Question #69

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: 26

Status: Correct

Correct Answer: A

Part of Context Group: Q69-71 First in Group
Shared Context
- Sanford's economic value added (EVA®) for 2008 is closest to: A) $567.80. B) $1,383.20. ln ( )  = T × ln ( Sanford P/E Index P/E 1 + Sanford short-term growth rate + Sanford dividend yield 1 + Index growth rate + Index dividend yield C) $525.80.
Question
Based on a comparison of the actual trailing P/FCFE ratio compared to the justified trailing P/FCFE ratio (based on Davenport's FCFE valuation model) for 2008, Sanford is:
Answer Choices:
A. overvalued because the actual P/FCFE ratio is greater than the justified P/FCFE ratio for 2008
B. correctly valued because the actual P/FCFE ratio is equal to the justified P/FCFE ratio for 2008
C. undervalued because the actual P/FCFE ratio is less than the justified P/FCFE ratio for 2008
Explanation
ln ( )  = T × ln ( Sanford P/E Index P/E 1 + Sanford short-term growth rate + Sanford dividend yield 1 + Index growth rate + Index dividend yield Sanford's actual P/FCFE ratio is the current market price of $15 divided by FCFE for 2008: The justified P/FCFE ratio is the value derived from the FCFE valuation model ($11.18) divided by FCFE for 2008: Based on this analysis, Sanford is overvalued on an absolute basis (NOT relative to the industry benchmark) because the actual P/FCFE ratio is greater than the justified P/FCFE ratio.
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