🧩 Chapter 17: Equity Valuation Models — Mock Questions

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Q1. The Gordon Growth Model (GGM) is best suited for companies that:

A. Have no dividends
B. Have stable, predictable dividend growth
C. Are loss-making
D. Are cyclical in nature

Answer: B

Q2. In GGM, intrinsic value = D1 / (r − g).

Here D1 represents:
A. Last year’s dividend
B. Next year’s expected dividend
C. Dividend 5 years later
D. Current EPS

Answer: B

Q3. If required return ≤ growth rate in GGM, the value becomes:

A. Zero
B. Infinite or invalid
C. Negative
D. Stable

Answer: B
✔ Model fails when r ≤ g.

Q4. Multi-stage DDM is used when:

A. Dividend grows at a constant rate
B. Dividend growth changes over time
C. Dividend is zero
D. Market is volatile

Answer: B

Q5. Free Cash Flow to Firm (FCFF) is discounted using:

A. Cost of equity
B. WACC
C. Risk-free rate only
D. Cost of debt

Answer: B

Q6. Free Cash Flow to Equity (FCFE) is discounted using:

A. WACC
B. Cost of equity
C. Cost of debt
D. Market return

Answer: B

Q7. FCFF represents cash flows available to:

A. Equity shareholders only
B. Debt holders only
C. All capital providers
D. Promoters only

Answer: C

Q8. A higher WACC will:

A. Increase firm value
B. Decrease firm value
C. Keep value same
D. Reduce debt

Answer: B

Q9. Relative valuation compares a company with:

A. Its past performance
B. Industry peers
C. Government benchmarks
D. Index returns

Answer: B

Q10. The P/B ratio is most useful for:

A. Technology startups
B. Asset-heavy companies (banks, NBFCs)
C. Loss-making firms
D. Pharma companies only

Answer: B

Q11. If EV/EBITDA of a company is higher than peers, it indicates:

A. Undervaluation
B. Overvaluation
C. Slow growth
D. High liquidity

Answer: B

Q12. PEG ratio adjusts the P/E ratio for:

A. Debt
B. Dividend
C. Growth
D. Cash flow volatility

Answer: C
✔ PEG = P/E divided by earnings growth.

Q13. A PEG ratio < 1 typically indicates:

A. Undervalued stock
B. Expensive stock
C. Overvalued stock
D. High debt levels

Answer: A

Q14. Residual Income Model values a firm based on:

A. Excess returns over cost of equity
B. Book value only
C. Dividend payout
D. Debt repayment ability

Answer: A

Q15. In relative valuation, using multiple metrics helps to:

A. Increase risk
B. Reduce valuation bias
C. Remove all uncertainty
D. Ignore fundamentals

Answer: B

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