Free CFA Level I Equity Investments Practice Questions
Equity investments on the CFA Level I exam cover market organization, security analysis, equity valuation models, and industry and company analysis. Weighted 11-14% of the exam (CFA Institute).
Sample Questions
Question 1
Easy
Enterprise value (EV) is calculated as:
Solution
B is correct.
Enterprise value = Market value of equity (market cap) + Market value of debt + Preferred stock + Minority interest - Cash and cash equivalents. The simplified formula is Market cap + Total debt - Cash. EV represents the total cost of acquiring a firm.
Enterprise value = Market value of equity (market cap) + Market value of debt + Preferred stock + Minority interest - Cash and cash equivalents. The simplified formula is Market cap + Total debt - Cash. EV represents the total cost of acquiring a firm.
Question 2
Medium
Rebalancing an equal-weighted index most likely involves:
Solution
A is correct.
Rebalancing an equal-weighted index requires restoring equal dollar weights to all constituents. Stocks that have risen in price will have above-average weights and must be partially sold, while stocks that have declined will have below-average weights and must be purchased. This creates an implicit contrarian tilt.
Rebalancing an equal-weighted index requires restoring equal dollar weights to all constituents. Stocks that have risen in price will have above-average weights and must be partially sold, while stocks that have declined will have below-average weights and must be purchased. This creates an implicit contrarian tilt.
Question 3
Hard
A company has a payout ratio of 60%, ROE of 15%, and required return of 10%. Using the Gordon Growth Model, the justified leading P/E ratio is closest to:
Solution
B is correct.
Sustainable growth rate g = ROE x (1 - payout ratio) = 15% x 0.40 = 6%. Justified leading P/E = payout ratio / (k - g) = 0.60 / (0.10 - 0.06) = 0.60 / 0.04 = 15.0x.
Sustainable growth rate g = ROE x (1 - payout ratio) = 15% x 0.40 = 6%. Justified leading P/E = payout ratio / (k - g) = 0.60 / (0.10 - 0.06) = 0.60 / 0.04 = 15.0x.