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

Actual exam question for CFA Institute's CFA-Level-I exam

Question #: 6
Topic #: 3

[All CFA-Level-I 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

2 months 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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Katina

1 months ago

I agree with you, option C seems like a good choice to go with.

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Osvaldo

1 months ago

I'm leaning towards option B, increasing the earnings retention rate seems promising.

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Jolene

2 months ago

I think option C is a safe bet.

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Gaynell

2 months 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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Ashanti

1 months ago

User 4: Looks like we're all on the same page with this one.

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Cristal

1 months ago

User 3: I agree, it's a safe bet to go with B in this case.

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Teri

1 months ago

User 2: Yeah, reinvesting earnings can definitely boost the stock value.

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Laurel

1 months ago

I think B is the correct answer too.

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Shawnee

2 months ago

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

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Freeman

2 months ago

I disagree, I believe the answer is C.

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Mabel

3 months ago

I think the answer is B.

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Josephine

3 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

2 months ago

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

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Michell

2 months 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

2 months 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

3 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

3 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

3 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

2 months 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

2 months 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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