10 Questions
What is the primary advantage of using the price-to-book (P/B) ratio for valuation?
It measures a company's asset value relative to its market price.
Which of the following is a potential disadvantage of the price-to-earnings (P/E) ratio?
All of the above.
What is a primary advantage of using the price-to-earnings (P/E) ratio for valuation?
It provides a direct comparison of a company's market value to its earnings.
What does a low price-to-book (P/B) ratio generally indicate?
The company is undervalued relative to its assets.
Which of the following is true about the price-to-earnings (P/E) ratio?
Both (a) and (b) are true.
What is the formula for calculating the price-to-book (P/B) ratio?
Market capitalization / Book value of equity
What does a high price-to-earnings (P/E) ratio generally indicate?
The company is overvalued relative to its earnings.
Which of the following is a potential limitation of using the price-to-book (P/B) ratio for valuation?
All of the above.
What is the formula for calculating the price-to-earnings (P/E) ratio?
Market capitalization / Earnings per share
Which of the following is a potential advantage of using the price-to-earnings (P/E) ratio for valuation?
It provides a direct comparison of a company's market value to its earnings.
Test your knowledge on stock valuation, specifically the concepts of overvalued and undervalued stocks based on actual and justified price multiples. Understand the difference between Trailing (lagging) P/E and Leading (forward) P/E ratios and how earnings are calculated in each scenario.
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