978-0133507676 Chapter 10 Part 2

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6) An investor estimates the value of a irm which manufactures cookware by examining

the cash lows of similar irms. Which of the following is assumed to be the same for these

irms?

A) P/E

B) annual growth rates

C) payout rates

D) all of the above

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

7) Use the table for the question(s) below.

Name Market Enterprise Enterprise

Enterprise

Capitalization Value Price/ Value/ Value/

($ million) ($ million) P/E Book Sales

EBITDA

Gannet 6350 10,163 7.36 0.73 1.4 5.04

New York Times2423 3472 18.09 2.64 1.10 7.21

McClatchy 675 3061 9.76 1.68 1.40 5.64

Media General 326 1192 14.89 0.39 1.31 7.65

Lee Enterprises 267 1724 6.55 0.82 1.57 6.65

Average 11.33 1.25 1.35 6.44

Maximum +60% 112% +16% +22%

Minimum -40% -69% -18% -19%

The table above shows the stock prices and multiples for a number of irms in the

newspaper publishing industry. Another newspaper publishing irm (not shown) had sales

of $600 million, EBITDA of $84 million, excess cash of $68 million, $18 million of debt, and

120 million shares outstanding. If the average enterprise value to sales for comparable

businesses is used, which of the following is the best estimate of the irm’s share price?

A) $6.45

B) $7.20

C) $7.17

D) $7.53

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

8) Use the table for the question(s) below.

Name Market Enterprise Enterprise

Enterprise

Capitalization Value Price/ Value/ Value/

($ million) ($ million) P/E Book Sales

EBITDA

Gannet 6350 10,163 7.36 0.73 1.4 5.04

New York Times2423 3472 18.09 2.64 1.10 7.21

McClatchy 675 3061 9.76 1.68 1.40 5.64

Media General 326 1192 14.89 0.39 1.31 7.65

Lee Enterprises 267 1724 6.55 0.82 1.57 6.65

Average 11.33 1.25 1.35 6.44

Maximum +60% 112% +16% +22%

Minimum -40% -69% -18% -19%

The table above shows the stock prices and multiples for a number of irms in the

newspaper publishing industry. Another newspaper publishing irm (not shown) had sales

of $640 million, EBITDA of $84 million, excess cash of $67 million, $14 million of debt, and

120 million shares outstanding. If the average enterprise value to sales for comparable

businesses is used, which of the following is the range of reasonable share price estimates?

A) $6.27 to $8.86

B) $4.59 to $12.23

C) $1.15 to $1.53

D) $6.19 to $9.32

AACSB Objective: Analytic Skills

Author: JP

Question Status: Revised

9) Use the table for the question(s) below.

Name Market Enterprise Enterprise

Enterprise

Capitalization Value Price/ Value/ Value/

($ million) ($ million) P/E Book Sales

EBITDA

Gannet 6350 10,163 7.36 0.73 1.4 5.04

New York Times2423 3472 18.09 2.64 1.10 7.21

McClatchy 675 3061 9.76 1.68 1.40 5.64

Media General 326 1192 14.89 0.39 1.31 7.65

Lee Enterprises 267 1724 6.55 0.82 1.57 6.65

Average 11.33 1.25 1.35 6.44

Maximum +60% 112% +16% +22%

Minimum -40% -69% -18% -19%

The table above shows the stock prices and multiples for a number of irms in the

newspaper publishing industry. Another newspaper publishing irm (not shown) had sales

of $620 million, EBITDA of $81 million, excess cash of $62 million, $11 million of debt, and

120 million shares outstanding. If the irm had an EPS of $0.41, what is the diference

between the estimated share price of this irm if the average price-earnings ratio is used

and the estimated share price if the average enterprise value/EBITDA ratio is used?

A) -$0.08

B) -$0.13

C) -$1.27

D) -$1.39

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

Use the table for the question(s) below.

Name Market Enterprise Enterprise

Enterprise

Capitalization Value Price/ Value/ Value/

($ million) ($ million) P/E Book Sales

EBITDA

Gannet 6350 10,163 7.36 0.73 1.4 5.04

New York Times2423 3472 18.09 2.64 1.10 7.21

McClatchy 675 3061 9.76 1.68 1.40 5.64

Media General 326 1192 14.89 0.39 1.31 7.65

Lee Enterprises 267 1724 6.55 0.82 1.57 6.65

Average 11.33 1.25 1.35 6.44

Maximum +60% 112% +16% +22%

Minimum -40% -69% -18% -19%

10) The table above shows the stock prices and multiples for a number of irms in the

newspaper publishing industry. Which of the following ratios would most likely be the most

reliable in determining the stock price of a comparable irm?

A) P/E

B) Price/Book

C) Enterprise Value/Sales

D) Enterprise Value/EBITDA

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

11) Which of the following is NOT an advantage of the valuation multiple method as

compared to the discounted cash low method?

A) calculations based upon widely available information

B) based upon actual stock prices of real irms

C) does not rely on estimates of future cash lows

D) takes into account important diferences between diferent irms

AACSB Objective: Analytic Skills

Author: DS

Question Status: Revised

12) Which of the following statements is FALSE?

A) Even two irms in the same industry selling the same types of products, while similar in

many respects, are likely to be of diferent size or scale.

B) In the method of comparables, we estimate the value of a irm based on the value of

other, comparable irms or investments that we expect will generate very similar cash lows

in the future.

C) Consider the case of a new irm that is identical to an existing publicly traded company.

If these irms will generate identical cash lows, the Law of One Price implies that we can

use the value of the existing company to determine the value of the new irm.

D) A valuation multiple is a ratio of some measure of a irm’s scale to the value of the irm.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

13) Which of the following statements is FALSE?

A) The most common valuation multiple is the price-earnings ratio.

B) You should be willing to pay proportionally more for a stock with lower current earnings.

C) A irm’s price-earnings ratio is equal to the share price divided by its earnings per share.

D) The intuition behind the use of the price-earnings ratio is that when you buy a stock, you

are in a sense buying the rights to the irm’s future earnings, and diferences in the scale of

irms’ earnings are likely to persist.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

14) Which of the following statements is FALSE?

A) We can estimate the value of a irm’s shares by multiplying its current earnings per

share by the average price-earnings ratio of comparable irms.

B) For valuation purposes, the trailing price-earnings ratio is generally preferred, since it is

based on actual not expected earnings.

C) Forward earnings are the expected earnings over the coming 12 months.

D) Trailing earnings are the earnings over the previous 12 months.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

15) Which of the following statements is FALSE?

A) As the enterprise value represents the entire value of a irm before the irm pays its

debt, to form an appropriate multiple, we divide it by a measure of earnings or cash lows

after interest payments are made.

B) We can compute a irm’s price-earnings ratio by using either trailing earnings or forward

earnings with the resulting ratio called the trailing price-earnings or forward price–

earnings.

C) It is common practice to use valuation multiples based on a irm’s enterprise value.

D) Using a valuation multiple based on comparables is best viewed as a “shortcut” to the

discounted cash low method of valuation.

AACSB Objective: Analytic Skills

Author: JN

Question Status: Revised

16) Which is the best valuation technique when using comparables?

AACSB Objective: Analytic Skills

Author: SS

Question Status: Revised