Reading 48: Market-Based Valuation: Price Multiples - LOS 2008, class, result, increase, following

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1.An increase in which of the following variables will NOT result in a corresponding increase in the PBV ratio for a high-growth firm?

A)   Required rate of return.

B)   Growth rates in earnings.

C)   Return on Equity.

D)   Payout ratios.

2.All other variables held constant, the price-to-book value (PBV) ratio will decrease with:

A)   a decrease in required rate of return.

B)   a decrease in retention ratio.

C)   a decrease in expected growth rate.

D)   an increase in return on equity.

3.An increase in return on equity (ROE) will cause a price-to-book (P/B) multiple to:

A)   increase.

B)   decrease.

C)   remain the same.

D)   there is insufficient information to tell.

4.An increase in financial leverage, assuming no change in the growth rate, will generally cause a price to cash flow (P/CF) ratio to:

A)   increase.

B)   remain the same.

C)   there is insufficient information to tell.

D)   decrease.

5.An increase in growth will cause a price-to-earnings (P/E) multiple to:

A)   decrease.

B)   remain the same.

C)   increase.

D)   there is insufficient information to tell.

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答案和详解如下：

1.An increase in which of the following variables will NOT result in a corresponding increase in the PBV ratio for a high-growth firm?

A)   Required rate of return.

B)   Growth rates in earnings.

C)   Return on Equity.

D)   Payout ratios.

The correct answer was A)

The PBV ratio decreases as the required rate of return increases.

2.All other variables held constant, the price-to-book value (PBV) ratio will decrease with:

A)   a decrease in required rate of return.

B)   a decrease in retention ratio.

C)   a decrease in expected growth rate.

D)   an increase in return on equity.

The correct answer was C)

All other variables held constant, a decrease in expected growth rate will result in a decrease in PBV ratio.

3.An increase in return on equity (ROE) will cause a price-to-book (P/B) multiple to:

A)   increase.

B)   decrease.

C)   remain the same.

D)   there is insufficient information to tell.

The correct answer was A)

An increase in ROE should increase the price to book (P/B) ratio:

P₀ / B₀ = (ROE – g) / (r – g)

4.An increase in financial leverage, assuming no change in the growth rate, will generally cause a price to cash flow (P/CF) ratio to:

A)   increase.

B)   remain the same.

C)   there is insufficient information to tell.

D)   decrease.

The correct answer was D)

An increase in financial leverage should increase the firm’s risk and consequently its required rate of return. This should decrease the P/CF ratio, as indicated by the following expression:

P₀ / CF₀ = (1 + g) / (r – g)

Note that the reading does not allow for any interactive relationship between leverage and growth. Thus, no explicit consideration is given to whether the increase in leverage would increase ROE and therefore growth through the g = (ROE × retention) relationship.

5.An increase in growth will cause a price-to-earnings (P/E) multiple to:

A)   decrease.

B)   remain the same.

C)   increase.

D)   there is insufficient information to tell.

The correct answer was C)

An increase in growth will decrease the denominator and increase the numerator in the trailing P/E expression, both of which should increase the P/E ratio:

P₀/E₀ = [(1 – b)(1 + g)] / (r – g)

Note that the reading does not allow for any interactive relationship between retention and growth. Thus, no explicit consideration is given to how the growth increase was generated.