🧩 Chapter 16: Valuation Principles — Mock Questions

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Q1. Intrinsic value represents:

A. Current market price
B. True underlying value of a security
C. Face value of stock
D. Dividend amount

Answer: B
✔ Intrinsic value = fair value based on fundamentals.

Q2. Valuation is primarily used to:

A. Predict stock price movement daily
B. Estimate fair value for investment decisions
C. Calculate taxes
D. Track index performance

Answer: B

Q3. The Dividend Discount Model values a stock based on:

A. Cash flows to equity holders
B. Net profit
C. Assets minus liabilities
D. P/E ratio

Answer: A
✔ DDM → Value = PV of future dividends.

Q4. A company with irregular or no dividends is best valued using:

A. Gordon Growth DDM
B. Price-to-book ratio
C. Free Cash Flow models
D. Dividend payout ratio

Answer: C
✔ FCF models are best when dividends aren’t predictable.

Q5. Terminal value in valuation refers to:

A. Bond maturity value
B. Present value of all cash flows beyond forecast period
C. Book value
D. Depreciated value

Answer: B

Q6. Higher discount rate results in:

A. Higher valuation
B. Lower valuation
C. No change
D. Higher dividend yield

Answer: B
✔ Higher discount rate = higher risk → lower present value.

Q7. The Gordon Growth Model assumes:

A. Dividend grows at constant rate
B. Zero growth
C. Variable growth
D. Negative growth only

Answer: A

Q8. If required return = 12% and constant growth = 5%, the DDM denominator is:

A. 12%
B. 7%
C. 5%
D. 17%

Answer: B
✔ Denominator = (r − g) = 12% − 5% = 7%.

Q9. The P/E ratio indicates:

A. Stock’s leverage
B. How much investors pay per ₹1 earnings
C. Dividend yield
D. Growth only

Answer: B

Q10. A company with high P/E usually indicates:

A. Low growth expectations
B. High growth expectations
C. High debt
D. Poor liquidity

Answer: B

Q11. The Discount Rate in equity valuation is commonly:

A. WACC or Cost of Equity
B. Depreciation rate
C. Inventory turnover
D. Revenue growth

Answer: A

Q12. Enterprise Value includes:

A. Market cap + Debt − Cash
B. Market cap only
C. Assets + Liabilities
D. Profit × P/E

Answer: A

Q13. EV/EBITDA is used because it:

A. Ignores operating income
B. Allows comparison across capital structures
C. Calculates dividend yield
D. Uses market price only

Answer: B

Q14. The margin of safety in valuation refers to:

A. Buying above intrinsic value
B. Difference between intrinsic value and market price
C. Dividends paid vs retained
D. Risk-free premium

Answer: B

Q15. If intrinsic value = ₹200 and market price = ₹150, the stock is:

A. Overvalued
B. Fairly valued
C. Undervalued
D. Untradeable

Answer: C
✔ Buying below intrinsic value = undervalued.

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