🧩 Chapter 8: Valuation Principles — Mock Questions
Q1. The intrinsic value of a stock refers to:
A. Current market price
B. Fair value based on fundamentals
C. Book value of the company
D. Last traded price
Answer: B
✔ Intrinsic value = value derived from business fundamentals, not market price.
Q2. In the Dividend Discount Model (DDM), the intrinsic value equals:
A. Sum of future dividends discounted to present
B. Book value + dividends
C. EPS × dividend payout ratio
D. Market cap / number of shares
Answer: A
✔ DDM uses future dividends as cash flows.
Q3. The Gordon Growth Model assumes:
A. Varying dividend growth
B. Constant growth in dividends
C. Zero dividend payout
D. Negative growth always
Answer: B
✔ GGM = single-stage constant growth model.
Q4. In valuation, the discount rate represents:
A. Company’s sales growth
B. Required return for investors
C. Dividend payout ratio
D. Market liquidity
Answer: B
✔ Discount rate = investor’s required rate of return (cost of equity or WACC).
Q5. A high P/E ratio generally implies:
A. Undervalued stock
B. High market expectations of future earnings
C. Falling profits
D. High dividend payout
Answer: B
✔ High P/E = market expects higher future growth.
Q6. Price-to-Book (P/B) ratio compares:
A. Market price to revenue
B. Market cap to net worth
C. Market price to debt
D. EPS to book value
Answer: B
✔ P/B = Market Capitalization / Net Worth.
Q7. Enterprise Value (EV) equals:
A. Equity value − debt
B. Market cap + debt − cash
C. Market cap only
D. Total assets − liabilities
Answer: B
✔ EV = real value of business for an acquirer.
Q8. Which is the most suitable valuation multiple for capital-intensive industries?
A. P/E
B. EV/EBITDA
C. Price-to-sales
D. Enterprise Value / Market Cap
Answer: B
✔ EV/EBITDA is robust for different capital structures.
Q9. A low EV/EBITDA ratio generally indicates:
A. Overvaluation
B. Possible undervaluation
C. Negative profits
D. High debt always
Answer: B
✔ Lower EV/EBITDA can mean the stock is cheaper relative to peers.
Q10. The margin of safety refers to:
A. Overpaying for a stock
B. Buying at a price significantly below intrinsic value
C. Dividend cushion
D. Difference between EPS and DPS
Answer: B
✔ Lower purchase price vs intrinsic value = safety buffer.
Q11. Two-stage DDM is used when:
A. Dividends grow at constant rate
B. Dividends grow at high rate initially then stabilize
C. Company never pays dividends
D. Dividends decline sharply every year
Answer: B
✔ Two-stage = high growth → stable growth.
Q12. Which method is best for valuing loss-making companies?
A. P/E ratio
B. P/B ratio
C. Dividend Discount Model
D. Free Cash Flow (FCF) based valuation
Answer: D
✔ Loss-making firms may have positive future FCF; P/E not applicable.
Q13. Higher WACC (discount rate) results in:
A. Higher present value
B. Lower intrinsic value
C. No impact on valuation
D. Higher market cap
Answer: B
✔ Higher discounting reduces PV of cash flows → intrinsic value falls.
Q14. PEG ratio adjusts P/E by:
A. Dividends
B. Earnings growth rate
C. Book value
D. Debt level
Answer: B
✔ PEG = P/E ÷ earnings growth %.
Q15. A PEG ratio less than 1 generally implies:
A. Overvaluation
B. Fair valuation
C. Undervaluation
D. Negative growth always
Answer: C
✔ PEG < 1 = price not fully reflecting growth potential.
Q16. Free Cash Flow to Firm (FCFF) is discounted using:
A. Cost of equity
B. WACC
C. Dividend yield
D. Market risk premium
Answer: B
✔ FCFF uses WACC because it represents entire firm (debt + equity).
Q17. Terminal value in DCF valuation accounts for:
A. Initial years of high growth only
B. Value beyond the explicit forecast period
C. Only dividend payouts
D. Cash on balance sheet
Answer: B
✔ Terminal value captures long-term stable growth value.
Q18. Sensitivity analysis helps an analyst understand:
A. Cash balances
B. Impact of changes in assumptions (growth, discount rate)
C. Market rumors
D. Regulatory penalties
Answer: B
✔ It tests how valuation reacts to key variable changes.
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