You’re on a roll
Create a free account to save your CFA progress, track your accuracy by topic, and pick up right where you left off.
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 91
Beginning book value per share is $40. ROE is 15%, required return is 10%. What is residual income per share for the year?
Select an option first.
Correct answer: A — $2
Explanation: Why correct: Net income = 0.15 × 40 = 6 Equity charge = 0.10 × 40 = 4 RI = 6 − 4 = 2 B: Equity charge, not RI. C: Net income, not RI. D: Arbitrary.
Question 92
Residual income valuation is most appropriate when:
Select an option first.
Correct answer: B — The firm does not pay dividends but has reliable accounting earnings
Explanation: Why correct: RI is ideal when dividends/FCF are not meaningful, but earnings and book value are. A: DDM is more natural. C: Negative book value breaks RI logic. D: Liquidation calls for asset‑based valuation.
Question 93
Which item most clearly violates the clean surplus relation?
Select an option first.
Correct answer: A — Foreign currency translation adjustments taken directly to equity
Explanation: Why correct: Clean surplus requires all changes in equity (except owner transactions) to pass through income. Translation adjustments bypass income → violation. B: Normal income statement item. C: Owner transaction, explicitly allowed. D: Normal income item.
Question 94
EBIT = 200, tax rate = 25%, depreciation = 30, capex = 70, increase in working capital = 20. What is FCFF?
Select an option first.
Correct answer: B — 90
Explanation: Why correct: [ FCFF = EBIT(1 - t) + Dep - Capex - \Delta WC ] [ = 200(0.75) + 30 - 70 - 20 = 150 + 30 - 70 - 20 = 90 ] A, C, D: Result from mis‑adding or mis‑subtracting one of the components.
Question 95
FCFF = 90, interest after tax = 15, net borrowing = 10. What is FCFE?
Select an option first.
Correct answer: C — 85
Explanation: Why correct: [ FCFE = FCFF - \text{interest after tax} + \text{net borrowing} = 90 - 15 + 10 = 85 ] A: Subtracts borrowing instead of adding. B: Mis‑adjusts interest. D: Adds both interest and borrowing.
Get the full CFA question bank — free
Drop your email and we'll send you fresh CFA practice questions, fully worked solutions and exam-deadline reminders. No spam — unsubscribe in one click.
Want to save your score and take a full mock exam? Create a free account →
Question 96
P/B – Relationship to ROE A firm’s ROE is consistently higher than its required return. Which is most likely?
Select an option first.
Correct answer: C — P/B > 1
Explanation: Why correct: ROE > r → value creation → P/B > 1. A: Implies ROE < r. B: Implies ROE = r. D: P/B is directly linked to ROE vs r.
Question 97
Weak‑form efficiency implies that:
Select an option first.
Correct answer: A — Technical analysis cannot consistently generate abnormal returns
Explanation: Why correct: Weak form: prices reflect all past price and volume data → technical analysis is ineffective. B: Fundamental analysis may still work. C, D: These are strong‑form implications.
Question 98
Which order type eliminates price uncertainty but introduces execution uncertainty?
Select an option first.
Correct answer: B — Limit order
Explanation: Why correct: Limit order guarantees maximum/minimum price, but may not execute. A, D: Execute with high probability but uncertain price. C: Triggered by price, then becomes market order.
Question 99
FCFE when:
Select an option first.
Correct answer: B — Leverage is changing significantly
Explanation: Why correct: Changing leverage makes FCFE volatile and harder to forecast; FCFF is more stable. A: Stable leverage → FCFE is fine. C: With no debt, FCFF and FCFE are similar. D: Dividend stability is not the key criterion.
Question 100
H‑Model – Conceptual The H‑model assumes:
Select an option first.
Correct answer: C — Growth declines linearly from high to stable
Explanation: Why correct: H‑model is built on linear decline in growth from an initial high rate to a stable rate. A: Gordon Growth. B: Two‑stage model. D: Not inherent to H‑model.
Question 101
P/B?
Select an option first.
Correct answer: C — Growth increases
Explanation: Why correct: Higher growth → higher present value of future residual income → higher P/B. A: Lower ROE → lower P/B. B: Higher r → lower P/B. D: Lower payout may or may not help; not as direct as growth.
Question 102
A firm has positive net income but negative residual income. This implies:
Select an option first.
Correct answer: C — ROE < required return
Explanation: Why correct: Negative RI means earnings do not cover the equity charge → ROE < r. A: Would imply positive RI. B: Would imply RI = 0. D: RI is directly linked to ROE vs r.
Question 103
High threat of substitutes implies:
Select an option first.
Correct answer: B — Lower pricing power
Explanation: Why correct: Substitutes cap prices → lower pricing power. A: Opposite. C: Incorrect. D: Substitutes are separate from entry barriers.
Question 104
ROE – DuPont Which change increases ROE without changing leverage?
Select an option first.
Correct answer: A — Higher net margin
Explanation: Why correct: DuPont: ROE = margin × turnover × leverage. Higher margin → higher ROE. B: Lower turnover → lower ROE. C: Higher taxes → lower net margin. D: Higher interest reduces net income.
Question 105
DCF models is that terminal value:
Select an option first.
Correct answer: B — Often represents a large portion of total value
Explanation: Why correct: Terminal value often dominates total DCF value → small assumption errors have big impact. A: Typically positive. C, D: Both growth and discount rate heavily affect TV.
Question 106
Adding a country risk premium to the discount rate is most justified when:
Select an option first.
Correct answer: C — The firm has significant exposure to high‑risk emerging markets
Explanation: Why correct: Country risk premium reflects additional risk in emerging markets. A, B, D: Little or no incremental country risk.
Question 107
At the deepest level, all equity valuation models are consistent with:
Select an option first.
Correct answer: A — Discounting expected future cash flows
Explanation: Why correct: Even multiples and RI can be derived from discounted cash flow logic. B: Ratios are shortcuts, not fundamentals. C: Book value is not economic value. D: Dividends are one possible cash flow, not the only one. 📍 DIVIDEND DISCOUNT MODELS — 30 MCQs WITH FULL EXPLANATIONS
Question 108
Model is valid only when:
Select an option first.
Correct answer: B — Growth < required return
Explanation: Why correct: If ( g \ge r ), denominator becomes zero or negative → invalid. A/C: Make denominator zero or negative. D: Negative growth is allowed.
Question 109
Multi‑Stage DDM – When Used A multi‑stage DDM is most appropriate when:
Select an option first.
Correct answer: C — Growth changes over time
Explanation: Why correct: Multi‑stage models capture changing growth patterns. A/B: Use Gordon Growth. D: DDM cannot be used without dividends.
Question 110
H‑Model – Concept The H‑model assumes:
Select an option first.
Correct answer: B — Growth declines linearly
Explanation: Why correct: H‑model = linear decline from high to stable growth. A: Two‑stage model. C: Gordon Growth. D: Not inherent to H‑model.
Question 111
DDM – Payout Ratio Impact Higher payout ratio increases intrinsic value under DDM when:
Select an option first.
Correct answer: A — ROE > required return
Explanation: Why correct: Higher payout increases dividends; if ROE > r, growth remains sustainable. B: Higher payout reduces growth further. C: Negative growth reduces value. D: Irregular dividends complicate DDM.
Question 112
DDM – Growth Decomposition Sustainable growth = ?
Select an option first.
Correct answer: B — ROE × retention
Explanation: Why correct: ( g = ROE \times b ), where b = retention ratio. A: Uses payout instead of retention. C/D: Incorrect formulas.
Question 113
DDM – Retention Effect If retention increases while ROE stays constant:
Select an option first.
Correct answer: A — Growth increases
Explanation: Why correct: Higher retention → higher sustainable growth. B/C/D: Opposite or impossible.
Question 114
Dividend yield equals:
Select an option first.
Correct answer: C — D1 / P0
Explanation: Why correct: Dividend yield = next dividend ÷ price. A/B: Components of GGM, not yield. D: Inverse of yield.
Question 115
DDM – When Invalid DDM is least appropriate when:
Select an option first.
Correct answer: A — Firm pays no dividends
Explanation: Why correct: DDM requires dividends. B/C/D: All suitable for DDM.
Question 116
A firm has high growth for 3 years, then stable growth. Which model?
Select an option first.
Correct answer: B — Two‑stage DDM
Explanation: Why correct: Two‑stage = high growth → stable growth. A: Constant growth only. C: Linear decline, not sudden drop. D: Not dividend‑based.
Question 117
When Preferred H‑model is preferred over two‑stage DDM when:
Select an option first.
Correct answer: B — Growth declines gradually
Explanation: Why correct: H‑model captures gradual decline. A: Two‑stage. C: DDM invalid. D: Growth model irrelevant.
Question 118
Required Return Sensitivity Which variable most strongly affects DDM valuation?
Select an option first.
Correct answer: B — Required return
Explanation: Why correct: Small changes in r → large changes in value. A/C/D: Minor impact on dividends.
Question 119
If actual price > GGM intrinsic value:
Select an option first.
Correct answer: B — Stock overvalued
Explanation: Why correct: Market price > intrinsic → overvalued. A: Opposite. C: Only if equal. D: Not necessarily.
Question 120
Sustainable growth cannot exceed:
Select an option first.
Correct answer: A — ROE
Explanation: Why correct: ( g = ROE × retention \le ROE ). B: g can exceed r temporarily. C/D: Not growth limits.
More free CFA topics
Economics2,066
Quantitative Methods1,213
Portfolio Management1,079
Fixed Income908
Financial Statement Analysis904
Corporate Issuers884
Portfolio Construction605
Alternative Investments540
Specialized Pathway - Private Markets500
Asset Allocation499
Derivatives498
Performance Measurement295
Specialized Pathway - Portfolio Management253
Derivatives and Risk Management131
Ten questions in
- The ones you miss are saved as a drill you can repeat
- Your place is kept, on this device and any other
- A streak, if that is the thing that gets you back tomorrow
Every question on this page stays free and open either way.