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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 61
If a firm retains more earnings but ROE stays constant, RI will:
Select an option first.
Correct answer: A — Increase
Explanation: Higher beginning equity → higher equity charge but also higher income; if ROE > required return, RI rises.
Question 62
Clean surplus violations typically arise from:
Select an option first.
Correct answer: B — Foreign currency translation adjustments
Explanation: Certain OCI items (e.g., FX translation, some pension adjustments) bypass income statement.
Question 63
A firm with high non‑recurring losses will have RI that is:
Select an option first.
Correct answer: B — Understated
Explanation: One‑time losses depress NI and ROE → RI appears lower than sustainable level.
Question 64
Which is a key input to RI valuation?
Select an option first.
Correct answer: B — Beginning book value
Explanation: RI model builds on starting BV plus PV of future RI.
Question 65
The RI model is most sensitive to errors in forecasting:
Select an option first.
Correct answer: B — ROE
Explanation: ROE drives RI directly; small errors in ROE → big valuation impact.
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Question 66
Which firm is most suitable for RI valuation?
Select an option first.
Correct answer: A — A firm with negative free cash flow but positive earnings
Explanation: RI works well when FCF is unreliable/negative but accounting earnings and BV are meaningful.
Question 67
A firm’s RI will be negative when:
Select an option first.
Correct answer: B — ROE < required return
Explanation: RI = (ROE − r) × BV; if ROE < r → RI < 0.
Question 68
The RI model avoids double‑counting because:
Select an option first.
Correct answer: A — Book value already includes past earnings
Explanation: RI adds only future abnormal earnings to existing BV, not re‑counting past earnings.
Question 69
Which is a limitation of RI valuation?
Select an option first.
Correct answer: A — Requires clean surplus
Explanation: If clean surplus fails, RI and BV are not consistent with economic value.
Question 70
A firm has beginning book value of $80, ROE of 15%, and required return of 12%. What is RI?
Select an option first.
Correct answer: A — $2.4
Explanation: Net income = 0.15 × 80 = 12 Equity charge = 0.12 × 80 = 9.6 RI = 12 – 9.6 = 2.4
Question 71
A stock is priced at $40. Next year’s dividend is expected to be $2.40, and long‑run growth is 4%. What is the implied required return?
Select an option first.
Correct answer: C — 10%
Explanation: Why correct: Using Gordon Growth: r = D1/P + g = 2.4/40 + 0.04 = 0.06 + 0.04 = 10%. A: Ignores growth. B: Too low; miscalculates dividend yield. D: Too high; would require unrealistic dividend yield.
Question 72
ROE = 9% and required return = 12%. What does this imply?
Select an option first.
Correct answer: C — Negative residual income
Explanation: Why correct: RI = (ROE − r) × BV. ROE < r → negative RI. A: Only if ROE > r. B: Only if ROE = r. D: RI is directly tied to ROE vs r.
Question 73
P/B = 1.6. Which is most consistent?
Select an option first.
Correct answer: A — ROE > required return
Explanation: Why correct: P/B > 1 implies value creation, meaning ROE > r. B: Would imply P/B < 1. C: P/B > 1 does not automatically mean overvaluation. D: Not implied by P/B.
Question 74
FCFF?
Select an option first.
Correct answer: B — Higher depreciation
Explanation: Why correct: Depreciation is added back in FCFF → increases FCFF. A: Interest affects FCFE, not FCFF. C: Dividends irrelevant to FCFF. D: Net borrowing affects FCFE, not FCFF.
Question 75
H‑Model – When Appropriate The H‑model is most appropriate when:
Select an option first.
Correct answer: B — Growth declines gradually over time
Explanation: Why correct: H‑model assumes linear decline in growth. A: Sudden drop → two‑stage model. C: Constant → Gordon Growth. D: Negative → special cases, not H‑model.
Question 76
FCFF?
Select an option first.
Correct answer: A — Increase in net borrowing
Explanation: Why correct: Net borrowing affects equity holders only → FCFE rises. B, C, D: Affect both FCFF and FCFE.
Question 77
Which factor increases competitive rivalry?
Select an option first.
Correct answer: C — Many competitors of similar size
Explanation: Why correct: More equal competitors → more intense rivalry. A: Reduces rivalry. B: Differentiation reduces rivalry. D: High barriers reduce rivalry.
Question 78
RI models is typically based on:
Select an option first.
Correct answer: A — Perpetual residual income
Explanation: Why correct: TV = RI_(t+1)/(r − g). B: DDM. C: Distress valuation. D: Alternative method.
Question 79
EBIT = 150, tax rate = 30%, depreciation = 40, capex = 60, ΔWC = 20. FCFF = ?
Select an option first.
Correct answer: C — 85
Explanation: Why correct: FCFF = EBIT(1−t) + Dep − Capex − ΔWC = 150(0.7) + 40 − 60 − 20 = 105 + 40 − 60 − 20 = 65 Correct answer is A, not C. B, C, D: Incorrect arithmetic.
Question 80
FCFF = 120, interest after tax = 15, net borrowing = 30. FCFE = ?
Select an option first.
Correct answer: B — 135
Explanation: Why correct: FCFE = FCFF − interest + net borrowing = 120 − 15 + 30 = 135. A: Subtracts incorrectly. C: Adds interest incorrectly. D: Ignores borrowing.
Question 81
ROE – Decomposition ROE increases when:
Select an option first.
Correct answer: A — Profit margin rises
Explanation: Why correct: Higher margins → higher ROE. B: Low turnover reduces ROE. C: Lower leverage reduces ROE. D: Higher taxes reduce ROE.
Question 82
Equity charge equals:
Select an option first.
Correct answer: B — Required return × beginning equity
Explanation: Why correct: Equity charge = r × BV. A, C, D: Not definitions of equity charge.
Question 83
Which formula is correct?
Select an option first.
Correct answer: B — P/B = 1 + (ROE − r)/(r − g)
Explanation: Why correct: This is the standard justified P/B formula. A: Missing the “1 +”. C, D: Incorrect relationships.
Question 84
The model is invalid when:
Select an option first.
Correct answer: A — Growth > required return
Explanation: Why correct: If g ≥ r → denominator ≤ 0 → invalid. B: Negative growth is allowed. C: Irregular dividends → still usable. D: Low payout → still usable.
Question 85
FCFE is preferred when:
Select an option first.
Correct answer: A — Leverage is stable
Explanation: Why correct: Stable leverage → FCFE reliable. B: Changing leverage → FCFF preferred. C, D: FCFE may be distorted.
Question 86
P/E is used in:
Select an option first.
Correct answer: A — Multi‑stage DCF
Explanation: Why correct: Terminal P/E is a terminal value shortcut in DCF. B: RI uses RI terminal value. C: Liquidation uses asset values. D: APT unrelated.
Question 87
High barriers to entry imply:
Select an option first.
Correct answer: B — Higher long‑term profitability
Explanation: Why correct: Barriers protect incumbents → higher profitability. A: Opposite. C: Incorrect. D: Barriers reduce rivalry.
Question 88
ROE – Leverage Impact ROE increases without improving fundamentals when:
Select an option first.
Correct answer: A — Leverage increases
Explanation: Why correct: Higher leverage → higher ROE mechanically. B, C, D: Improve fundamentals.
Question 89
Weak‑form efficiency implies:
Select an option first.
Correct answer: A — Technical analysis is ineffective
Explanation: Why correct: Weak form: prices reflect past prices → technical analysis fails. B: Fundamental analysis may still work. C: Insider info still profitable. D: Only strong form.
Question 90
All valuation models ultimately rely on:
Select an option first.
Correct answer: A — Discounting future cash flows
Explanation: Why correct: All models (multiples, RI, DDM, FCFF) are cash‑flow‑based at their core. B: Multiples are shortcuts. C: Book value is not fundamental value. D: Dividends are not required.
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