Reading 59: Introduction to Price Multiples LOSb习题精选 2010, statements, following, interpret

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

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

A) 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.

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

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

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A decrease in the tax rate would increase the company’s EPS and thus would increase the value of the firm. (The equation for EPS includes the term (1 ? t).)

The other statements are incorrect.

Increase in dividend payout/reduction in earnings retention. In this case, an increase in the dividend payout will likely decrease the P/E ratio because a decrease in earnings retention will likely lower the P/E ratio. The logic is as follows: Because earnings retention impacts both the numerator (dividend payout) and denominator (g) of the P/E ratio, the impact of a change in earnings retention depends upon the relationship of k_e and ROE. If the company is earning a higher rate on new projects than the rate required by the market (ROE > k_e), investors will likely prefer that the company retain more earnings. Since an increase in the dividend payout would decrease earnings retention, the P/E ratio would fall, as investors will value the company lower if it retains a lower percentage of earnings.

Decrease in the expected inflation rate and decrease in the required rate of return. The expected inflation rate is a component of k_e (through the nominal risk-free rate). k_e can be represented by the following: nominal risk-free rate + stock risk premium, where nominal risk-free rate = [(1 + real risk-free rate) × (1 + expected inflation rate)] – 1.

• If the rate of inflation decreases, the nominal risk-free rate will decrease.

• k_e will decrease.

• The spread between k_e and g, or the P/E denominator, will decrease.

• P/E ratio will increase.

 

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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) 0.65.

B) 2.77.

C) 10.83.

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6% profit margin = $650,000/x; x (sales) = $10,833,333.
Sales per share = $10.83 M/1,000,000 = $10.83 per share.
P/Sales = $30.00/$10.83 = 2.77.

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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) that hold primarily liquid assets.

C) with the same stock prices.

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

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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) 10.000.

B) 0.010.

C) 4.000.

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The price/sales ratio is (price per share)/(sales per share) = (40)/(4,000/1,000) = 10.0. Alternatively, the price/sales ratio may be thought of as the market value of the company divided by its sales, or (40 × 1,000)/4,000, or 10.0 again.

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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) 5.5X.

B) 2.5X.

C) 2.0X.

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Book value of equity = $550,000 - $500,000 = $50,000

Market value of equity = ($100)(1000) = $100,000

Price/Book = $100,000/$50,000 = 2.0X

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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) 0.50X.

B) 2.50X.

C) 2.00X.

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Market value of equity = ($100)(1000) = $100,000

Price / Sales = $100,000 / $200,000 = 0.5X

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

A) Interest expense.

B) Net income.

C) Sales.

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Sales is the accounting variable considered least likely to be manipulated.

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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.

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When earnings are negative, P/E ratios cannot be used but P/B ratios can be used. The firm's rate of growth and the volatility of markets do not suggest advantages of using P/B ratios rather than P/E ratios.

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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.

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An increase in a firm’s stock price will, everything else being equal (i.e., the CF does not change), cause the P/CF ratio to increase.

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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.

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Cash Flow = Net income per share + Depreciation per share = $6 + $2 = $8

Price/cash flow = $100 / $8.0X = 12.5X