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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 151
FCFF models is typically based on:
Select an option first.
Correct answer: B — Perpetual FCFF
Explanation: Why correct: Terminal FCFF = FCFF₁ / (WACC − g). A/C/D: Not FCFF‑based.
Question 152
FCFE models is discounted using:
Select an option first.
Correct answer: B — Cost of equity
Explanation: Why correct: FCFE → equity cash flows → discount at ke. A: Used for FCFF. C/D: Not discount rates.
Question 153
FCFF can be negative when:
Select an option first.
Correct answer: B — Capex is high
Explanation: Why correct: High capex reduces FCFF significantly. A: Increases FCFF. C: Affects FCFE only. D: Dividends irrelevant.
Question 154
FCFF is positive if:
Select an option first.
Correct answer: A — Interest expense is high
Explanation: Why correct: High interest reduces FCFE but not FCFF. B/C/D: Increase FCFE or irrelevant.
Question 155
Increasing leverage:
Select an option first.
Correct answer: C — No effect on FCFF
Explanation: Why correct: FCFF is pre‑debt → leverage irrelevant. A/B/D: Incorrect.
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Question 156
Increasing leverage:
Select an option first.
Correct answer: A — Increases FCFE
Explanation: Why correct: More borrowing → higher FCFE. B: Opposite. C: Incorrect. D: Only if no debt.
Question 157
WACC to discount FCFF will:
Select an option first.
Correct answer: B — Undervalue the firm
Explanation: Why correct: ke > WACC → higher discount rate → lower value. A: Opposite. C/D: Incorrect.
Question 158
WACC instead of cost of equity to discount FCFE will:
Select an option first.
Correct answer: A — Overvalue equity
Explanation: Why correct: WACC < ke → lower discount rate → higher value. B: Opposite. C/D: Incorrect.
Question 159
Long‑term FCFF growth must be:
Select an option first.
Correct answer: B — Less than WACC
Explanation: Why correct: If g ≥ WACC → denominator ≤ 0 → invalid. A/C: Impossible. D: Allowed but not required.
Question 160
Long‑term FCFE growth must be:
Select an option first.
Correct answer: A — Less than cost of equity
Explanation: Why correct: If g ≥ ke → infinite value. B/C: Impossible. D: Growth is essential.
Question 161
Higher inflation generally:
Select an option first.
Correct answer: B — Decreases FCFF
Explanation: Why correct: Inflation → higher capex & WC → lower FCFF. A/C/D: Incorrect.
Question 162
FCFE is unaffected by:
Select an option first.
Correct answer: A — Dividends
Explanation: Why correct: Dividends are uses of equity cash flow, not determinants of FCFE. B/C/D: All directly affect FCFE. 📍 RESIDUAL INCOME MODELS — 30 MCQs WITH FULL EXPLANATIONS
Question 163
Residual income equals:
Select an option first.
Correct answer: B — Net income minus equity charge
Explanation: Why correct: Residual income = NI − (required return × beginning equity). A: Dividends irrelevant. C: Mixes operating and financing. D: Describes FCFF/FCFE, not RI.
Question 164
The equity charge represents:
Select an option first.
Correct answer: B — Required return on beginning equity
Explanation: Why correct: Equity charge = r × BV₀. A: Not part of RI. C: RI uses beginning BV. D: Market value irrelevant.
Question 165
Clean surplus requires:
Select an option first.
Correct answer: B — All changes in equity (except owner transactions) pass through income
Explanation: Why correct: Clean surplus: BV₁ = BV₀ + NI − Div. A: Opposite of clean surplus. C: Not required. D: Never required.
Question 166
ROE vs Required Return Residual income is positive when:
Select an option first.
Correct answer: A — ROE > required return
Explanation: Why correct: RI = (ROE − r) × BV. B: RI = 0. C: RI negative. D: False.
Question 167
If a firm’s justified P/B > 1, this implies:
Select an option first.
Correct answer: C — ROE > required return
Explanation: Why correct: P/B > 1 indicates value creation → ROE > r. A/B: Would give P/B ≤ 1. D: Not implied.
Question 168
A persistence factor close to 1 implies:
Select an option first.
Correct answer: B — Abnormal earnings persist strongly
Explanation: Why correct: High persistence → slow fade of RI. A: Low persistence. C/D: Not implied.
Question 169
RI models is usually based on:
Select an option first.
Correct answer: A — Perpetual RI
Explanation: Why correct: TV = RI₁ / (r − g). B/C/D: Not RI‑based.
Question 170
RI vs Economic Profit Residual income differs from economic profit because:
Select an option first.
Correct answer: A — RI uses equity charge; EP uses capital charge
Explanation: Why correct: EP uses WACC × invested capital; RI uses r × equity. B: Reversed. C: EP uses NOPAT, not NI. D: RI explicitly includes cost of equity.
Question 171
RI – When Preferred RI valuation is most useful when:
Select an option first.
Correct answer: B — FCFE is negative but earnings are positive
Explanation: Why correct: RI works when cash flows are unreliable but earnings/book value are meaningful. A: DDM better. C: Negative BV breaks RI. D: Asset‑based valuation needed.
Question 172
Which item violates clean surplus?
Select an option first.
Correct answer: A — Unrealized gains taken directly to equity
Explanation: Why correct: Bypasses income → violation. B/C/D: Normal items.
Question 173
RI – Sensitivity RI valuation is most sensitive to errors in:
Select an option first.
Correct answer: B — ROE
Explanation: Why correct: ROE directly drives RI. A/C/D: Indirect effects only.
Question 174
RI – Negative RI A firm with positive net income but negative RI must have:
Select an option first.
Correct answer: C — ROE < r
Explanation: Why correct: Equity charge > NI → ROE < r. A/B/D: Incorrect.
Question 175
RI – Book Value Forecast Ending book value equals:
Select an option first.
Correct answer: B — BV₀ + NI − Div
Explanation: Why correct: Clean surplus formula. A/C/D: Incorrect signs.
Question 176
RI – Growth Effect If ROE increases while required return and retention unchanged:
Select an option first.
Correct answer: A — RI increases
Explanation: Why correct: Higher ROE → higher NI → higher RI. B/C/D: Opposite.
Question 177
RI – Equity Charge Increase If required return increases:
Select an option first.
Correct answer: B — RI decreases
Explanation: Why correct: Equity charge increases → RI decreases. A/C/D: Incorrect.
Question 178
RI – Terminal Growth Constraint Long‑term RI growth must be:
Select an option first.
Correct answer: A — Less than required return
Explanation: Why correct: If g ≥ r → infinite value. B/C: Impossible. D: Growth is essential.
Question 179
RI – Accounting Distortion Which accounting issue most distorts RI?
Select an option first.
Correct answer: B — Off‑balance‑sheet liabilities
Explanation: Why correct: Understated liabilities → overstated equity → overstated RI. A/C: Minor distortions. D: Payout irrelevant to RI.
Question 180
RI – Link to P/B Justified P/B equals:
Select an option first.
Correct answer: B — 1 + (ROE − r)/(r − g)
Explanation: Why correct: Standard RI‑based P/B formula. A: Missing “1 +”. C/D: Incorrect.
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