Kingpin804

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.

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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. A firm may have negative book value if it shows accounting losses consistently.

Kingpin804

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 firm with accounting standards consistent to other firms.

C) A service industry firm without significant fixed assets.

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Assuming consistent accounting standards across firms, P/B ratios can reveal signs of misvaluation across firms.

Kingpin804

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.

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CFs are not easier to estimate than dividends.

Kingpin804

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

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

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

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

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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.

Kingpin804

The price to book value ratio (P/BV) is a helpful valuation technique when examining firms:

A) with older assets compared to those with newer assets.

B) with the same stock prices.

C) that hold primarily liquid assets.

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P/BV analysis works best for firms that hold primarily liquid assets.

Kingpin804

Assume that the expected dividend growth rate (g) for a firm decreased from 5% to zero. Further, assume that the firm's cost of equity (k) and dividend payout ratio will maintain their historic levels. The firm's P/E ratio will most likely:

A) decrease.

B) become undefined.

C) increase.

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The P/E ratio may be defined as: Payout ratio / (k - g), so if k is constant and g goes to zero, the P/E will decrease.

Kingpin804

According to the earnings multiplier model, all else equal, as the required rate of return on a stock increases, the:

A) P/E ratio will increase.

B) P/E ratio will decrease.

C) earnings per share will increase.

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According to the earnings multiplier model, the P/E ratio is equal to P0/E1 = (D1/E1)/(ke − g). As ke increases, P0/E1 will decrease, all else equal.

Kingpin804

According to the earnings multiplier model, a stock’s P/E ratio (P0/E1) is affected by all of the following EXCEPT the:

A) required return on equity.

B) expected dividend payout ratio.

C) expected stock price in one year.

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According to the earnings multiplier model, the P/E ratio is equal to P0/E1 = (D1/E1)/(ke - g).
Thus, the P/E ratio is determined by:

• 
  The expected dividend payout ratio (D1/E1).
• 
  The required rate of return on the stock (ke).
• 
  The expected growth rate of dividends (g).

Kingpin804

The earnings multiplier model, derived from the dividend discount model, expresses a stock’s P/E ratio (P0/E1) as the :

A) expected dividend payout ratio divided by the difference between the required return on equity and the expected dividend growth rate.

B) expected dividend payout ratio divided by the sum of the expected dividend growth rate and the required return on equity.

C) expected dividend in one year divided by the difference between the required return on equity and the expected dividend growth rate.

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Starting with the dividend discount model P0 = D1/(ke − g), and dividing both sides by E1 yields: P0/E1 = (D1/E1)/(ke − g) Thus, the P/E ratio is determined by:

• The expected dividend payout ratio (D1/E1).
• The required rate of return on the stock (ke).
• The expected growth rate of dividends (g).

Kingpin804

If the payout ratio increases, the P/E multiple will:

A) decrease, if we assume that the growth rate remains constant.

B) always increase.

C) increase, if we assume that the growth rate remains constant.

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When payout ratio increases, the P/E multiple increases only if we assume that the growth rate will not change as a result.