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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 121
Multi‑Stage DDM – Discounting In multi‑stage DDM, dividends in each stage are discounted at:
Select an option first.
Correct answer: B — The same required return
Explanation: Why correct: Required return applies to all future cash flows. A: Not typical unless risk changes. C/D: Incorrect.
Question 122
Increasing payout ratio reduces growth because:
Select an option first.
Correct answer: B — Retention decreases
Explanation: Why correct: Retention ↓ → growth ↓. A: ROE unchanged. C/D: Not directly affected.
Question 123
Negative growth in GGM:
Select an option first.
Correct answer: B — Is allowed and reduces value
Explanation: Why correct: Negative g → lower numerator → lower value. A: Allowed. C: Only if g ≥ r. D: Only if dividends = 0.
Question 124
DDM – Dividend Timing DDM uses:
Select an option first.
Correct answer: B — Next expected dividend
Explanation: Why correct: DDM always uses D1, not D0. A/C/D: Not forward‑looking.
Question 125
Multi‑Stage DDM – Growth Transition A firm’s growth declines from 12% to 4% over 6 years. Best model?
Select an option first.
Correct answer: C — H‑model
Explanation: Why correct: Linear decline → H‑model. A: Constant growth only. B: Sudden drop only. D: Not dividend‑based.
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Question 126
DDM – Required Return Increase If required return increases while dividends and growth unchanged:
Select an option first.
Correct answer: B — Value decreases
Explanation: Why correct: Higher r → lower present value. A: Opposite. C: Only if r unchanged. D: Value cannot be negative.
Question 127
If next year’s dividend unexpectedly increases permanently:
Select an option first.
Correct answer: A — Value increases
Explanation: Why correct: Higher D1 → higher intrinsic value. B: Opposite. C: Only if D1 unchanged. D: Only if r ≤ g.
Question 128
DDM – ROE and Growth If ROE increases while payout unchanged:
Select an option first.
Correct answer: A — Growth increases
Explanation: Why correct: ( g = ROE × retention ). Retention unchanged → g increases. B/C/D: Opposite or impossible.
Question 129
Multi‑Stage DDM – Discounting Terminal Value Terminal value in multi‑stage DDM is discounted back to:
Select an option first.
Correct answer: A — Year 0
Explanation: Why correct: All cash flows must be discounted to present value. B/C/D: Intermediate discounting only.
Question 130
DDM – Payout Too High If payout ratio is 100%:
Select an option first.
Correct answer: B — Growth = 0
Explanation: Why correct: Retention = 0 → g = 0. A: Requires retention > 0. C: Only if ROE < 0. D: No link.
Question 131
H‑Model – Sensitivity H‑model valuation is most sensitive to:
Select an option first.
Correct answer: A — High‑growth rate
Explanation: Why correct: High‑growth assumptions dominate early‑stage value. B: Stable growth less impactful. C: H affects magnitude but not as strongly. D: Yield matters but less than growth.
Question 132
DDM – Core Principle DDM is fundamentally based on:
Select an option first.
Correct answer: A — Discounting future dividends
Explanation: Why correct: DDM values equity as PV of future dividends. B/C: Not dividend‑based. D: DDM uses dividends, not all cash flows.
Question 133
Firm (FCFF) represents cash flow available to:
Select an option first.
Correct answer: C — Both debt and equity holders
Explanation: Why correct: FCFF is cash flow before interest payments → available to all capital providers. A: FCFE is for equity only. B: Interest is not yet deducted. D: Preferred holders are only one class.
Question 134
FCFE represents cash flow available to:
Select an option first.
Correct answer: C — Only equity holders
Explanation: Why correct: FCFE = FCFF − interest + net borrowing → cash flow after debt obligations. A: That’s FCFF. B: Opposite. D: Too narrow.
Question 135
EBIT = 300, tax rate = 30%, depreciation = 40, capex = 80, ΔWC = 20. FCFF = ?
Select an option first.
Correct answer: B — 150
Explanation: Why correct: FCFF = EBIT(1−t) + Dep − Capex − ΔWC = 300(0.7) + 40 − 80 − 20 = 210 + 40 − 80 − 20 = 150 A/C/D: Incorrect arithmetic.
Question 136
FCFF = 150, interest after tax = 20, net borrowing = 30. FCFE = ?
Select an option first.
Correct answer: C — 160
Explanation: Why correct: FCFE = FCFF − interest + net borrowing = 150 − 20 + 30 = 160 A/B/D: Misapply interest or borrowing.
Question 137
FCFF valuation is preferred when:
Select an option first.
Correct answer: B — Leverage is changing significantly
Explanation: Why correct: Changing leverage makes FCFE volatile → FCFF more stable. A: FCFE fine when leverage stable. C: FCFF and FCFE nearly identical. D: Dividend stability irrelevant.
Question 138
FCFE valuation is preferred when:
Select an option first.
Correct answer: A — Leverage is stable
Explanation: Why correct: Stable leverage → FCFE reliable. B: FCFF preferred. C: FCFE unreliable. D: Both models struggle.
Question 139
WACC represents:
Select an option first.
Correct answer: C — Required return on the entire firm
Explanation: Why correct: WACC = weighted average of all capital costs. A/B/D: Only components of WACC.
Question 140
WACC should be used to discount:
Select an option first.
Correct answer: B — FCFF
Explanation: Why correct: FCFF is pre‑debt → discount at WACC. A: FCFE uses cost of equity. C/D: Not FCFF‑based.
Question 141
CAPM?
Select an option first.
Correct answer: C — Higher risk‑free rate
Explanation: Why correct: ke = rf + β(MRP). Higher rf → higher ke. A/B: Reduce ke. D: Not directly in CAPM.
Question 142
Cost of Equity – Build‑Up Model The build‑up model differs from CAPM because it:
Select an option first.
Correct answer: B — Assumes beta = 1
Explanation: Why correct: Build‑up adds premiums without scaling by beta → implicitly β = 1. A: No beta used. C: Uses multiple premiums. D: Includes company‑specific risk.
Question 143
Increasing depreciation:
Select an option first.
Correct answer: B — Increases FCFF
Explanation: Why correct: Depreciation is added back → increases FCFF. A/C/D: Incorrect.
Question 144
Increasing net borrowing:
Select an option first.
Correct answer: A — Increases FCFE
Explanation: Why correct: FCFE = FCFF − interest + net borrowing. B/C: Opposite. D: FCFF unaffected.
Question 145
FCFF:
Select an option first.
Correct answer: C — Not at all
Explanation: Why correct: FCFF uses EBIT(1−t) → interest irrelevant. A/B/D: Misunderstand FCFF structure.
Question 146
FCFE:
Select an option first.
Correct answer: B — Negatively
Explanation: Why correct: FCFE subtracts interest after tax. A: Opposite. C: Incorrect. D: Dividends irrelevant.
Question 147
An increase in working capital:
Select an option first.
Correct answer: B — Decreases FCFF
Explanation: Why correct: ΔWC is subtracted → reduces FCFF. A: Opposite. C/D: Incorrect.
Question 148
An increase in working capital:
Select an option first.
Correct answer: B — Decreases FCFE
Explanation: Why correct: Higher ΔWC reduces cash available to equity. A/C/D: Incorrect.
Question 149
Higher capital expenditures:
Select an option first.
Correct answer: B — Decrease FCFF
Explanation: Why correct: Capex is subtracted → reduces FCFF. A/C/D: Incorrect.
Question 150
Higher capex:
Select an option first.
Correct answer: B — Decreases FCFE
Explanation: Why correct: Capex reduces FCFF → reduces FCFE. A/C/D: Incorrect.
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