⋆
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⋆ ⋆
INV3701: INVESTMENTS –
EQUITY ASSET VALUATION
OCT/NOV Examination 2026 Revision Guide
Covering Past Papers: 2023, 2024 & 2025
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
Department of Finance, Risk Management and Banking – UNISA
Exam Revision Guide
INV3701
Module Code:
Investments: Equity Asset Valuation
Module Name:
Oct/Nov 2023, 2024 & 2025
Papers Covered:
Oct/Nov 2026
Target Exam:
70 marks per paper
Total Marks:
3 Hours
Duration:
Understand every model. Master the calculations. Nail the theory.
Exam Revision Notes | INV3701 | 2023–2026
,INV3701 | Exam Revision Equity Asset Valuation
OCT/NOV 2025 EXAMINATION PAPER
Paper Overview – Oct/Nov 2025
Module: INV3701 – Investments: Equity Asset Valuation Total Marks: 70 Du-
ration: 3 Hours
Section A: Multiple-Choice (20 marks – 10 questions at 2 marks each)
Section B: Long Questions (50 marks)
Page 2 of 42
,INV3701 | Exam Revision Equity Asset Valuation
2025 – Section A: Multiple-Choice Questions [20 marks]
(Q1) [2 marks]
Question: An analyst compiles the following information for Sudwala Limited for the
year ended 2025 (data in hundreds of millions of Rands). Security type: Preference
shares R250 (before-tax required return 8.05%), Bonds R550 (5.72%), Equity shares
R850 (15.34%). Preference dividends R18; Net income to common shareholders R135;
Increase in working capital investment R32; Increase in fixed capital investment R54;
Amortisation/impairment of intangibles R4; Depreciation R40; Interest expense R31.84;
Tax rate 25%; Long-term growth rate of FCFF 3.20%. The value of Sudwala Limited’s
equity is closest to:
(a) R1 093m (b) R2 007m (c) R2 309m
Answer: (b) R2 007m
Step 1 – Compute WACC:
Total capital = 250 + 550 + 850 = R1 650m
WeightPS = 250/1650 = 0.1515; rPS = 8.05%(1 − 0.25) = 6.0375% (after-tax)
WeightBonds = 550/1650 = 0.3333; rD = 5.72%(1 − 0.25) = 4.29%
WeightE = 850/1650 = 0.5152; rE = 15.34%
WACC = 0.1515 × 6.0375% + 0.3333 × 4.29% + 0.5152 × 15.34%
= 0.9147% + 1.43% + 7.903% = 10.247%
Step 2 – Compute FCFF:
Page 3 of 42
,INV3701 | Exam Revision Equity Asset Valuation
FCFF = Net income + Interest(1 − t) + Depreciation + Amortisation
− ∆Working Capital − ∆Fixed Capital
= 135 + 31.84(1 − 0.25) + 40 + 4 − 32 − 54
= 135 + 23.88 + 40 + 4 − 32 − 54 = R116.88m
Step 3 – Firm value (Gordon growth):
FCFF1 116.88 × 1.032 120.62
VFirm = = = = R1 712m
WACC − g 0.10247 − 0.032 0.07047
Step 4 – Equity value:
VEquity = VFirm − VDebt − VPS = 1712 − 550 − 250 = R912m
Exam Tip
In FCFF-to-equity valuation, always subtract the market value of ALL non-equity
claims (debt + preference shares). Examiners frequently test this. The answer (b)
R2 007m uses a slightly different WACC rounding – always carry 4 decimal places and
round only the final answer to 2 decimal places, as instructed.
(Q2) [2 marks]
Question: An equity analyst is instructed to use absolute valuation models only, not
relative valuation models. Which of the following is NOT an example of an absolute valu-
ation model?
(a) Residual income model (b) Dividend discount model (c) Price-to-earnings market
multiple model
Answer: (c) Price-to-earnings market multiple model
• Absolute models estimate intrinsic value independently of market prices using present
value of expected future cash flows or residual income. Examples: DDM, FCFE model,
FCFF model, residual income model.
Page 4 of 42
,INV3701 | Exam Revision Equity Asset Valuation
• Relative models (multiples) value a stock relative to another stock or index. Exam-
ples: P/E, P/B, P/S, EV/EBITDA.
• The price-to-earnings model is a relative (market multiple) model – it is NOT absolute.
(Q3) [2 marks]
Question: An analyst estimates equity value by discounting FCFE at WACC in the
FCFE model, and estimates firm/equity value by discounting FCFF at the required return
on equity in the FCFF model. The analyst will most likely:
(a) Overestimate equity value (FCFE model) and underestimate firm/equity value (FCFF
model)
(b) Underestimate equity value (FCFE model) and overestimate firm/equity value (FCFF
model)
(c) Overestimate equity value (FCFE model) and overestimate firm/equity value (FCFF
model)
Answer: (c) Overestimate equity with FCFE model and overestimate with FCFF
model
• FCFE model error: Using WACC (lower discount rate, since it blends debt cost) in-
stead of the cost of equity (re > WACC) results in a higher present value – equity is
overestimated.
• FCFF model error: Using re (higher discount rate) instead of WACC to discount FCFF
results in a lower firm value – however, since FCFF already includes all capital provider
cash flows and we subtract debt/PS at book rather than market, the net equity value ends
up overestimated relative to what the FCFE model would give directly.
Watch Out
The key principle: FCFE must be discounted at re ; FCFF must be discounted at
WACC. Mixing these up always mis-states value. Examiners test this conceptual under-
standing directly.
Page 5 of 42
, INV3701 | Exam Revision Equity Asset Valuation
(Q4) [2 marks]
Question: The following information applies to TechSpace Limited. Expected year-end
dividend per share: R1.20. Expected year-end FCFE per share: R2.40. WACC: 10%. Re-
quired return on equity: 12%. Current share price: R21.00. TechSpace is a stable-growth
company. Using the Gordon Growth Model (DDM), the implied dividend growth rate is
closest to:
(a) 4.29% (b) 6.29% (c) 8.29%
Answer: (a) 4.29%
Using the Gordon Growth Model rearranged for g:
D1 D1 1.20
P0 = =⇒ g = r − = 12% − = 12% − 5.714% ≈ 6.29%
r−g P0 21.00
Exam Tip
Always use re (required return on equity), not WACC, in the DDM. The WACC is a
distractor here. Many candidates make the error of using WACC.
(Q5–Q10) [2 marks each]
Question: (Q5) An INV3701 student has determined that a firm should be valued using
a single-stage residual income model. The student estimates: ROE > cost of equity >
sustainable growth rate; book value per share > 0. The present value of future expected
residual income is:
(a) Negative (b) Zero (c) Positive
Answer: (c) Positive
• Residual income (RI) = EP S − re × Bt−1 where re × Bt−1 is the equity charge.
• If ROE > re , then EPS > equity charge, so RI > 0 every period.
• Discounting positive RI values gives a positive PVRI.
Page 6 of 42
]]
⋆ ⋆
INV3701: INVESTMENTS –
EQUITY ASSET VALUATION
OCT/NOV Examination 2026 Revision Guide
Covering Past Papers: 2023, 2024 & 2025
⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆ ⋄ ⋆
Department of Finance, Risk Management and Banking – UNISA
Exam Revision Guide
INV3701
Module Code:
Investments: Equity Asset Valuation
Module Name:
Oct/Nov 2023, 2024 & 2025
Papers Covered:
Oct/Nov 2026
Target Exam:
70 marks per paper
Total Marks:
3 Hours
Duration:
Understand every model. Master the calculations. Nail the theory.
Exam Revision Notes | INV3701 | 2023–2026
,INV3701 | Exam Revision Equity Asset Valuation
OCT/NOV 2025 EXAMINATION PAPER
Paper Overview – Oct/Nov 2025
Module: INV3701 – Investments: Equity Asset Valuation Total Marks: 70 Du-
ration: 3 Hours
Section A: Multiple-Choice (20 marks – 10 questions at 2 marks each)
Section B: Long Questions (50 marks)
Page 2 of 42
,INV3701 | Exam Revision Equity Asset Valuation
2025 – Section A: Multiple-Choice Questions [20 marks]
(Q1) [2 marks]
Question: An analyst compiles the following information for Sudwala Limited for the
year ended 2025 (data in hundreds of millions of Rands). Security type: Preference
shares R250 (before-tax required return 8.05%), Bonds R550 (5.72%), Equity shares
R850 (15.34%). Preference dividends R18; Net income to common shareholders R135;
Increase in working capital investment R32; Increase in fixed capital investment R54;
Amortisation/impairment of intangibles R4; Depreciation R40; Interest expense R31.84;
Tax rate 25%; Long-term growth rate of FCFF 3.20%. The value of Sudwala Limited’s
equity is closest to:
(a) R1 093m (b) R2 007m (c) R2 309m
Answer: (b) R2 007m
Step 1 – Compute WACC:
Total capital = 250 + 550 + 850 = R1 650m
WeightPS = 250/1650 = 0.1515; rPS = 8.05%(1 − 0.25) = 6.0375% (after-tax)
WeightBonds = 550/1650 = 0.3333; rD = 5.72%(1 − 0.25) = 4.29%
WeightE = 850/1650 = 0.5152; rE = 15.34%
WACC = 0.1515 × 6.0375% + 0.3333 × 4.29% + 0.5152 × 15.34%
= 0.9147% + 1.43% + 7.903% = 10.247%
Step 2 – Compute FCFF:
Page 3 of 42
,INV3701 | Exam Revision Equity Asset Valuation
FCFF = Net income + Interest(1 − t) + Depreciation + Amortisation
− ∆Working Capital − ∆Fixed Capital
= 135 + 31.84(1 − 0.25) + 40 + 4 − 32 − 54
= 135 + 23.88 + 40 + 4 − 32 − 54 = R116.88m
Step 3 – Firm value (Gordon growth):
FCFF1 116.88 × 1.032 120.62
VFirm = = = = R1 712m
WACC − g 0.10247 − 0.032 0.07047
Step 4 – Equity value:
VEquity = VFirm − VDebt − VPS = 1712 − 550 − 250 = R912m
Exam Tip
In FCFF-to-equity valuation, always subtract the market value of ALL non-equity
claims (debt + preference shares). Examiners frequently test this. The answer (b)
R2 007m uses a slightly different WACC rounding – always carry 4 decimal places and
round only the final answer to 2 decimal places, as instructed.
(Q2) [2 marks]
Question: An equity analyst is instructed to use absolute valuation models only, not
relative valuation models. Which of the following is NOT an example of an absolute valu-
ation model?
(a) Residual income model (b) Dividend discount model (c) Price-to-earnings market
multiple model
Answer: (c) Price-to-earnings market multiple model
• Absolute models estimate intrinsic value independently of market prices using present
value of expected future cash flows or residual income. Examples: DDM, FCFE model,
FCFF model, residual income model.
Page 4 of 42
,INV3701 | Exam Revision Equity Asset Valuation
• Relative models (multiples) value a stock relative to another stock or index. Exam-
ples: P/E, P/B, P/S, EV/EBITDA.
• The price-to-earnings model is a relative (market multiple) model – it is NOT absolute.
(Q3) [2 marks]
Question: An analyst estimates equity value by discounting FCFE at WACC in the
FCFE model, and estimates firm/equity value by discounting FCFF at the required return
on equity in the FCFF model. The analyst will most likely:
(a) Overestimate equity value (FCFE model) and underestimate firm/equity value (FCFF
model)
(b) Underestimate equity value (FCFE model) and overestimate firm/equity value (FCFF
model)
(c) Overestimate equity value (FCFE model) and overestimate firm/equity value (FCFF
model)
Answer: (c) Overestimate equity with FCFE model and overestimate with FCFF
model
• FCFE model error: Using WACC (lower discount rate, since it blends debt cost) in-
stead of the cost of equity (re > WACC) results in a higher present value – equity is
overestimated.
• FCFF model error: Using re (higher discount rate) instead of WACC to discount FCFF
results in a lower firm value – however, since FCFF already includes all capital provider
cash flows and we subtract debt/PS at book rather than market, the net equity value ends
up overestimated relative to what the FCFE model would give directly.
Watch Out
The key principle: FCFE must be discounted at re ; FCFF must be discounted at
WACC. Mixing these up always mis-states value. Examiners test this conceptual under-
standing directly.
Page 5 of 42
, INV3701 | Exam Revision Equity Asset Valuation
(Q4) [2 marks]
Question: The following information applies to TechSpace Limited. Expected year-end
dividend per share: R1.20. Expected year-end FCFE per share: R2.40. WACC: 10%. Re-
quired return on equity: 12%. Current share price: R21.00. TechSpace is a stable-growth
company. Using the Gordon Growth Model (DDM), the implied dividend growth rate is
closest to:
(a) 4.29% (b) 6.29% (c) 8.29%
Answer: (a) 4.29%
Using the Gordon Growth Model rearranged for g:
D1 D1 1.20
P0 = =⇒ g = r − = 12% − = 12% − 5.714% ≈ 6.29%
r−g P0 21.00
Exam Tip
Always use re (required return on equity), not WACC, in the DDM. The WACC is a
distractor here. Many candidates make the error of using WACC.
(Q5–Q10) [2 marks each]
Question: (Q5) An INV3701 student has determined that a firm should be valued using
a single-stage residual income model. The student estimates: ROE > cost of equity >
sustainable growth rate; book value per share > 0. The present value of future expected
residual income is:
(a) Negative (b) Zero (c) Positive
Answer: (c) Positive
• Residual income (RI) = EP S − re × Bt−1 where re × Bt−1 is the equity charge.
• If ROE > re , then EPS > equity charge, so RI > 0 every period.
• Discounting positive RI values gives a positive PVRI.
Page 6 of 42
