mouse123

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.

mouse123

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) 2.0X.

C) 2.5X.

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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

mouse123

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) 10.83.

C) 2.77.

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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.

mouse123

An analyst studying Albion Industries determines that the average EV/EBITDA ratio for Albion’s industry is 10. The analyst obtains the following information from Albion’s financial statements:

EBITDA = £11,000,000
Market value of debt = £30,000,000
Cash = £1,000,000

Based on the industry’s average enterprise value multiple, what is the equity value of Albion Industries?

A) £110,000,000.

B) £80,000,000.

C) £81,000,000.

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Enterprise value = Average EV/EBITDA × company EBITDA = 10 × £11,000,000 = £110,000,000
Enterprise value = Equity value + debt − cash
Equity value = Enterprise value − debt + cash = £110,000,000 − £30,000,000 + £1,000,000 = £81,000,000

mouse123

Gwangwa Gold, a South African gold producer, has as its primary asset a mine which is shown on the balance sheet with a value of R100 million. An analyst estimates the market value of this mine to be 90% of book value. The company’s balance sheet shows other assets of R20 million and liabilities of R40 million, and the analyst feels that the book value of these items reflects their market values. Using the asset-based valuation approach, what should the analyst estimate the value of the company to be?

A) R80 million.

B) R70 million.

C) R110 million.

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Market value of assets = 0.9(R100 million) + R20 million = R110 million
Market value of liabilities = R40 million
Estimated net value of company = R110 million − R40 million = R70 million.

mouse123

Regarding the estimates required in the constant growth dividend discount model, which of the following statements is most accurate?

A) Dividend forecasts are less reliable than estimates of other inputs.

B) The variables "k" and "g" are easy to forecast.

C) The model is most influenced by the estimates of "k" and "g."

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The relationship between "k" and "g" is critical - small changes in the difference between these two variables results in large value fluctuations.

mouse123

Which of the following is NOT an advantage of using price-to-book value (PBV) multiples in stock valuation?

A) Book value is often positive, even when earnings are negative.

B) PBV ratios can be compared across similar firms if accounting standards are consistent.

C) Book values are very meaningful for firms in service industries.

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Book values are NOT very meaningful for firms in service industries.

mouse123

One advantage of price/sales (P/S) multiples over price to earnings (P/E) and price-to-book value (PBV) multiples is that:

A) P/S can be used for distressed firms.

B) P/S is easier to calculate.

C) Regression shows a strong relationship between stock prices and sales.

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Unlike the PBV and P/E multiples, which can become negative and not meaningful, the price/sales multiple is meaningful even for distressed firms (that may have negative earnings or book value).

mouse123

Which of the following is least likely an advantage of using price/sales (P/S) multiple?

A) P/S multiples are more reliable because sales data cannot be distorted by management.

B) P/S multiples provide a meaningful framework for evaluating distressed firms.

C) P/S multiples are not as volatile as P/E multiples and hence may be more reliable in valuation analysis.

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Accounting data on sales is used to calculate the P/S multiple. The P/S multiple is thought to be more reliable because sales figures are not as easy to manipulate as the earnings and book value, both of which are significantly affected by accounting conventions. However, it is not true that "sales data cannot be distorted by management" because aggressive revenue recognition practices can influence reported sales.

mouse123

An argument against using the price to cash flow (P/CF) valuation approach is that:

A) non-cash revenue and net changes in working capital are ignored when using earnings per share (EPS) plus non-cash charges as an estimate.

B) cash flows are not as easy to manipulate or distort as EPS and book value.

C) price to cash flow ratios are not as volatile as price-to-earnings (P/E) multiples.

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Items affecting actual cash flow from operations are ignored when the EPS plus non-cash charges estimate is used. For example, non-cash revenue and net changes in working capital are ignored. Both remaining responses are arguments in favor of using the price to cash flow approach.