Free CFA Level I Equity Investments Practice Questions

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. Choice A incorrectly includes net income and dividends, which are income statement items not used in EV calculation. Choice C describes a variation of book value of equity, not enterprise value.

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.
Choice B is incorrect because reconstitution (adding/removing securities) is separate from rebalancing, and selection is not based on market cap in an equal-weighted index. Choice A describes a price-weighted index adjustment, not an equal-weighted rebalancing.

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. Choice A (8.3x) uses the reciprocal: (k-g)/payout = 0.04/0.60 = 0.067 then incorrectly computes 1/0.12 = 8.3. Choice B (25.0x) applies an incorrect denominator: 0.60/(0.10-0.076) where g is miscalculated.