CFA Program — Equity

Question 1

Which of the following is a characteristic typically associated with preferred stock, distinguishing it from common stock?

• A) Preferred stockholders typically have voting rights while common stockholders do not
• B) Preferred stockholders generally have a priority claim on dividends and assets over common stockholders
• C) Preferred stock dividends always grow at a fixed rate
• D) Preferred stock cannot be issued by public companies

Question 2

A stock currently pays an annual dividend of $2.00, expected to grow at a constant rate of 4% indefinitely. If the required rate of return is 9%, what is the stock's value using the Gordon Growth Model?

• A) $22.22
• B) $40.00
• C) $41.60
• D) $44.44

Question 3

Which of the following best describes a stock index that weights constituent companies by their total market capitalization?

• A) Price-weighted index
• B) Equal-weighted index
• C) Market-capitalization-weighted index
• D) Fundamental-weighted index

Question 4

A company has net income of $5 million and 2 million shares outstanding. What is its earnings per share (EPS)?

• A) $0.40
• B) $2.00
• C) $2.50
• D) $10.00

Question 5

A stock trades at a price-to-earnings (P/E) ratio of 20, while the industry average P/E is 12. All else equal, this suggests the stock may be:

• A) Undervalued relative to the industry
• B) Overvalued relative to the industry, or the market expects higher future growth
• C) Fairly valued regardless of the industry average
• D) Impossible to compare to industry peers

Question 6

In a primary market transaction, a company:

• A) Sells newly issued securities directly to investors, raising new capital
• B) Facilitates trading of securities between existing investors
• C) Only repurchases its own previously issued shares
• D) Cannot raise any new capital

Question 7

A stock is expected to pay a dividend of $1.80 next year, growing at a constant 4.5% rate thereafter. Using a required return of 10%, the Gordon Growth Model value is closest to:

• A) $45.00
• B) $32.73
• C) $40.00
• D) $18.00

Question 8

A stock trades at $48 with trailing EPS of $3.20. The trailing P/E ratio is closest to:

• A) 15.0x
• B) 12.0x
• C) 18.0x
• D) 10.0x

Question 9

Which of the following best describes an American Depositary Receipt (ADR)?

• A) A type of U.S. government bond.
• B) A certificate representing ownership in a U.S.-only mutual fund.
• C) A type of derivative with no connection to any underlying equity.
• D) A certificate representing shares of a foreign company, traded on a U.S. exchange, allowing U.S. investors to invest in foreign companies without directly trading on a foreign exchange.

Question 10

A company undertakes a 2-for-1 stock split. All else equal, this action will:

• A) Immediately double the company's total market capitalization.
• B) Have no effect on the number of shares outstanding.
• C) Double the number of shares outstanding and approximately halve the stock price, with no change to total market capitalization.
• D) Halve the number of shares outstanding.

Question 11

Which type of equity index weighting method gives every constituent company an equal influence on the index, regardless of its market capitalization or share price?

• A) Fundamental weighting based solely on revenue
• B) Equal weighting
• C) Market-capitalization weighting
• D) Price weighting

Question 12

An investor purchases shares of a closed-end fund. Unlike an open-end mutual fund, a closed-end fund:

• A) Has a fixed number of shares that trade on an exchange at a price that can differ from the fund's net asset value (trading at a premium or discount).
• B) Continuously issues and redeems shares at net asset value.
• C) Cannot be traded by investors at any time.
• D) Is always required to trade at exactly its net asset value.

Question 13

Which of the following best describes a "dual-class" share structure?

• A) A structure in which a company issues two or more classes of common stock with differing voting rights, often used by founders to retain control while raising outside capital.
• B) A structure where all shareholders receive identical voting rights regardless of share class.
• C) A structure exclusive to preferred stock, never used for common stock.
• D) A structure that automatically doubles a company's total number of shares annually.

Question 14

A company just paid a dividend of $4.00 per share, expected to grow at 3% annually. Using a required return of 9.5%, the value of the stock today is closest to:

• A) $70.00
• B) $63.38
• C) $61.54
• D) $42.11

Question 15

Which of the following best describes "weak-form" market efficiency?

• A) Stock prices fully reflect all historical price and volume information, implying technical analysis of past price patterns cannot reliably generate excess returns.
• B) Stock prices reflect all public and private information.
• C) Stock prices never change in response to any new information.
• D) Stock prices reflect only insider information, not public data.

Question 16

Which of the following is a primary function of an initial public offering (IPO)?

• A) Eliminating the need for the company to ever report financial results.
• B) Allowing a private company to raise capital by selling shares to public investors for the first time.
• C) Allowing a public company to become privately held.
• D) Guaranteeing the company will never lose money after going public.

Question 17

An investor believes a stock is overvalued and wants to profit if its price declines, without owning the shares. Which strategy would most directly achieve this?

• A) Holding the shares in a long-term retirement account.
• B) Purchasing a call option only, with no other position.
• C) Short selling the stock (borrowing and selling shares, intending to repurchase them later at a lower price).
• D) Buying additional shares of the stock.

Question 18

Which of the following best describes "book value per share"?

• A) The current market trading price of one share.
• B) Total revenue divided by shares outstanding.
• C) The dividend paid per share in the most recent year.
• D) Total shareholders' equity divided by the number of common shares outstanding.

Question 19

A stock pays a dividend of $2 next year, which is expected to grow at 5% forever. If the required return is 9%, the intrinsic value using the Gordon Growth Model is:

• A) $40
• B) $50
• C) $22.22
• D) $44.44

Question 20

Which of the following market structures features a few dominant firms with interdependent pricing decisions?

• A) Perfect competition
• B) Monopolistic competition
• C) Oligopoly
• D) Monopoly

Question 21

A company has EPS of $4 and a P/E ratio of 15. If earnings grow by 10%, the new stock price (assuming the P/E ratio remains constant) is:

• A) $60
• B) $66
• C) $64
• D) $70

Question 22

Which of the following is the strongest form of the Efficient Market Hypothesis (EMH)?

• A) Weak-form: prices reflect all past trading data
• B) Semi-strong form: prices reflect all publicly available information
• C) Strong form: prices reflect all information, public and private
• D) Perfect form: no investor can ever earn excess returns

Question 23

An investor uses a price-to-book (P/B) ratio to value a bank stock. A P/B below 1.0 most likely indicates:

• A) The bank is overvalued
• B) The market values the bank's equity below its book value
• C) The bank has high growth expectations
• D) The bank's ROE exceeds its cost of equity

Question 24

A company repurchases shares using excess cash. All else equal, this action will most likely:

• A) Decrease earnings per share
• B) Decrease the P/E ratio if stock price remains unchanged
• C) Increase earnings per share
• D) Have no effect on earnings per share

Question 25

A stock is expected to pay a dividend of $2.00 next year, growing at a constant rate of 4% per year indefinitely. Using a required rate of return of 9%, the Gordon Growth Model value of the stock is closest to:

• A) $50.00
• B) $18.18
• C) $40.00
• D) $22.22

Question 26

A stock trades at $63 per share and has trailing earnings per share of $4.50. The trailing price-to-earnings (P/E) ratio is closest to:

• A) 20.0x
• B) 14.0x
• C) 12.5x
• D) 18.0x

Question 27

In a well-functioning secondary market for common stock, trades occur:

• A) Between investors, without the issuing company directly receiving any proceeds from the trade.
• B) Only between the issuing company and a single investor.
• C) Only during a company's initial public offering.
• D) With all proceeds automatically going to the issuing company.

Question 28

Which of the following best distinguishes preferred stock from common stock?

• A) Preferred stock always has more voting power than common stock.
• B) Preferred stock guarantees capital appreciation, unlike common stock.
• C) Preferred stock is legally classified as debt in every jurisdiction.
• D) Preferred stock typically has a fixed dividend and priority over common stock in claims on assets and earnings, but generally lacks voting rights.

Question 29

A company's stock has a beta of 1.3. According to the Capital Asset Pricing Model (CAPM), this stock's expected return relative to the market portfolio should generally reflect:

• A) Movement exactly opposite to the overall market.
• B) Guaranteed outperformance of the market in every period.
• C) Greater sensitivity to market movements than the average stock, since beta greater than 1 indicates above-average systematic risk.
• D) No relationship to market movements at all.

Question 30

The risk-free rate is 3%, the expected market return is 9%, and a stock has a beta of 1.2. Using the Capital Asset Pricing Model, the stock's expected return is closest to:

• A) 6.0%
• B) 10.2%
• C) 9.0%
• D) 10.8%

Question 31

A stock trades at $54 per share and has a book value per share of $36. The stock's price-to-book (P/B) ratio is closest to:

• A) 0.67x
• B) 1.20x
• C) 2.00x
• D) 1.50x

Question 32

A price-weighted index consists of three stocks currently priced at $40, $60, and $20, with a divisor of 3 (no stock splits have occurred). The current index level is closest to:

• A) 40.0
• B) 120.0
• C) 33.3
• D) 60.0

Question 33

According to the semi-strong form of the efficient market hypothesis, security prices fully reflect:

• A) Only historical price and volume data, not other public information.
• B) Insider (private) information not yet available to the public.
• C) No information whatsoever, since prices move entirely at random.
• D) All publicly available information, including historical prices as well as public financial statements, news, and economic data, implying that fundamental analysis of public information alone cannot reliably generate abnormal risk-adjusted returns.

Question 34

A company just paid a dividend of $2.00 per share (D0), which is expected to grow at 20% annually for the next 2 years before settling into a constant long-run growth rate of 5% thereafter. Using a required return of 11%, the value of the stock today, using a two-stage dividend discount model, is closest to:

• A) $36.00
• B) $50.40
• C) $45.41
• D) $60.00

Question 35

A share of preferred stock pays a fixed annual dividend of $5.00 in perpetuity. Using a required rate of return of 8%, the value of the preferred share is closest to:

• A) $40.00
• B) $62.50
• C) $50.00
• D) $80.00

Question 36

A stock has a trailing P/E ratio of 18x and an expected annual earnings growth rate of 12%. The stock's PEG ratio is closest to:

• A) 1.50
• B) 0.67
• C) 2.16
• D) 1.20