anshultongia

The warranted or intrinsic price multiple is called the:

A) justified price multiple.

B) multiple implied by the market price.

C) multiple implied by historical growth.

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A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.

anshultongia

The multiple indicated by applying the discounted cash flow (DCF) model to a firm’s fundamentals is necessarily the:

A) justified price multiple.

B) same as the average industry multiple.

C) result of calculating retention/(required rate of return - growth) for the overall market.

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A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple. The question is limited to an individual firm and does not necessarily apply to the market or an industry.

anshultongia

An argument against using the price-to-sales (P/S) valuation approach is that:

A) P/S ratios are not as volatile as price-to-earnings (P/E) multiples.

B) P/S ratios do not express differences in cost structures across companies.

C) sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value.

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P/S ratios do not express differences in cost structures across companies. Both remaining responses are advantages of the P/S ratios, not disadvantages

anshultongia

Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation?

A) Book value is often positive, even when earnings are negative.

B) Book values are very meaningful for firms in service industries.

C) PBV ratios can be compared across similar firms if accounting standards are consistent.

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Book values are NOT very meaningful for firms in service industries.

anshultongia

Which of the following is a disadvantage of using the price-to-book value (PBV) ratio?

A) Book value may not mean much for manufacturing firms with significant fixed costs.

B) Firms with negative earnings cannot be evaluated with the PBV ratios.

C) Book values are affected by accounting standards, which may vary across firms and countries.

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The disadvantages of using PBV ratios are:

• Book values are affected by accounting standards, which may vary across firms and countries.
• Book value may not mean much for service firms without significant fixed costs.
• Book value of equity can be made negative by a series of negative earnings, which limits the usefulness of the variable.

anshultongia

Which of the following is a disadvantage of using price-to-sales (P/S) multiples in stock valuations?

A) It is difficult to capture the effects of changes in pricing policies using P/S ratios.

B) The use of P/S multiples can miss problems associated with cost control.

C) P/S multiples are more volatile than price-to-earnings (P/E) multiples.

Due to the stability of using sales relative to earnings in the P/S multiple, an analyst may miss problems of troubled firms concerning its cost control. P/S multiples are actually less volatile than P/E ratios, which is an advantage in using the P/S multiple. Also, P/S ratios provide a useful framework for evaluating effects of pricing changes on firm value.

JonnyKay

An argument for using the price-to-earnings (P/E) valuation approach is that:

A) earnings can be negative.

B) management discretion increases the reliability of the ratio.

C) earnings power is the primary determinant of investment value.

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Earnings power is the primary determinant of investment value. Both remaining factors reduce the usefulness of the P/E approach

JonnyKay

A firm is better valued using the discounted cash flow approach than the P/E multiples approach when:

A) earnings per share are negative.

B) expected growth rate is very high.

C) dividend payout is low.

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P/E multiples are not meaningful when the earnings per share are negative. While this problem can be partially offset by using normalized or average earnings per share, the problem cannot be eliminated.

JonnyKay

One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:

A) profit margins are not consistent across firms within an industry.

B) P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes.

C) sales are relatively stable and might not change even though earnings and value might change significantly.

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The stability of sales (relative to earnings and book value) can be a disadvantage. For example, revenues may remain stable but earnings and book values can drop significantly due to a sharp increase in expenses.

JonnyKay

One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:

A) profit margins are not consistent across firms within an industry.

B) P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes.

C) sales are relatively stable and might not change even though earnings and value might change significantly.

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The stability of sales (relative to earnings and book value) can be a disadvantage. For example, revenues may remain stable but earnings and book values can drop significantly due to a sharp increase in expenses.