Market-Based Valuation – Question Bank
LO.a: Distinguish between the method of comparables and the method based on forecasted
fundamentals as approaches to using price multiples in valuation, and explain economic
rationales for each approach.
1. Bottles Co. is trading at a P/E multiple of 5. The average industry P/E multiple is 6. Based on
a DCF valuation, its justified P/E based on forecasted fundamentals is 4. Bottles Co. is:
A. undervalued based on forecasted fundamentals but overvalued based on method of
comparables.
B. overvalued based on forecasted fundamentals but undervalued based on method of
comparables.
C. overvalue based on forecasted fundamentals but fairly valued based on method of
comparables.
LO.b: Calculate and interpret a justified price multiple.
2. Bradman Co. is currently trading at $30 per share. Its forecasted EPS for next year is $5. The
company's value based on a discounted dividend model is $25 per share. The company's
justified forward P/E is:
A. 6.
B. 5.
C. 4.
LO.c: Describe rationales for and possible drawbacks to using alternative price multiples
and dividend yield in valuation.
3. A possible drawback for using the P/E ratio for valuation purposes is that:
A. the use of different accounting methods does not distort EPS values.
B. it is an uncommon method for valuation.
C. it can be meaningless if earnings are negative.
4. Compared to the P/E ratio, P/B is:
A. not meaningful when EPS is zero.
B. more meaningful when EPS is highly variable.
C. not applicable for companies expected to go into liquidation.
LO.d: Calculate and interpret alternative price multiples and dividend yield.
5. Bamboo Inc. paid a dividend of $1 last year. The expected dividends for the next four
quarters are $0.20, $0.25, $0.30 and $0.05. The stock currently trades at $8. The leading
dividend yield is closest to:
A. 10.0%.
B. 12.5%.
C. 2.5%.
LO.e: Calculate and interpret underlying earnings, explain methods of normalizing
earnings per share (EPS), and calculate normalized EPS.
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, Market-Based Valuation – Question Bank
6. Tesma Ltd. reported earnings of $800 last year. Upon studying the notes to financial
statements, an analyst identifies the following items which were included in earnings:
Sales from a new product launched $200
Gain on sale of a business segment $300
Restructuring expenses $100
The company's earnings, adjusted for nonrecurring items, are closest to:
A. $800.
B. $400.
C. $600.
LO.f: Explain and justify the use of earnings yield (E/P).
7. Which of the following statements about earnings yield is most likely true?
A. When comparing companies based on earnings yield, the company with the highest
earnings yield is the cheapest.
B. When comparing companies based on earnings yield, the company with the lowest
earnings yield is the cheapest.
C. Earnings yield can never be negative.
LO.g: Describe fundamental factors that influence alternative price multiples and dividend
yield.
8. All else equal, the justified P/E of a stock based on forecasted fundamentals is:
A. directly related to the stock’s required rate of return.
B. inversely related to growth rate.
C. inversely related to the stock’s discount rate.
LO.h. Calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book
ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals.
9. Boxer Inc.'s data is given below:
Number of Annual net sales Book value of Current share Value as per
shares equity price DCF
outstanding
10,000 $150,000 $250,000 $45 $50
The company's justified price to sales and price to book multiples are:
Justified Price to Justified Price to
Sales Book
A. 3.33 2.00
B. 3.00 1.80
C. 2.00 3.33
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LO.a: Distinguish between the method of comparables and the method based on forecasted
fundamentals as approaches to using price multiples in valuation, and explain economic
rationales for each approach.
1. Bottles Co. is trading at a P/E multiple of 5. The average industry P/E multiple is 6. Based on
a DCF valuation, its justified P/E based on forecasted fundamentals is 4. Bottles Co. is:
A. undervalued based on forecasted fundamentals but overvalued based on method of
comparables.
B. overvalued based on forecasted fundamentals but undervalued based on method of
comparables.
C. overvalue based on forecasted fundamentals but fairly valued based on method of
comparables.
LO.b: Calculate and interpret a justified price multiple.
2. Bradman Co. is currently trading at $30 per share. Its forecasted EPS for next year is $5. The
company's value based on a discounted dividend model is $25 per share. The company's
justified forward P/E is:
A. 6.
B. 5.
C. 4.
LO.c: Describe rationales for and possible drawbacks to using alternative price multiples
and dividend yield in valuation.
3. A possible drawback for using the P/E ratio for valuation purposes is that:
A. the use of different accounting methods does not distort EPS values.
B. it is an uncommon method for valuation.
C. it can be meaningless if earnings are negative.
4. Compared to the P/E ratio, P/B is:
A. not meaningful when EPS is zero.
B. more meaningful when EPS is highly variable.
C. not applicable for companies expected to go into liquidation.
LO.d: Calculate and interpret alternative price multiples and dividend yield.
5. Bamboo Inc. paid a dividend of $1 last year. The expected dividends for the next four
quarters are $0.20, $0.25, $0.30 and $0.05. The stock currently trades at $8. The leading
dividend yield is closest to:
A. 10.0%.
B. 12.5%.
C. 2.5%.
LO.e: Calculate and interpret underlying earnings, explain methods of normalizing
earnings per share (EPS), and calculate normalized EPS.
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, Market-Based Valuation – Question Bank
6. Tesma Ltd. reported earnings of $800 last year. Upon studying the notes to financial
statements, an analyst identifies the following items which were included in earnings:
Sales from a new product launched $200
Gain on sale of a business segment $300
Restructuring expenses $100
The company's earnings, adjusted for nonrecurring items, are closest to:
A. $800.
B. $400.
C. $600.
LO.f: Explain and justify the use of earnings yield (E/P).
7. Which of the following statements about earnings yield is most likely true?
A. When comparing companies based on earnings yield, the company with the highest
earnings yield is the cheapest.
B. When comparing companies based on earnings yield, the company with the lowest
earnings yield is the cheapest.
C. Earnings yield can never be negative.
LO.g: Describe fundamental factors that influence alternative price multiples and dividend
yield.
8. All else equal, the justified P/E of a stock based on forecasted fundamentals is:
A. directly related to the stock’s required rate of return.
B. inversely related to growth rate.
C. inversely related to the stock’s discount rate.
LO.h. Calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book
ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals.
9. Boxer Inc.'s data is given below:
Number of Annual net sales Book value of Current share Value as per
shares equity price DCF
outstanding
10,000 $150,000 $250,000 $45 $50
The company's justified price to sales and price to book multiples are:
Justified Price to Justified Price to
Sales Book
A. 3.33 2.00
B. 3.00 1.80
C. 2.00 3.33
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