honeycfa

An argument against using the price-to-earnings (P/E) valuation approach is that:

A) research shows that P/E differences are significantly related to long-run average stock returns.

B) earnings power is the primary determinant of investment value.

C) earnings can be negative.

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Negative earnings render the P/E ratio useless. Both remaining factors increase the usefulness of the P/E approach.

honeycfa

An argument against using the price-to-sales (P/S) valuation approach is that:

A) P/S ratios do not express differences in cost structures across companies.

B) P/S ratios are not as volatile as price-to-earnings (P/E) multiples.

C) sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value.

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P/S ratios do not express differences in cost structures across companies. Both remaining responses are advantages of the P/S ratios, not disadvantages.

honeycfa

Which of the following is a disadvantage of using the price-to-book value (PBV) ratio?

A) Book value may not mean much for manufacturing firms with significant fixed costs.

B) Book values are affected by accounting standards, which may vary across firms and countries.

C) Firms with negative earnings cannot be evaluated with the PBV ratios.

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The disadvantages of using PBV ratios are:

1. Book values are affected by accounting standards, which may vary across firms and countries.
2. Book value may not mean much for service firms without significant fixed costs.
3. Book value of equity can be made negative by a series of negative earnings, which limits the usefulness of the variable.