CFA Institute Exam CFA-Level-I Topic 3 Question 6 Discussion

Actual exam question for CFA Institute's CFA Level I Chartered Financial Analyst exam

Question #: 6
Topic #: 3

[All CFA Level I Chartered Financial Analyst Questions]

Consider the following information for Magical Interactions, Inc.

Based on the assumptions above, which of the following statements is TRUE?

AThe stock is undervalued.

BIf the earnings retention rate increases, the value of the stock will increase (all else equal).

CIf management can increase the EBITDA ratio by only 1.0%, the stock will be properly priced (all else equal).

DIf inflation expectations decrease, the value of the stock will increase (all else equal).

Show Suggested Answer

Suggested Answer: D

by Ozell at Sep 16, 2024, 01:17 PM

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Shelba

15 days ago

I'm not sure if I'm feeling lucky enough to gamble on this one. But, you know what they say, 'You miss 100% of the shots you don't take.' I'm going to go with C. If management can increase the EBITDA ratio by only 1.0%, the stock will be properly priced (all else equal).

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Jolene

7 days ago

I think option C is a safe bet.

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Gaynell

21 days ago

Ha! These finance questions always try to trick you. I'm going to go with B. If the earnings retention rate increases, the value of the stock will increase (all else equal). Can't go wrong with good old-fashioned reinvestment, right?

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Shawnee

27 days ago

I'm not sure, but I think the answer might be D.

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Freeman

28 days ago

I disagree, I believe the answer is C.

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Mabel

1 months ago

I think the answer is B.

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Josephine

1 months ago

Hmm, this is a tricky one. I'm going to go with D. If inflation expectations decrease, the value of the stock will increase (all else equal). That makes sense to me, as lower inflation would mean a higher real return on the stock.

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Sherrell

16 days ago

Interesting perspectives. I'm leaning towards A, that the stock is undervalued based on the assumptions provided.

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Michell

19 days ago

I see your point, but I still think D is the right answer. If inflation expectations decrease, the value of the stock will increase.

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Belen

29 days ago

I disagree, I believe C is the true statement. If management can increase the EBITDA ratio by only 1.0%, the stock will be properly priced.

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Janine

1 months ago

I think B is the correct statement. If the earnings retention rate increases, the value of the stock will increase.

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Trinidad

1 months ago

I'm a bit stumped on this one. I'm leaning towards C, but I'm not 100% sure. If management can increase the EBITDA ratio by only 1.0%, the stock will be properly priced (all else equal). That seems like a reasonable assumption, but I'd have to double-check the math.

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Howard

1 months ago

I think the correct answer is B. If the earnings retention rate increases, the value of the stock will increase (all else equal). This makes sense because a higher retention rate means the company is reinvesting more of its earnings, which should lead to higher future growth and stock value.

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Evan

19 days ago

I think you're right. A higher earnings retention rate could definitely signal future growth potential for the company.

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Harrison

20 days ago

I agree, B seems like the correct answer. It makes sense that reinvesting earnings would lead to higher stock value.

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