anshultongia

Which of the following is a disadvantage of using the price-to-book value (PBV) ratio?

A) Book value may not mean much for manufacturing firms with significant fixed costs.

B) Firms with negative earnings cannot be evaluated with the PBV ratios.

C) Book values are affected by accounting standards, which may vary across firms and countries.

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The disadvantages of using PBV ratios are:

• Book values are affected by accounting standards, which may vary across firms and countries.
• Book value may not mean much for service firms without significant fixed costs.
• Book value of equity can be made negative by a series of negative earnings, which limits the usefulness of the variable.

anshultongia

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

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

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

anshultongia

An argument against using the price-to-sales (P/S) valuation approach is that:

A) P/S ratios are not as volatile as price-to-earnings (P/E) multiples.

B) P/S ratios do not express differences in cost structures across companies.

C) sales figures are not as easy to manipulate or distort as earnings per share (EPS) and book value.

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P/S ratios do not express differences in cost structures across companies. Both remaining responses are advantages of the P/S ratios, not disadvantages

anshultongia

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.

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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.

anshultongia

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.

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

anshultongia

A justified price multiple is the:

A) multiple implied by historical growth.

B) warranted or intrinsic price multiple.

C) multiple implied by the market price.

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

anshultongia

The value of a firm, calculated using the discounted cash flow (DCF) method, will be closest to the valuation using P/E multiples when P/E multiples are estimated using:

A) P/E multiples of comparable firms.

B) historical P/E multiples.

C) fundamental data.

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In the DCF valuation method, an analyst makes specific assumptions about each variable, such as growth, risk, payout, etc. The valuation using P/E multiples will be closest to the one obtained using the DCF approach when fundamental data -- for growth, risk, payout, etc. -- is used to estimate P/E multiples.

anshultongia

P/E multiples are often computed using the average of the multiples of comparable firms, because:

A) it provides the most accurate results.

B) it is very easy to find comparable firms that have the same business mix and risk and growth profiles.

C) it is conceptually very straightforward.

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The use of comparable firms is quite common, because it is conceptually very straightforward. Also, it does not require the analyst to make specific assumptions regarding growth, risk, and other variables. However, it is often difficult to find comparable firms, since even within the same industry different firms can have different business mixes and risk and growth profiles.

anshultongia

Which of the following statements about the method of forecasted fundamentals in price multiple valuation is most accurate?

A) It relates multiples to company fundamentals using a discounted cash flow (DCF) model.

B) It values an asset relative to a benchmark value of the multiple.

C) It relies on the Law of One Price.

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The method of forecasted fundamentals relates multiples to company fundamentals using a DCF method. It does not explicitly rely on the Law of One Price. Further, it does not typically focus on benchmarks.

anshultongia

Which of the following statements about the method of comparables in price multiple valuation is CORRECT?

A) It relates multiples to company fundamentals using a discounted cash flow (DCF) model.

B) It values an asset relative to a benchmark value of the multiple.

C) It assumes that cash flows are related to fundamentals.

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The method of comparables involves using a price multiple to evaluate whether an asset is valued properly relative to a benchmark value of the multiple. It makes no explicit assumptions about fundamentals and does not rely on a DCF model.