Question #8

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: 4

Status: Correct

Correct Answer: A

Part of Context Group: Q7-8
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
The price/cash flow ratio of Massive Tech, where cash flow is defined as earnings plus noncash charges, is closest to:
Answer Choices:
A. 16.67
B. 9.65
C. 7.89
Explanation
Cash flow = net income plus depreciation plus amortization = ($4,300 + 3,500 + 5,675) = $13,475 million. P/CF = market capitalization/cash flow = ($130,000/13,475) = 9.65.
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