
Correct answer: A — Firm A is overvalued relative to Firm B
Explanation: Why correct: For the same P/E, lower earnings quality implies higher effective risk and likely overvaluation relative to a high‑quality earnings peer. B: The higher‑quality firm is more likely fairly or undervalued at the same multiple. C: Equal P/E does not mean equal value when risk/quality differ. D: P/E is influenced by risk, but here it’s not differentiating enough.
Question 360
Private company – guideline transactions vs public comps You value a private firm using guideline public company multiples and guideline transaction multiples. Transaction multiples are consistently higher. The most likely explanation is:
Select an option first.
Correct answer: B — Transactions reflect control and synergy premiums
Explanation: Why correct: Guideline transactions typically reflect control and sometimes synergy, leading to higher multiples than minority trading prices. A: Not necessarily; the difference is structural (control), not mispricing. C: Public trading prices are minority, not control. D: Transaction data are central to control‑level valuation.
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