invic

If cash flow from operations (CFO) embeds financing-related flows, it should be adjusted by:

A) subtracting (net interest outflow) × (1 - tax rate).

B) adding (net interest outflow) × (1 - tax rate).

C) subtracting capital expenditures.

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Cash flow from operations CFO should be adjusted to CFO + (net cash interest outflow) × (1 – tax rate), if CFO embeds financing-related flows.

invic

Earnings before interest, taxes, depreciation, and amortization (EBITDA) is best suited as a measure of:

A) equity value.

B) total company value.

C) debt capacity.

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EBITDA is a pre-tax, pre-interest measure, which represents a flow to both equity and debt. Thus, it is better suited as an indicator of total company value than just equity value.

invic

Precision Tools is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.00, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A) 6.00.

B) 7.14.

C) 9.00.

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P5/E5 = (0.40 × 1.05) / (0.12 – 0.05) = 6.00

invic

A common price to earnings (P/E) based method for estimating terminal value in multi-stage models is the:

A) P/E to growth (PEG) approach.

B) dividend yield approach.

C) fundamentals approach.

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It is common to restate the Gordon growth model price as a multiple of expected future book value per share or earnings per share (EPS).

invic

At a regional security analysts conference, Sandeep Singh made the following comment: "A PEG ratio is a very useful valuation metric because it generates meaningful results for all equities, regardless of the rate of dividend growth." Is Singh correct?

A) Yes, because the expected dividend growth rate is cancelled out in the computation of the PEG ratio.

B) Yes, because the computation of the PEG ratio does include the rate of expected dividend growth.

C) No, because the PEG ratio generates highly questionable results for low-growth companies.

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The PEG ratio measures the tradeoff between P/E and expected earnings growth (g). The formula for the PEG ratio is: PEG = (P/E) / g. PEG ratios generate questionable results for low-growth companies. Also, the PEG ratio is undefined for companies with zero expected growth (division by zero) or meaningless for companies with negative expected earnings growth.

invic

Good Sports, Inc., (GSI) has a leading price-to-earnings (P/E) ratio of 12.75 and a 5-year consensus growth rate forecast of 8.5%. What is the firm’s P/E to growth (PEG) ratio?

A) 150.00.

B) 1.50.

C) 0.67.

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The firm’s PEG is 12.75 / 8.50 = 1.50.

invic

The relative valuation model known as the PEG ratio is equal to:

A) earnings per share growth rate / price-to-earnings.

B) P/E × earnings.

C) price-to-earnings (P/E) / earnings per share (EPS) growth rate.

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The PEG ratio is equal to the price-to-earnings ratio divided by the EPS growth rate.

invic

Which of the following statements regarding the P/E to growth (PEG) valuation approach is least accurate? The P/E to growth (PEG) valuation approach assumes that:

A) there are no risk differences among stocks.

B) there is a linear relationship between price to earnings (P/E) and growth.

C) stocks with higher PEGs are more attractive than stocks with lower PEGs.

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The PEG valuation approach implicitly assumes there is a linear relationship between price to earnings (P/E) and growth, even though there is not a "real world" linear relationship. The analyst must be cautious when using the PEG ratio for valuation or comparison purposes especially if the growth rate is very small or very large. If earnings or the growth rate is negative the PEG ratio is meaningless. The PEG ratio does not adjust for varying levels of risk among stocks and views stocks with lower PEG ratios to be more attractive than stocks with higher PEG ratios.

invic

The definition of a PEG ratio is price to earnings (P/E):

A) divided by the expected earnings growth rate.

B) divided by the average growth rate of the peer group.

C) divided by average historical earnings growth rate.

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The PEG ratio is P/E divided by the expected earnings growth rate.

invic

Two security analysts, Ramon Long and Sri Beujeau, disagree about certain aspects of the PEG ratio. Long argues that: "unlike typical valuation metrics that incorporate dividend discounting, the PEG ratio is unique because it generates meaningful results for firms with negative expected earnings-growth." Is Long correct?

A) Yes, because the expected earnings-growth rate is cancelled out in the computation of the PEG ratio.

B) No, because the PEG ratio generates meaningless results for negative earnings-growth companies.

C) Yes, because the computation of the PEG ratio does not use the rate of expected earnings growth.

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The PEG ratio is: PEG = (P/E) / earnings growth. As such, firms with negative expected earnings growth will have a negative PEG ratio, which is meaningless.