CPA Quiz: Apply Valuation Models
20 questions · exam conditions
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Apply Valuation ModelsQuestion 1 of 20

Stock just paid a $2 dividend. Growth is 20% for 2 years, then 5% forever. Required return 12%. Value?

$37.23
$43.20
$35.19
$38.88
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CPA Quiz

CPA Quiz: Apply Valuation Models

Practice Apply Valuation Models in CPA with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Apply Valuation Models, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

Stock just paid a $2 dividend. Growth is 20% for 2 years, then 5% forever. Required return 12%. Value?

  1. $37.23
  2. $43.20
  3. $35.19
  4. $38.88 (correct answer)
Explanation: Growth gives D1 = 2.40 and D2 = 2.88. D3 is 2.88 x 1.05 = 3.024, so the year-2 terminal value is 3.024 / (0.12 - 0.05) = 43.20. Discount D1, D2, and that terminal value back one and two years: 2.40/1.12 + 2.88/1.12^2 + 43.20/1.12^2 = 38.88. The tempting 43.20 is the terminal value at year 2, not its present value today.

Question 2

Project costs $500K and yields $120K forever. All-equity cost is 12%; tax 21%; debt $200K. Adjusted present value?

  1. $500,000
  2. $542,000 (correct answer)
  3. $458,000
  4. $1,042,000
Explanation: Value the unlevered project: 120,000 / 0.12 = 1,000,000. Subtract the 500,000 initial cost to get 500,000. Add the debt tax shield: 21% of 200,000 = 42,000. Total is 542,000. The tempting mistake is adding the tax shield to 1,000,000 and forgetting the 500,000 cost, giving 1,042,000.

Question 3

Next year's FCFF is $8M; WACC 12%; growth 3%; debt $10M; excess cash $2M. Equity value?

  1. $80.9M (correct answer)
  2. $78.9M
  3. $88.9M
  4. $66.7M
Explanation: Discount next year's FCFF at the perpetuity growth rate: 8 / (0.12 - 0.03) = 88.9M enterprise value. Then subtract the 10M debt and add the 2M excess cash: 88.9 - 10 + 2 = 80.9M. The tempting 88.9M is enterprise value, not equity value, because it skips the debt and cash adjustments.

Question 4

EV/EBITDA is 8x; EBITDA $40M; debt $80M; excess cash $20M. Equity value?

  1. $240M
  2. $320M
  3. $260M (correct answer)
  4. $340M
Explanation: EV = 8 x 40 = $320M. Subtract net debt: debt $80M less cash $20M = $60M. Equity = 320 - 60 = $260M. The $240M trap subtracts all debt but forgets excess cash reduces net debt.

Question 5

Equity beta 1.5, debt beta 0.3, D/E 0.5, tax 21%, risk-free 3%, market risk premium 7%. WACC for DCF?

  1. 10.7%
  2. 8.8%
  3. 10.3% (correct answer)
  4. 13.5%
Explanation: Cost of equity is 3% + 1.5(7%) = 13.5%. Cost of debt is 3% + 0.3(7%) = 5.1%, and after tax it is 5.1%(1 - 0.21) = 4.029%. With D/E = 0.5, equity is 2/3 of capital and debt is 1/3, so WACC = (2/3)(13.5%) + (1/3)(4.029%) = 10.34%, about 10.3%. The 10.7% answer comes from using the pre-tax 5.1% debt cost and ignoring the debt tax shield.

Question 6

A bond has a face value of $1,000, an annual coupon rate of 6%, and 3 years to maturity. The market yield is 8%. The PV annuity factor for 3 years at 8% is 2.577 and the PV factor for Year 3 is 0.794. What is the bond's current price?

  1. $948.60 (correct answer)
  2. $1,000.00
  3. $1,051.40
  4. $972.00
Explanation: Annual coupon = $1,000 x 6% = $60. PV of coupons = $60 x 2.577 = $154.62. PV of face value = $1,000 x 0.794 = $794.00. Bond price = $154.62 + $794.00 = $948.62, approximately $948.60. When market yield exceeds coupon rate, bonds trade at a discount to face value. Option B is face value, which applies only when coupon rate equals market yield. Option C is a premium price, which would apply if the coupon rate exceeded the market yield. Option D applies an incorrect annuity factor.

Question 7

A stock pays an annual dividend of $3.00 per share. Dividends are expected to grow at 4% per year in perpetuity and the required rate of return is 10%. Using the Gordon Growth Model, what is the estimated intrinsic value per share?

  1. $30.00
  2. $75.00
  3. $52.00 (correct answer)
  4. $60.00
Explanation: Gordon Growth Model: P = D1 / (r - g). D1 = D0 x (1 + g) = $3.00 x 1.04 = $3.12. P = $3.12 / (0.10 - 0.04) = $3.12 / 0.06 = $52.00. Option A divides only D0 by the required rate of return, omitting the growth rate. Option B divides D1 by only the growth rate. Option D uses D0 in the numerator without the growth adjustment.

Question 8

A preferred stock pays a fixed annual dividend of $5,000 indefinitely. The required rate of return is 8%. What is the present value of this perpetuity?

  1. $40,000
  2. $5,000
  3. $50,000
  4. $62,500 (correct answer)
Explanation: PV of perpetuity = Annual payment / Discount rate = $5,000 / 0.08 = $62,500. Option A divides by 0.125 (a different rate). Option B reports the annual payment rather than the present value. Option C uses a 10% discount rate instead of 8%.

Question 9

A company evaluates after-tax lease payments of $80,000 per year reduced to $60,000 after a 25% tax rate. The present value annuity factor for 5 years at 8% is 3.993. What is the present value of the after-tax lease payments?

  1. $319,440
  2. $200,000
  3. $239,580 (correct answer)
  4. $299,250
Explanation: After-tax annual lease payment = $80,000 x (1 - 0.25) = $60,000. PV of after-tax lease payments = $60,000 x 3.993 = $239,580. Option A applies the pre-tax lease payment to the annuity factor without the tax reduction. Option B multiplies the after-tax payment by 5 years without discounting. Option D applies the pre-tax payment and an incorrect annuity factor.

Question 10

A company applies the adjusted net asset method to value a private business. Book value of assets is $4,200,000. Unrecorded identifiable intangibles have a fair value of $800,000. Total liabilities are $1,900,000. What is the estimated equity value?

  1. $2,300,000
  2. $4,200,000
  3. $5,000,000
  4. $3,100,000 (correct answer)
Explanation: Adjusted total assets = Book value + Unrecorded intangibles = $4,200,000 + $800,000 = $5,000,000. Equity value = Adjusted assets - Liabilities = $5,000,000 - $1,900,000 = $3,100,000. Option A uses only book value assets minus liabilities, omitting the unrecorded intangibles. Option B reports only the book value of assets. Option C reports the adjusted asset total before subtracting liabilities.

Question 11

An acquisition generates a positive NPV only if the target achieves 12% annual revenue growth for 5 years. The target's historical growth rate is 4%. Which concern is most analytically important before proceeding?

  1. The 12% growth assumption is acceptable if senior management endorses it
  2. Acquisitions always generate synergies that justify assuming higher growth than historical rates
  3. The model should be rerun using the 8% midpoint between historical and assumed growth
  4. The acquisition's value depends on achieving three times the historical growth rate; sensitivity analysis should test whether value is preserved at growth rates closer to the historical baseline (correct answer)
Explanation: When an acquisition requires a substantial departure from historical performance to produce a positive NPV, the investment is highly sensitive to that assumption. Sensitivity and scenario analysis - testing NPV at historical growth (4%), a moderate improvement (8%), and the full assumption (12%) - reveals the range of outcomes and the probability that the deal creates value. Management endorsement does not make an aggressive assumption reliable, and synergies do not automatically triple a company's growth rate. Option C introduces an arbitrary midpoint without analytical justification. Option B is an unsupported generalization.

Question 12

Project C has the highest NPV ($180,000) but the longest payback period (6 years) of all projects considered. Management proposes rejecting Project C in favor of Project D (NPV $95,000, payback 2 years). Which concern is most analytically relevant?

  1. Project C should be rejected because a 6-year payback period always signals excessive risk
  2. Selecting Project D over Project C sacrifices $85,000 of shareholder value; the payback period ignores cash flows beyond the recovery point and does not account for the time value of money (correct answer)
  3. The payback period is more reliable than NPV for projects with long time horizons
  4. Both projects should be accepted because both generate positive NPV and capital is unconstrained
Explanation: The payback period ignores all cash flows after the investment is recovered and does not discount future cash flows. A project with a long payback but high NPV may generate most of its value after the payback point. Overweighting payback leads to rejecting long-horizon, high-value projects in favor of faster-recovering, lower-value alternatives - exactly the tradeoff here. Option A makes an absolute rule about payback length that has no analytical basis. Option C inverts the well-established ranking of decision criteria. Option D is incorrect because the projects are implicitly mutually exclusive given that management is choosing between them.

Question 13

A company uses CAPM to estimate its cost of equity. The risk-free rate is 4%, the company's beta is 1.2, and the equity risk premium is 6%. What is the estimated cost of equity?

  1. 10.0%
  2. 7.2%
  3. 9.6%
  4. 11.2% (correct answer)
Explanation: CAPM: Cost of equity = Risk-free rate + (Beta x Equity risk premium) = 4% + (1.2 x 6%) = 4% + 7.2% = 11.2%. Option A omits the beta adjustment and uses the raw risk-free rate plus equity risk premium without beta. Option B reports only the beta-adjusted risk premium without adding the risk-free rate. Option C uses a beta of 1.0 rather than 1.2.

Question 14

A company's WACC is 9% and a proposed project has an expected IRR of 12%. An analyst endorses the project. A second analyst notes the project has unconventional cash flows: a large positive cash flow in Year 1 followed by large negative cash flows in Years 2-4. Which concern does the second analyst raise?

  1. Unconventional cash flows always produce an IRR above WACC, so the project should be rejected
  2. The second analyst is incorrect; IRR is always a reliable measure regardless of cash flow patterns
  3. The payback period should be used instead of IRR for all capital projects
  4. Projects with unconventional cash flows may yield multiple IRRs or no real IRR, making the standard accept-or-reject IRR rule unreliable; NPV is the more appropriate evaluation method (correct answer)
Explanation: IRR assumes that all cash flows - both inflows and outflows - follow a single sign change (negative then positive). When cash flows change sign more than once (positive, then negative, then positive again), the IRR calculation may produce multiple mathematically valid solutions or no real solution. Using one of these multiple IRRs to compare against WACC produces an unreliable decision signal. NPV does not have this limitation and remains valid for unconventional cash flow patterns. Option A draws an incorrect general conclusion. Option B dismisses a well-documented limitation. Option C overgeneralizes from one limitation of IRR.

Question 15

A company has equity with a market value of $600,000 (cost 11.2%) and debt with a book value of $400,000 (pre-tax cost 6%, tax rate 25%). Total firm value is $1,000,000. What is the weighted average cost of capital (WACC)?

  1. 8.52% (correct answer)
  2. 7.85%
  3. 9.20%
  4. 10.00%
Explanation: After-tax cost of debt = 6% x (1 - 0.25) = 4.5%. Weight of equity = $600,000 / $1,000,000 = 60%. Weight of debt = 40%. WACC = (60% x 11.2%) + (40% x 4.5%) = 6.72% + 1.80% = 8.52%. Option B applies an incorrect weighting or cost of equity. Option C uses the pre-tax cost of debt rather than the after-tax cost. Option D applies equal weights or ignores the tax shield.

Question 16

A project requires an initial investment of $150,000 and generates equal annual after-tax cash flows of $40,000 for 5 years. The discount rate is 8% and the present value annuity factor for 5 years at 8% is 3.993. What is the project's net present value?

  1. $50,000
  2. $200,000
  3. $9,720 (correct answer)
  4. -$9,720
Explanation: PV of annuity = $40,000 x 3.993 = $159,720. NPV = $159,720 - $150,000 = 9,720.OptionAsubtractstheannualcashflowfromtheinitialinvestmentratherthancomputingPV.OptionBreportsthetotalundiscountedcashflows(9,720. Option A subtracts the annual cash flow from the initial investment rather than computing PV. Option B reports the total undiscounted cash flows (40,000 x 5 = $200,000). Option D applies the correct formula but labels the sign incorrectly.

Question 17

Project A has an NPV of $50,000 and IRR of 18%. Project B has an NPV of $75,000 and IRR of 14%. Both projects exceed the 10% cost of capital. The projects are mutually exclusive. Which should be selected?

  1. Project A, because its higher IRR of 18% indicates a higher percentage return on invested capital
  2. Project B, because it creates more absolute value for shareholders at $75,000 versus $50,000, and both projects exceed the cost of capital (correct answer)
  3. Either project is acceptable because both produce positive NPV and IRR above the cost of capital
  4. Project A, because IRR is always the superior decision criterion for mutually exclusive projects
Explanation: For mutually exclusive projects, NPV is the preferred decision criterion because it measures the absolute dollar value created for shareholders. Project B's NPV of $75,000 exceeds Project A's $50,000, meaning Project B creates $25,000 more value. The IRR conflict arises because the projects likely differ in scale or timing - Project B may require a larger investment but generates more total value. Option A elevates IRR over NPV, which is the classic error in mutually exclusive project analysis. Option C is incorrect; when projects are mutually exclusive, only one can be chosen. Option D is a general overstatement about IRR's superiority.

Question 18

A project requires an initial investment of $200,000 and generates after-tax cash flows of $60,000 (Year 1), $70,000 (Year 2), $80,000 (Year 3), and $50,000 (Year 4). Using a 10% discount rate and PV factors of 0.909, 0.826, 0.751, and 0.683 respectively, what is the project's net present value?

  1. -$6,590
  2. $6,590 (correct answer)
  3. $60,000
  4. $206,590
Explanation: PV of cash flows: (60,000x0.909)+(60,000 x 0.909) + (70,000 x 0.826) + (80,000x0.751)+(80,000 x 0.751) + (50,000 x 0.683) = $54,540 + $57,820 + $60,080 + $34,150 = $206,590. NPV = $206,590 - $200,000 = $6,590. Option A applies the correct calculation but labels the sign incorrectly. Option C reports only Year 1 cash flows. Option D reports the total present value without subtracting the initial investment.

Question 19

The internal rate of return (IRR) is best defined as which of the following?

  1. The discount rate that maximizes the net present value of a project's cash flows
  2. The discount rate at which the net present value of a project equals zero (correct answer)
  3. The average annual return expressed as a percentage of the original investment cost
  4. The minimum required rate of return established by management for approving capital investments
Explanation: The IRR is the specific discount rate that sets NPV equal to zero - the rate at which the present value of future cash inflows exactly equals the initial investment. A project is accepted when its IRR exceeds the required rate of return. Option A is incorrect; higher discount rates reduce NPV rather than maximizing it. Option C describes the accounting rate of return. Option D describes the hurdle rate or cost of capital, which is used as the acceptance benchmark for IRR, not the definition of IRR itself.

Question 20

Under the income approach to fair value measurement, value is estimated by which of the following methods?

  1. Discounting expected future cash flows or earnings at a rate reflecting the risk of those cash flows (correct answer)
  2. Summing the fair values of all identifiable assets and subtracting the fair values of all liabilities
  3. Applying a valuation multiple derived from prices paid in recent comparable company transactions
  4. Calculating the replacement cost of the assets required to replicate the company's operations
Explanation: The income approach estimates value by converting future economic benefits into a present value using an appropriate discount rate. Common income approach methods include DCF analysis and the capitalization of earnings. Option B describes the asset (or cost) approach, which values a business by reference to the net asset value. Option C describes the market approach using precedent transactions. Option D describes the replacement cost variant of the asset approach.