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LOS a, (Part 1): Discuss the rationales for the use of price to earnings (P/E), price to book value (P/BV), price to sales (P/S), and price to cash flow (P/CF) in equity valuation. ffice ffice" />
Q1. One advantage of using price-to-book value (PBV) multiples for stock valuation is that:
A) it is a stable and simple benchmark for comparison to the market price.
B) most of the time it is close to the market value.
C) book value of a firm can never be negative.
Correct answer is A)
Book value provides a relatively stable measure of value that can be compared to the market price. For investors who mistrust the discounted cash flow estimates of value, it provides a much simpler benchmark for comparison. Book value may or may not be closer to the market value, and accounting standards for assets also vary from firm to firm. (At times, firms may use different methods for accounting depreciation.). A firm may have negative book value if it shows accounting losses consistently.
Q2. Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation?
A) Book values are very meaningful for firms in service industries.
B) Book value is often positive, even when earnings are negative.
C) PBV ratios can be compared across similar firms if accounting standards are consistent.
Correct answer is A)
Book values are not very meaningful for firms in service industries.
Q3. Of the following types of firm, which is most suitable for P/B ratio analysis?
A) A firm with accounting standards different from other firms.
B) A service industry firm without significant fixed assets.
C) A firm with accounting standards consistent to other firms.
Correct answer is C)
Assuming consistent accounting standards across firms, P/B ratios can reveal signs of misvaluation across firms.
Q4. One advantage of price/sales (P/S) multiples over price to earnings (P/E) and price-to-book value (PBV) multiples is that:
A) P/S can be used for distressed firms.
B) P/S is easier to calculate.
C) Regression shows a strong relationship between stock prices and sales.
Correct answer is A)
Unlike the PBV and P/E multiples, which can become negative and not meaningful, the price/sales multiple is meaningful even for distressed firms (that may have negative earnings or book value).
Q5. Which of the following is least likely a reason the price to cash flow (P/CF) model has grown in popularity?
A) CFs are generally more difficult to manipulate than earnings.
B) CFs are used extensively in valuation models.
C) CFs are more easily estimated than future dividends.
Correct answer is C)
CFs are not easier to estimate than dividends.
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发表于 2009-3-2 14:42
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