Reading 59: Introduction to Price Multiples- LOSb～ Q1-10

statements, following, interpret, regarding, increase

LOS b: Calculate and interpret P/E, P/BV, P/S, and P/CF.

Q1. Which of the following statements regarding the value of the firm is most accurate?

A) The board of directors increases the dividend payout ratio, the value of the company will increase.

B) A company's legal and treasury departments act to reduce the tax rate from 37.5% to 37.0%, the value of the firm will increase.

C) The government engages in a restrictive monetary policy and the expected inflation rate decreases, the P/E ratio will decrease.

Q2. An increase in a firm’s stock price will, all else equal, cause the price to cash flow (P/CF) ratio to:

A) there is insufficient information to tell.

B) increase.

C) decrease.

Q3. Given the following information, compute the price/cash flow ratio for EAV Technology.

Net income per share = $6
Price per share = $100
Depreciation per share = $2
Interest expense per share = $4
Marginal tax rate = 25%

A) 8.3X.

B) 12.5X.

C) 9.1X.

Q4. Which of the following accounting variables is least likely to be manipulated?

A) Interest expense.

B) Sales.

C) Net income.

Q5. One advantage to using the price/book value (P/B) ratio over using the price/earnings (P/E) ratio is that P/B can be used when:

A) stock markets are volatile.

B) earnings or cash flows are negative.

C) the firm is in a slow growth phase.

Q6. 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.

Q7. The current price of XYZ, Inc., is $40 per share with 1,000 shares of equity outstanding. Sales are $4,000 and the book value of the firm is $10,000. What is the price/sales ratio of XYZ, Inc.?

A) 0.010.

B) 4.000.

C) 10.000.

Q8. Given the following information, compute price/book value.

Book value of assets = $550,000
Total sales = $200,000
Net income = $20,000
Dividend payout ratio = 30%
Operating cash flow = $40,000
Price per share = $100
Shares outstanding = 1000
Book value of liabilities = $500,000

A) 2.0X.

B) 5.5X.

C) 2.5X.

Q9. Given the following information, compute price/sales.

Book value of assets = $550,000
Total sales = $200,000
Net income = $20,000
Dividend payout ratio = 30%
Operating cash flow = $40,000
Price per share = $100
Shares outstanding = 1,000
Book value of liabilities = $500,000

A) 2.50X.

B) 0.50X.

C) 2.00X.

Q10. General, Inc., has net income of $650,000 and one million shares outstanding. The profit margin is 6 percent and General, Inc., is selling for $30.00. The price/sales ratio is equal to:

A) 2.77.

B) 0.65.

C) 10.83.