Sample Questions
Question 1
Easy
The PEG ratio is calculated as the P/E ratio divided by:
Solution
A is correct.
The PEG (Price/Earnings-to-Growth) ratio divides the P/E ratio by the expected earnings growth rate (in percentage terms, not decimal). For example, a stock with a P/E of and expected earnings growth of has a PEG of . . It adjusts the P/E ratio for growth, allowing comparison of companies with different growth prospects.
The PEG (Price/Earnings-to-Growth) ratio divides the P/E ratio by the expected earnings growth rate (in percentage terms, not decimal). For example, a stock with a P/E of and expected earnings growth of has a PEG of . . It adjusts the P/E ratio for growth, allowing comparison of companies with different growth prospects.
Question 2
Medium
The clean surplus relation requires that:
Solution
A is correct.
The clean surplus relation states:
where is book value, is earnings (net income), and is dividends. This means all changes in book value flow through the income statement — there are no 'dirty surplus' items that bypass income. The clean surplus relation requires that all changes in equity (other than transactions with owners like dividends) are captured in net income.
The clean surplus relation states:
where is book value, is earnings (net income), and is dividends. This means all changes in book value flow through the income statement — there are no 'dirty surplus' items that bypass income. The clean surplus relation requires that all changes in equity (other than transactions with owners like dividends) are captured in net income.
Question 3
Hard
Based on the vignette, using a single-stage FCFF model, NovaChem's equity value per share is closest to:
Solution
C is correct (37.45).
First build the FCFF that feeds the model. On the CFO route:
Capitalize that trailing figure at the spread between the WACC and the long-run growth rate. Because FCFF is discounted at the WACC, what the model returns is the value of the whole firm, not the value of the equity:
Then bridge to equity by deducting debt once. NovaChem has no preferred stock or minority interests, so the 800 million of total debt is the only claim to strip out:
Against a market price of 28.00 the shares screen as undervalued, consistent with the discount NovaChem carries to its peer set on EV/EBITDA.
First build the FCFF that feeds the model. On the CFO route:
Capitalize that trailing figure at the spread between the WACC and the long-run growth rate. Because FCFF is discounted at the WACC, what the model returns is the value of the whole firm, not the value of the equity:
Then bridge to equity by deducting debt once. NovaChem has no preferred stock or minority interests, so the 800 million of total debt is the only claim to strip out:
Against a market price of 28.00 the shares screen as undervalued, consistent with the discount NovaChem carries to its peer set on EV/EBITDA.
