Practice questions provided by PrepNuggets are intended as a supplementary resource and should be used after mastering the comprehensive ones provided by the CFA Institute (accessible under candidate resources, or at the end of each reading in the curriculum textbook). While PrepNuggets’ questions test topic understanding, they may not mirror the exam’s exact question types. Prioritize the CFA Institute’s questions for optimal exam preparation.
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“It’s not going to be easy, but it’s going to be worth it.”
Company Alpha has consistently paid dividends and has a clear dividend policy tied to its profitability. However, you own a significant amount of shares and have influence over the company’s dividend policy. In this case, which model would be the most appropriate for valuing the company?
You are tasked with valuing a startup tech firm in a high-growth industry. The firm has been reinvesting all of its profits to fuel growth and has not paid dividends. In addition, the company has negative free cash flows due to its substantial capital investments. What model would you use to estimate the intrinsic value of the company’s equity?
A company in a mature industry has a consistent history of dividend payments and a clear dividend policy. However, the company has recently embarked on a massive expansion strategy, and free cash flows are expected to turn negative. What impact could this have on the valuation model choice?
A company has a current dividend of $0.911, an expected dividend growth rate of 4.5%, and a required return on equity of 6.8%. What is the Gordon growth model value for the company?
A company has an expected return on equity of 10%, a payout ratio of 60%, and a required return on equity of 8%. What is the company’s justified leading P/E ratio?
A company has a current stock price of $100, expected earnings of $10 per share, expected growth rate of 12%, and a required return on equity of 16%. What is the Present Value of Growth Opportunities (PVGO)?
A company’s stock is currently priced at $120. The company just paid a dividend of $4, and the required rate of return is 8%. If the market is efficient, what is the implied dividend growth rate?
A company’s dividends are expected to grow at a rate of 15% for the next 3 years, after which the growth rate will drop to a constant 6%. The company just paid a dividend of $2.00, and the required rate of return is 10%. What is the intrinsic value of the company’s stock?
Company B is a technology firm that has been growing rapidly due to a unique technology. However, competition is expected to increase, causing the company’s growth rate to decline linearly over the next 10 years to a stable growth rate. The company is considering diversifying its product line to mitigate the impact of competition. How should an analyst incorporate this diversification strategy into the valuation of the company’s stock using the H-model?
Company D is a mature firm with a stable growth rate. However, it has recently invested in a new business line that is expected to generate high growth for the next 5 years. After this period, the growth rate is expected to return to the original stable rate. The success of the new business line is uncertain. How should this situation be handled when valuing the company’s stock using the Two-Stage Dividend Discount Model?
Company A is a mature firm with a stable growth rate. The firm’s current dividend is $2.00, and it’s expected to grow at a rate of 5% per year indefinitely. The firm’s stock is currently trading at $50.00. What is the implied required return based on the Gordon Growth Model?
Company C is a mature firm with a stable growth rate. The firm’s current dividend is $3.00, and it’s expected to grow at a rate of 4% per year indefinitely. The firm’s stock is currently trading at $60.00. An analyst believes that the required return should be 8%. Based on the Gordon Growth Model, is the stock overvalued, undervalued, or fairly valued?
Company A has a return on equity (ROE) of 20%, a retention ratio of 50%, and a payout ratio of 50%. However, the company is considering changing its payout policy. Which of the following changes would increase the company’s sustainable growth rate?
Company C has a return on equity (ROE) of 12% and a sustainable growth rate of 4.8%. The company is considering a new strategy that would increase its profit margin but decrease its asset turnover. Assuming the retention ratio and financial leverage remain constant, what would be the likely effect on the company’s sustainable growth rate?
Many years ago, I was exactly where you are today—a CFA Level I candidate juggling a demanding full-time career with the daunting CFA curriculum. Coming from a Computer Engineering background, finance was entirely new territory for me. And yes, it was tough!
I struggled with dense textbooks, late-night cramming, and the frustration of concepts that seemed impossible after a long workday. But after passing Level I (barely), I realized something had to change.
Using the Pareto Principle (80/20 rule), I distilled the vast CFA syllabus into essential, easy-to-understand nuggets. I leaned into visual summaries and bite-sized learning sessions that worked around my busy schedule. This smarter approach helped me clear Levels II and III on my first attempts with significantly less stress.
I founded PrepNuggets to share the streamlined strategies and innovative learning methods that transformed my CFA journey. Our mission is simple: leverage technology to make CFA prep more effective, accessible, and enjoyable.
Join the PrepNuggets community today—sign up for your free account, and let our thoughtfully crafted materials propel you toward CFA success without unnecessary overwhelm.
Here’s to your CFA journey!
Keith Tan, CFA
Founder & Chief Instructor, PrepNuggets
Keith is the founder and chief instructor of PrepNuggets. He has a wide range of interests in all things related to tech, from web development to e-learning, gadgets to apps. Keith loves exploring different cultures and the untouched gems around the world. He currently lives in Singapore but frequently travels to share his knowledge and expertise with others.
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