Test Bank for Financial

Test Bank for Financial Statement Analysis & Valuation 7th Edition By Easton, McAnally, Crawford, Sommers (All Modules 1-15, 100% Complete, A+ Garde)

All Modules Arranged Reverse: 15-1

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Module 15 Market-Based Valuation Learning Objectives – Coverage by question True/False Multiple Choice LO1 – Explain company valuation using balance sheet multiples.

1-3, 5, 7, 9

LO2 – Explain company valuation using income statement multiples.

6, 8, 10

LO3 – Identify comparable to derive market multiples. 4, 11-22 LO4 – Interpret and reverse-engineer market multiples to assess the reliability of market expectations.23-25 These questions are available to assign in myBusinessCourse.15-1 Financial Statement Analysis & Valuation, 7 th Edition

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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?

• Stock price
• Weighted average cost of capital
• Summary performance measure
• 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?

• Stock price
• Net operating assets
• Net operating profit after tax
• 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?

• Using a market multiple assumes that the target company is correctly priced, while comparable

companies are mispriced.

• Using a market multiple assumes that the target company is mispriced, while comparable

companies are correctly priced.

• Using a market multiple assumes that all companies are mispriced.
• 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.Test Bank, Module 15 15-2

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Topic: Residual Operating Income Model

LO: 3

4.When considering the residual operating income model, a company value to net operating assets

ratio equal to 1 would suggest:

• Future ROPI is equal to 0
• Future ROPI is equal to 1
• Present value of expected ROPI is equal to 0
• Present value of expected 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: Valuation Using Balance Sheet Multiple

LO: 1

• Foraker Products is a manufacturer and distributor of numerous food products. The company has a

book value of $20.68 per share. Foraker Products is part of the food processing industry which has an industry PB ratio of 2.15.Using industry information, estimate the intrinsic value of Foraker Products’ equity per share?

A) $ 9.62

B) $20.68

C) $44.46

D) $22.83

Answer: C

Rationale: Intrinsic value equals book value per share multiplied by the industry PB ratio, ($20.68 x

2.15 = $44.46).

Topic: Valuation Using Income Statement Multiple

LO: 2

• Foraker Products is a manufacturer and distributor numerous food products. The company recently

reported earnings per share of $5.90. Based on its recent price of $110.48, the company has a PE ratio of 18.72542373. Foraker Products is part of the food processing industry which has an industry PE ratio of 19.75.Using industry information, estimate the intrinsic value of Foraker Products’ earnings per share?

A) $ 5.90

B) $ 62.68

C) $104.75

D) $116.53

Answer: D

Rationale: Intrinsic value equals earnings per share multiplied by the industry PE ratio, ($5.90 x

19.75 = $116.53).

15-3 Financial Statement Analysis & Valuation, 7 th Edition .

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