6.Barnes is contemplating the use of a price/earnings ratio to value a start-up medical technology firm. Which of the following is the most compelling reason not to use the P/E ratio?

A)   The company is likely to be unprofitable.

B)   Earnings per share are not a good determinant of investment value for medical-technology companies.

C)   Clients who receive a report on the company may not understand what the P/E ratio means.

D)   P/E ratios for medical-technology firms with different specialties are not comparable.

7.Based on their responses to Powell, which of the analysts is most likely concerned about earnings volatility?

A)   Barnes.

B)   Bosley.

C)   Marks.

D)   Lincoln.

8.Based on their responses to Powell, which of the analysts has proposed a method that has the best chance to work for determining the relative value start-up companies?

A)   Bosley.

B)   Lincoln.

C)   Barnes.

D)   Marks.

9.Barnes would be least likely to use EV/EBITDA ratio, rather than the price/earnings ratio, when analyzing a company that:

A)   pays a dividend, and is likely to deliver little earnings growth.

B)   is unprofitable.

C)   reports a lot of depreciation expense.

D)   has a different capital structure than most of its peers.

10.Barnes is considering the four methods previously described to analyze the small-cap stocks provided to her by Powell. For which method does Barnes provide the weakest justification?

A)   The PEG ratio.

B)   The mean P/E of S& 500 companies.

C)   The median P/E of S& 500 companies.

D)   The price/sales ratio.

答案和详解如下：

6.Barnes is contemplating the use of a price/earnings ratio to value a start-up medical technology firm. Which of the following is the most compelling reason not to use the P/E ratio?

A)   The company is likely to be unprofitable.

B)   Earnings per share are not a good determinant of investment value for medical-technology companies.

C)   Clients who receive a report on the company may not understand what the P/E ratio means.

D)   P/E ratios for medical-technology firms with different specialties are not comparable.

The correct answer was A)

Earnings are the chief determinant of value for most companies, including med-tech. P/E is the most common valuation method and the best known by lay investors. Comparability of P/E ratios across industries is always problematic, but not as much so for within the med-tech industry. A start-up company is very likely to have negative earnings, which renders the P/E ratio useless.

7.Based on their responses to Powell, which of the analysts is most likely concerned about earnings volatility?

A)   Barnes.

B)   Bosley.

C)   Marks.

D)   Lincoln.

The correct answer was D)

Book value tends to be more stable than earnings. Therefore, Lincoln’s favorite valuation tool, the price to book (P/B) ratio, is less volatile than the P/E. The P/S ratio tends to be less volatile than the P/E as well, but Bosley’s other favorite, earnings yield, is just as volatile. The methods preferred by the other analysts are likely to be more volatile than the P/B ratio.

8.Based on their responses to Powell, which of the analysts has proposed a method that has the best chance to work for determining the relative value start-up companies?

A)   Bosley.

B)   Lincoln.

C)   Barnes.

D)   Marks.

The correct answer was A)

Start-up companies tend to be unprofitable, and also often have negative free cash flow. Book value has some predictive power for such companies, but this is also often negative for new and unprofitable companies. The price/sales ratio, one of Bosley’s favorites, is the only metric that will work even if earnings, cash flows, and book value are negative.

9.Barnes would be least likely to use EV/EBITDA ratio, rather than the price/earnings ratio, when analyzing a company that:

A)   pays a dividend, and is likely to deliver little earnings growth.

B)   is unprofitable.

C)   reports a lot of depreciation expense.

D)   has a different capital structure than most of its peers.

The correct answer was A)

For companies that are unprofitable, report a lot of depreciation expense, or must be compared to companies with different levels of financial leverage, the EV/EBITDA ratio may be more useful than the P/E. For companies that pay a dividend and have little profit growth, both should work fine. Given Barnes’ stated preference for the P/E ratio, she is least likely to use the EV/EBITDA ratio with the dividend-paying firm.

10.Barnes is considering the four methods previously described to analyze the small-cap stocks provided to her by Powell. For which method does Barnes provide the weakest justification?

A)   The PEG ratio.

B)   The mean P/E of S& 500 companies.

C)   The median P/E of S& 500 companies.

D)   The price/sales ratio.

The correct answer was A)

No valuation method will work dependably across all types of stocks. The four Barnes proposed are probably as good as any. But the PEG ratio does not correct for risk – it works as a comparison tool only if the companies have similar expected risks and returns. The other justifications are reasonable.