Multiples valuation Flashcards
Which of the following statements are true?
a) High growth firms will have high P/E
b) High risk firms will have lower P/E
c) Firms with lower reinvestment needs (as inversely measurde by the payout ratio) will have higher P/E ratios
d) All of the above
(d) all of the above
Which relationship between the P/E multiple, expected growth rates and interest rates is true?
a) The P/E multiple is much more sensitive to changes in expected growth rates when interest rates are high.
b) The P/E multiple is much more sensitive to changes in expected growth rates when interest rates are low.
c) The P/E multiple is not dependent of the level of interest rates.
d) The P/E multiple is not dependent of expected growth rates.
b) The P/E multiple is much more sensitive to changes in expected growth rates when interest rates are low.
What is not true about the P/BV - multiple (several answers)?
a) It’s a relative, stable and intuitive measure of value than can be compared to market value
b) It cannot be compared across similar firms
c) Firms with negative earnings can usually be valued with P/BV
d) Book values are not affected by accounting standards
e) Book values may be meaningless for technology firms that do not have significant tangible assets.
f) BV can be negative after several years with negative profits.
(b) and (d)
The multiple can be compared across similar firms.
Book values are affected by accounting standards that cary across firms and countries.
What happens to the P/BV multiple when the cost of equity increases?
a) The higher the cost of equity, the higher the P/BV multiple.
b) A higher cost of equity does not influence the P/BV multiple.
c) The higher the cost of equity, the lower the P/BV multiple.
d) The higher the cost of equity, the P/BV multiple decreases with the same amount as the cost of equity increases.
c) The higher the cost of equity, the lower the P/BV multiple.
The ratio of price to book value is strongly influences by the return on equity, both directly and indirectly - how?
Directly: through the ROE in its breakdown formula.
Indirectly: as a component of growth
What is true about EBITDA multiples?
a) Firms that derive a greater portion of their EBITDA from D&A should trade at higher EBITDA multiples
b) Firms that derive a smaller portion of their EBITDA from D&A should trade at lower EBITDA multiples
c) Firms that derive a greater portion of their EBITDA from D&A should trade at lower EBITDA multiples
d) How much a firm derive from D&A’s do not affect the value a firm should trade at.
c) Firms that derive a greater portion of their EBITDA from D&A should trade at lower EBITDA multiples
What is true about EBITDA multiples?
a) The greater the portion of the EBITDA that needs to be reinvested, the higher the multiple
b) The greater the portion of the EBITDA that needs to be reinvested, the lower the multiple
c) The lower the portion of the EBITDA that needs to be reinvested, the lower the multiple
d) The reinvestment needs does not affect the level of the multiple
b) The greater the portion of the EBITDA that needs to be reinvested, the lower the multiple
What is true about the EV/EBITDA multiple?
a) Only a few (very distressed) firms show negative EBITDA
b) It’s unaffected by depreciation policies
c) Frequently, potential acquires consider an EV multiple because debt will be refinances after a takeover
d) It can be compared more easily among firms with different leverage
e) All of the above
e) All of the above
What is true about the pros and cons of the EV/sales multiple (several answers)?
a) It can be used for firms with negative earnings
b) Revenues are more affected by accounting standards than other variables.
c) Revenues could be less affected by economic changes than earnings multiples.
d) Can lead to low values to firms that are losing money
e) The failure to control for differences across firms in costs and profit margin can lead to misleading valuations
f) All of the above
(a), (c) and (e)
(b) Revenues are less effected by accounting standards than other variables.
(d) Can lead to high values to firms that are losing money.
How is the P/E multiple and the levered cost of equity affected, when the D/E ratio increases (in a steady state)?
a) The levered cost of equity decreases and P/E increases
b) The levered cost of equity is not affected and P/E decreases
c) The levered cost of equity increases and P/E decreases
d) The levered cost of equity increases and P/E is not affected
c) The levered cost of equity increases and P/E decreases
How is the P/BV multiple and the levered cost of equity affected, when the D/E ratio increases (in a steady state)?
a) The levered cost of equity decreases and P/BV increases
b) The levered cost of equity is not affected and P/BV increases
c) The levered cost of equity increases and P/BV is not affected
d) The levered cost of equity increases and P/BV increases
d) The levered cost of equity increases and P/BV increases
How is the EV/EBIT and WACC affected, when the D/E ratio increases (in a steady state)?
a) WACC decreases and EV/ EBIT increases
b) WACC increases and EV/ EBIT decreases
c) WACC is not affected and EV/EBIT increases
d) WACC decreases and EV/EBIT is not affected
a) WACC decreases and EV/ EBIT increases
