Table of Contents
CFA Level 2 – Equity, Session 10 – Reading 34, A Note on Asset Valuation – LOS a
(Practice Questions, Sample Questions)
1. Although we often take modern security analysis for granted, the basic concept that a firm’s value could be determined by analyzing its income statement and balance sheet was not seriously advanced until the 1930s, when this approach was published by:
A) Harry Markowitz.
B) John Burr Williams.
C) Benjamin Graham and David Dodd
[Explanation: The concept that a firm’s value could be discerned by analysis of its financial statements was first advanced in Security Analysis, published in 1934 by Benjamin Graham and David Dodd]
2. Modern security analysis is built on the concept of:
A) constant growth of earnings and dividends.
B) speculation as a professional activity.
C) discounting future returns
[Explanation: The concept that the value of an investment is equal to the discounted value of future returns is attributed to the work of Graham and Dodd, and John Burr Williams. This concept forms the basis for modern security analysis]
3. Which of the following models is credited to the work of John Burr Williams?
A) Cash flow return on investment (CFROI).
B) Dividend discount model (DDM).
C) Free cash flow to equity (FCFE)
[Explanation: John Burr Williams published The Theory of Investment Value in 1938, setting forth the theory that a value of a stock could be determined by discounting the value of future dividends]
4. Which of the following authors wrote that the value of any investment is the present value of its future cash flows, discounted at the opportunity cost of the capital necessary to make the investment?
A) John Williams.
B) Benjamin Graham.
C) Michael Porter
[Explanation: The value of any investment is the present value of its future cash flows, discounted at the opportunity cost of the capital necessary to make the investment. This is the central idea in John Williams’ book, The Theory of Investment Value]
