FSA3e Test BankB Mod15 092412. Module 15 Market-Based Valuation

Module 15 Market-Based Valuation Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essays LO1 – Explain company valuation using market multiples based on balance sheet measur ...

Module 15 Market-Based Valuation Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essays LO1 – Explain company valuation using market multiples based on balance sheet measures. LO2 – Explain company valuation using market multiples based on income statement measures. LO3 – Identify comparable companies for use in company valuation with market multiples. LO4 – Interpret and reverseengineer market multiples to assess the reliability of market expectations. Module 15: Market-Based Valuation Multiple Choice Topic: Market Multiples LO: 1 1. Valuation using market multiples is popular because it simply multiplies a market multiple by what variable to determine value? A) Stock price B) Weighted average cost of capital C) Summary performance measure D) Working capital Answer: C Rationale: Using market multiples values the firm as the summary performance measure multiplied by the market multiple. Topic: Market Multiples LO: 1 2. Which of the following would not be used as a summary performance measure when using market multiples to determine value? A) Stock price B) Net operating assets C) Net operating profit after tax D) Book value Answer: A Rationale: Summary performance measures include earnings, book value, NOA, and NOPAT. Topic: Market Multiples LO: 1 3. Which of the following is an inconsistency of using market multiples to determine value? A) Using a market multiple assumes that the target company is correctly priced, while comparable companies are mispriced. B) Using a market multiple assumes that the target company is mispriced, while comparable companies are correctly priced. C) Using a market multiple assumes that all companies are mispriced. D) Using a market multiple assumes that the target company can be fully described by its summary performance measure. Answer: B Rationale: Using market multiples values the firm as the summary performance measure multiplied by the market multiple, which implicitly assumes that other firms from which the market multiple is obtained are correctly valued. ©Cambridge Business Publishers, 2013 15-2 Financial Statement Analysis & Valuation, 3rd EditionTopic: Balance Sheet Market Multiples LO: 1 4. When considering the residual operating income model, a company-value-to-net-operating-assets ratio equal to 1 would suggest: A) Future ROPI is equal to 0 B) Future ROPI is equal to 1 C) The expected present value of future ROPI is equal to 0 D) The expected present value of future ROPI is equal to 1 Answer: C Rationale: When using market multiples and the residual operating income model if company value equals 1 then future ROPI must be zero. Topic: Balance Sheet Market Multiples LO: 1 5. Zhang Foods is a manufacturer and distributor of numerous food items. The company has a book value of $22.17 per share. Zhang Foods is part of the food processing industry which has an industry PB ratio of 2.17. Using industry information, estimate the intrinsic value of Zhang Foods equity per share? A) $10.22 B) $48.11 C) $37.71 D) $46.58 Answer: B Rationale: Intrinsic value equals book value per share multiplied by the industry PB ratio. Topic: Income Statement Market Multiples LO: 2 6. Zhang Foods is a manufacturer and distributor numerous food items. The company recently reported earnings per share of $4.60. Based on its recent price of $75.42 the company has a PE ratio of 16.4. Zhang Foods is part of the food processing industry which has an industry P/E ratio of 20.25. Using industry information, estimate the intrinsic value of Zhang Foods equity per share? A) $ 4.60 B) $75.42 C) $93.15 D) $37.71 Answer: C Rationale: Intrinsic value equals earnings per share multiplied by the industry PE ratio ©Cambridge Business Publishers, 2013 Test Bank, Module 15 15-3Topic: Balance Sheet Market Multiples LO: 1 7. Time Computers is a manufacturer of computer parts. The company has a book value of $1,054,704. In addition the company has 212,500 common shares issued and outstanding. Time Computers is part of the computing industry which has an industry PB ratio of 5.31. Using industry information, estimate the intrinsic value of Time Computers equity per share? A) $15.58 B) $ 4.96 C) $10.62 D) $26.36 Answer: D Rationale: Intrinsic value equals book value multiplied by the industry PB ratio. Dividing the intrinsic value by the number of shares outstanding provides an intrinsic value per share. Topic: Income Statement Market Multiples LO: 2 8. Time Computers is a manufacturer of computer parts. The company recently reported earnings of $1,019,684. In addition, Time Computers has 212,500 shares issued and outstanding. The company has a PE ratio of 21.8. Time Computers is part of the computer parts industry which has an industry P/E ratio of 24.3. Using industry information, estimate the intrinsic value of time Computers equity per share? A) $ 4.80 B) $ 77.74 C) $116.60 D) $104.61 Answer: C Rationale: Intrinsic value equals earnings multiplied by the industry PE ratio. Dividing the intrinsic value by the number of shares outstanding provides an intrinsic value per share. Topic: Balance Sheet Market Multiples LO: 1 9. Fairfield Learning is a retailer focused on education supplies. The company has a book value of $28.88 per share. Fairfield Learning has a PB ratio of 6.23 and the education supplies industry PB ratio is 5.31. Assuming that comparable industry companies are priced correctly the intrinsic value of Fairfield Learning’s equity per share is: A) Undervalued $26.57 per share B) Overvalued $26.57 per share C) Priced correctly D) Overvalued by $28.88 per share Answer: B Rationale: Intrinsic value equals book value per share multiplied by the industry PB ratio. To determine the amount of mispricing, the intrinsic value would be compared to the current price. ©Cambridge Business Publishers, 2013 15-4 Financial Statement Analysis & Valuation, 3rd EditionTopic: Income Statement Market Multiples LO: 2 10. Fairfield Learning is a retailer focused on education supplies. The company recently reported earnings per share of $2.76. Based on its recent price of $32.71 the company has a PE ratio of 11.85. The educational supplies industry P/E ratio is 20.25. Assuming that comparable industry companies are priced correctly the intrinsic value of Fairfield Learning’s equity per share is: A) Undervalued $23.18 per share B) Overvalued $23.18 per share C) Priced correctly D) Overvalued by $2.76 per share Answer: A Rationale: Intrinsic value equals earnings per share multiplied by the industry PE ratio. To determine the amount of mispricing the intrinsic value would be compared to the current price. Topic: Selecting Comparables for Market Multiples LO: 3 11. Which of the following factors should not be considered when choosing comparable companies and using net operating assets as the summary performance measure? A) Expected future profitability B) Expected future growth C) Capital structure D) Expected operating risk Answer: C Rationale: RNOA, growth in NOA and the variance of operating income are the three factors that need to be considered when choosing comparables when net operating assets is the summary performance measure. Topic: Selecting Comparables for Market Multiples LO: 3 12. Which of the following factors should not be considered when choosing comparable companies and using book value as the summary performance measure? A) Expected future profitability B) Expected future growth C) Expected equity growth D) Capital structure Answer: C Rationale: RNOA, growth in NOA and the variance of operating income and capital structure are the four factors that need to be considered when choosing comparable companies when book value is the summary performance measure.