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Advanced Wealth Management Course (IIBF) - Paper 3

Part III: Ch 7: Valuation

Q1.

(I) DCF models determine an asset’s value relative to that of other similar assets. (II) Relative valuation models estimate the intrinsic value of an asset based on the present value of cash flows that an investor expects to receive by holding that asset.

Both the statements are correct

Only statement (I) is correct

Only statement (II) is correct

Both the statements are wrong

Q2.

FCFE, which is the cash flow available after all direct costs and investments but before any payments to the capital suppliers.

True

False

Q3.

Suppose for company X the EPS for FY 2005 was Rs.8 per share. If the current market price of the equity share of X is Rs.120 then the P/E ratio for this company will be:

0.06

6.6

1.5

Q4.

(I) The advantage of using cash flow instead of EPS is that cash flow is less susceptible to manipulation. (II) P/E ratio has been used widely as it is believed that of all accounting measures, sales are the least susceptible to manipulation.

Both the statements are correct

Only statement (I) is correct

Only statement (II) is correct

Both the statements are wrong

Q5.

If for Company X, Risk free rate is 6%, Expected Return from the Market is 12% & beta is 1.2. What would be the Cost of Equity?

4.32%

1.2%

13.2%

1.32%

Q6.

Higher the pay out ratio, higher the surplus cash available for reinvestment and hence higher the growth.

True

False

Q7.

Suppose, Company X expects growth in earnings of 10% and its ROE is 20%. What would be its reinvestment rate?

50%

40%

0.5%

0.4%

Q8.

FCFE is the surplus cash available to equity holders after all operating expenses, payment of all liabilities to the debt holders, investment in working capital and capital expenditure.

True

False

Q9.

(I) WACC is the discount rate normally used for discounting FCFE. (II) Specifically companies with low P/BV ratio are likely to generate higher returns.

Both the statements are correct

Only statement (I) is correct

Only statement (II) is correct

Both the statements are wrong

Q10.

DDM is a type of DCF valuation model where only cash flows considered are the dividends actually paid to the investors.

True

False

Q11.

Suppose reinvestment rate of company X is 10% and its ROE is 25%. What would be the Growth in Earnings?

0.25%

0.025%

0.0025%

2.5%

Q12.

(I) FCFF approach is typically used in valuation of banks. (II) Relative valuation models estimate the value of an equity share as a multiple of certain key variables like earnings, book value, cash flow and sales.

Both the statements are correct

Only statement (I) is correct

Only statement (II) is correct

Both the statements are wrong

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