LOS j, (Part 2): Explain the importance of fundamentals in using the method of comparables.

Q1. Enhanced Systems, Inc., has a price to book value (P/B) of five while the median P/B of a peer group of companies within the industry is five. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

A)   viewed as a properly valued stock.

B)   bought as an undervalued stock.

C)   sold or sold short as an overvalued stock.

Q2. Enhanced Systems, Inc., (ESI) has a leading price to sales (P/S) of 0.18 while the median leading P/S of a peer group of companies within the industry is 0.10. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

A)   bought on margin as an undervalued stock.

B)   sold or sold short as an overvalued stock.

C)   bought as an undervalued stock.

Q3. Enhanced Systems, Inc., (ESI) has a leading price to book value (P/B) of four while the median P/B of a peer group of companies within the industry is six. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

A)   viewed as a properly valued stock.

B)   sold as an overvalued stock.

C)   bought as an undervalued stock.

LOS j, (Part 2): Explain the importance of fundamentals in using the method of comparables. fficeffice" />

Q1. Enhanced Systems, Inc., has a price to book value (P/B) of five while the median P/B of a peer group of companies within the industry is five. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

A)   viewed as a properly valued stock.

B)   bought as an undervalued stock.

C)   sold or sold short as an overvalued stock.

Correct answer is A)

The price per dollar of book value is the same as that for the median of the peer group, which implies that it is likely properly valued.

Q2. Enhanced Systems, Inc., (ESI) has a leading price to sales (P/S) of 0.18 while the median leading P/S of a peer group of companies within the industry is 0.10. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

A)   bought on margin as an undervalued stock.

B)   sold or sold short as an overvalued stock.

C)   bought as an undervalued stock.

Correct answer is B)

The price per dollar of sales is considerably higher than that for the median of the peer group, which implies that it may well be overvalued.

Q3. Enhanced Systems, Inc., (ESI) has a leading price to book value (P/B) of four while the median P/B of a peer group of companies within the industry is six. Based on the method of comparables, an analyst would most likely conclude that ESI should be:

A)   viewed as a properly valued stock.

B)   sold as an overvalued stock.

C)   bought as an undervalued stock.

Correct answer is C)

The price per dollar of book value is considerably lower than that for the median of the peer group, which implies that it may well be undervalued.

thanks