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

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

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

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

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

Which of the following measures of cash flow is most closely linked with valuation theory?

A) Free cash flow to equity (FCFE).

B) Cash flow from operations (CFO).

C) Earnings before interest, taxes, depreciation, and amortization (EBITDA).

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FCFE is most strongly linked to valuation theory. Both remaining proxies are in need of significant adjustment to accurately measure cash flow in valuation.

luckygiftvn

An analyst gathered the following data for TRK Construction [all amounts in Swiss francs (Sf)]:

Recent share price	Sf 30.00
Shares outstanding	Sf 40 million
Market value of debt	Sf 120 million
Cash and marketable securities	Sf 75 million
Investments	Sf 200 million
Net income	Sf 160 million
Interest expense	Sf 9 million
Depreciation and amortization	Sf 12 million
Taxes	Sf 48 million

The EV/EBITDA multiple for TRK Construction is closest to:

A) 3.47x.

B) 4.56x.

C) 5.21x.

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EBITDA = (net income + interest + taxes + depreciation / amortization)EV = (market value of common stock + market value of debt – cash and investments)
EBITDA = 160 + 9 + 12 + 48 = Sf 229 million
EV = (30 × 40) + 120 – 75 – 200 = Sf 1045 million
EV / EBITDA = 4.56

luckygiftvn

An analyst gathered the following data for TRK Construction [all amounts in Swiss francs (Sf)]:

Recent share price	Sf 22.00
Shares outstanding	40 million
Market value of debt	Sf 140 million
Cash and marketable securities	Sf 55 million
Investments	Sf 300 million
Net income	Sf 140 million
Interest expense	Sf 7 million
Depreciation and amortization	Sf 10 million
Taxes	Sf 56 million

The EV/EBITDA ratio for TRK Construction is closest to:

A) 3.12x.

B) 2.52x.

C) 3.49x.

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EBITDA = (net income + interest + taxes + depreciation / amortization)
EV = (market value of common stock + market value of debt – cash and investments)
EBITDA = 140 + 7 + 10 + 56 = Sf 213 million
EV = (22 × 40) + 140 – 55 – 300 = Sf 665 million
EV / EBITDA = 3.12

luckygiftvn

Which of the following are advantages of using EV/EBITDA?

A) If working capital is growing, EBITDA will be larger than CFO.

B) EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization.

C) EV/EBITDA ignores how different revenue recognition policies affect CFO.

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EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization. The other statements are disadvantages to using EV/EBITDA.

luckygiftvn

Which of the following is a disadvantage to using EV/EBITDA?

A) Since FCFF captures the amount of capital expenditures, it is more strongly linked with valuation theory than EBITDA.

B) EBITDA is useful for valuing capital-intensive businesses with high levels of depreciation and amortization.

C) EBITDA is usually positive even when EPS is not.

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Since FCFF captures the amount of capital expenditures, it is more strongly linked with valuation theory than EBITDA. The other statements are advantages.