LOS b: Define a justified price multiple.

Q1. The multiple indicated by applying the discounted cash flow (DCF) model to a firm’s fundamentals is necessarily the:

A)   justified price multiple.

B)   same as the average industry multiple.

C)   result of calculating retention/(required rate of return - growth) for the overall market.

Q2. The warranted or intrinsic price multiple is called the:

A)   justified price multiple.

B)   multiple implied by the market price.

C)   multiple implied by historical growth.

Q3. A justified price multiple is the:

A)   warranted or intrinsic price multiple.

B)   multiple implied by historical growth.

C)   multiple implied by the market price.

LOS b: Define a justified price multiple. fficeffice" />

Q1. The multiple indicated by applying the discounted cash flow (DCF) model to a firm’s fundamentals is necessarily the:

A)   justified price multiple.

B)   same as the average industry multiple.

C)   result of calculating retention/(required rate of return - growth) for the overall market.

Correct answer is A)

A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple. The question is limited to an individual firm and does not necessarily apply to the market or an industry.

Q2. The warranted or intrinsic price multiple is called the:

A)   justified price multiple.

B)   multiple implied by the market price.

C)   multiple implied by historical growth.

Correct answer is A)

A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.

Q3. A justified price multiple is the:

A)   warranted or intrinsic price multiple.

B)   multiple implied by historical growth.

C)   multiple implied by the market price.

 Correct answer is A)

A justified price multiple is the warranted or intrinsic price multiple. It is the estimated fair value of that multiple.