Question #106 - Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

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: 36

Status: Unattempted

Correct Answer: B

Shared Context

- Based on their responses to Powell, which of the analysts is most likely concerned about earnings volatility? A) Lincoln. B) Barnes. C) Bosley.

Question

Barnes would be least likely to use EV/EBITDA ratio, rather than the P/E ratio, when analyzing a company that:

Answer Choices:

A. pays a dividend, and is likely to deliver little earnings growth

B. reports a lot of depreciation expense

C. has a different capital structure than most of its peers

Explanation

For companies that report a lot of depreciation expense or must be compared to companies with different levels of financial leverage, the EV/EBITDA ratio may be more useful than the P/E. For companies that pay a dividend and have little profit growth, both should work fine. Given Barnes' stated preference for the P/E ratio, she is least likely to use the EV/EBITDA ratio with the dividend-paying firm.

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