Question 1

In estimating and comparing value,empirical evidence shows that forward-looking multiples are more accurate predictors of value than are historical multiples.

Accepted Answer

Forward-looking multiples take into account future expectations and growth potential, while historical multiples only reflect past performance. Therefore, forward-looking multiples are considered to be more accurate predictors of value.

Question 2

In estimating and comparing value,the price-to-earnings (P/E )multiple has two major flaws.Which of the following are those flaws?
I.It is in squared currency units.
II.The P/E is affected by a company's capital structure.
III.The earnings (net income )are calculated after nonoperating items.
IV.The market measure of price usually has significant error.

Accepted Answer

The two major flaws of the price-to-earnings (P/E) multiple are that it is affected by a company's capital structure (II) and the earnings (net income) are calculated after nonoperating items (III). The P/E multiple is not in squared currency units (I) and the market measure of price may have significant error, but this is not one of the major flaws of the P/E multiple (IV). Therefore, the correct choice is C.

Question 3

Which of the following is true in using EBIT,EBITA,or EBITDA when estimating a firm's value?

Accepted Answer

B

Question 4

In estimating value creation,analysts should use EBITA rather than EBITDA,because depreciation is a noncash item whereas amortization is not.

Accepted Answer

They are both noncash items.

Question 5

ComboCo,a large U.S.company,operates in two areas: high tech and retail clothing.To value this firm using multiples analysis,one should use a peer group of other large U.S.diversified companies.

Accepted Answer

This approach is not appropriate, because the valuation depends on the types of areas/subindustries of the peers. If they are diversified in different areas, they won’t be comparable. A better approach would be to compare companies with similar segments, or triangulate the results with companies in those areas.

Question 6

The EV-to-revenue multiple is useful in valuing some companies.

Accepted Answer

The EV-to-revenue multiple is useful in valuing some special situations, such as for start-up companies, where profits are negative or a sustainable margin level can’t be estimated, and for industries with highly volatile profit margins, where you believe that over the long term the companies will have roughly similar profit margins.

Question 7

Which of the following are reasons that the value-to-EBITA ratio is superior to the price-to-earnings ratio as a multiple to aid in valuation?
I.The P/E is distorted by capital structure.
II.The P/E is distorted by inflation.
III.The P/E is distorted by nonoperating gains and losses.
IV.The P/E is distorted by dividend payouts.

Accepted Answer

(600 + 300 – 100 – 50)/100 = 7.5×

Question 8

Increasing growth and ROIC by the same amount while holding taxes and WACC constant will decrease the value-to-EBITA ratio.

Accepted Answer

It will increase it.

Question 9

Given that the value-to-EBITA ratio of a company is 11.2 and the projected EBITA growth is 4.2 percent,what is the P/E-to-growth (PEG )ratio?

Accepted Answer

PEG ratio = 11.2/4.2 = 2.67

Question 10

List the three requirements for carrying out a useful analysis of comparable multiples.

Accepted Answer

The answer of List the three requirements for carrying out...

Question 11

A firm has $600 market value of equity and $300 market value of debt.The firm also has $100 in nonconsolidated subsidiaries and $50 in excess cash.If the firm's expected EBITA is $100,what is the value-to-EBITA ratio?

Accepted Answer

The value-to-EBITA ratio is calculated by dividing the firm's total value by its EBITA. To find the firm's total value, add the market value of equity ($600) and the market value of debt ($300), then subtract the excess cash ($50) since it's not part of the operating assets. Nonconsolidated subsidiaries are not included in this calculation as they are not part of the firm's core operations. So, the total value is $600 + $300 - $50 = $850. The EBITA is given as $100. Therefore, the value-to-EBITA ratio is $850 / $100 = 8.5×. However, since 8.5× is not an option and considering the calculation should exclude non-operating assets like excess cash, the closest correct option provided is 7.5×, which seems to be a mistake in the calculation or options provided. Given the options, the correct approach to the calculation would lead to reevaluation, but based on the initial calculation, none of the options accurately reflect the correct calculation. This suggests a need for clarification or correction in the provided options or the calculation approach.

Question 12

Increasing growth while holding ROIC,the tax rate,and WACC constant will:

Accepted Answer

The answer of Increasing growth while holding ROIC,the tax rate,and...

Question 13

Assuming the tax rate remains constant,what will be the effect on the value-to-EBITA ratio of doubling the following inputs: growth,ROIC,and WACC?

Accepted Answer

The answer of Assuming the tax rate remains constant,what will...

Question 14

Given the following inputs,compute the value-to-EBITA ratio: tax rate = 34%,growth rate = 5%,ROIC = 12%,and WACC = 8%.

Accepted Answer

Value-to-EBITA = (1 – 0.34) * (1 – 0.05/0.12)/(0.08 – 0.05) = 0.1283 or 12.83×

Question 15

Given the following inputs,compute the value-to-EBITA ratio: tax rate = 34%,growth rate = 4%,ROIC = 10%,and WACC = 9%.

Accepted Answer

Value-to-EBITA = (1 – 0.34) * (1 – 0.04/0.10)/(0.09 – 0.04) = 7.92×

Question 16

Nonfinancial ratios such as value to web site hits,value to unique visitors,and value to number of subscribers had some explanatory power for assessing Internet company stock prices in the early years of the wave of Internet companies.

Accepted Answer

Nonfinancial ratios such as value to web site hits, value to unique visitors, and value to number of subscribers were indeed used as a measure for assessing Internet company stock prices in the early years of the wave of Internet companies. However, their usefulness in predicting stock prices was later questioned as the dot-com bubble burst.

Question 17

The enterprise value (EV)-to-revenue multiple is useful in valuing most companies.

Accepted Answer

The EV-to-revenue multiple is not useful in valuing most companies, because it is not showing value related to profitability.

Quiz 16: Using Multiples