Wealth-Forum e-zine

Test your understanding of this topic

Q1.

Monetary loosening by RBI would:

a. Increase the value of the stock

b. Decrease the value of the stock

c. Not affect the stock

Q2.

The success of DCF valuation depends upon the fund manager’s ability to:

a. Correctly assume a discount rate

b. Correctly assume a perpetuity growth rate

c. Correctly forecast the future cash flows of a firm

d. All of the above

Q3.

Terminal value of a firm

a. Assumes a perpetuity growth rate

b. Assumes a constant discount rate

c. Both of the above

Q4.

Company A’s current stock price is Rs. 160. It is trading at a P/E of 8. An increase in interest rates is expected to decrease the EPS of the firm in the next fiscal to Rs. 15. What is the expected intrinsic value of the stock of firm A.

a. Rs. 150

b. Rs. 100

c. Rs. 120

Q5.

There are two firms P and Q. Stock P has been a great investing opportunity based on its past performance and high earnings. However, the future forecast of earnings of P is uncertain and bleak as its major revenue generating export markets have eroded. Company Q is new and has not performed exceptionally well in the past. However, it has recently commissioned new plants which are expected to generate huge cash flows till a long time in the future. Which stock would you prefer?

a. Stock P

b. Stock Q

c. Any of the above