Question #7

Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf

Page: 3

Status: Incorrect

Correct Answer: B

Your Answer: B

Part of Context Group: Q7-8 First in Group
Shared Context
- Which valuation ratio is least appropriate for comparing Massive and Mouse? A) Enterprise value/EBITDA because Massive and Mouse have very different debt levels. B) Price/book because Massive is larger than Mouse. C) Price/cash flow because cash flows for small companies can be extremely volatile.
Question
Mouse & Associates is cheaper than Massive Tech as measured by:
Answer Choices:
A. the price/sales ratio and the dividend yield
B. the earnings yield but not the price/book
Explanation
To calculate the P/E, divide the market capitalization by the earnings. Lower is cheaper. To calculate the P/B, divide the market capitalization by the equity. Lower is cheaper. To calculate the P/S, determine sales by dividing the earnings by the net margin. Then divide the market capitalization by the sales. Lower is cheaper. To calculate the earnings yield, divide the earnings by the market capitalization. Higher is cheaper. To calculate the dividend yield, divide the dividends by the price. Higher is cheaper. Massive Tech Mouse & Associates P/E 30.23 26.67 P/B 10.83 15.27 P/S 3.63 5.87 Earnings yield 3.31% 3.75% Dividend yield 4.62% 0.17%
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