Stock Valuation and P/E Ratios Quiz
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Questions and Answers

What is the primary advantage of using the price-to-book (P/B) ratio for valuation?

  • It compares a company's earnings to its market capitalization.
  • It reflects a company's ability to generate cash flows.
  • It accounts for a company's future growth prospects.
  • It measures a company's asset value relative to its market price. (correct)

    • Which of the following is a potential disadvantage of the price-to-earnings (P/E) ratio?

  • It fails to consider a company's debt levels.
  • It does not account for non-recurring expenses or income.
  • It ignores a company's growth potential.
  • All of the above. (correct)

    • What is a primary advantage of using the price-to-earnings (P/E) ratio for valuation?

  • It considers a company's long-term growth potential.
  • It provides a direct comparison of a company's market value to its earnings. (correct)
  • It accounts for a company's debt levels.
  • It reflects a company's asset value relative to its market price.

    • What does a low price-to-book (P/B) ratio generally indicate?

    <p>The company is undervalued relative to its assets.</p> Signup and view all the answers

    Which of the following is true about the price-to-earnings (P/E) ratio?

    <p>Both (a) and (b) are true.</p> Signup and view all the answers

    What is the formula for calculating the price-to-book (P/B) ratio?

    <p>Market capitalization / Book value of equity</p> Signup and view all the answers

    What does a high price-to-earnings (P/E) ratio generally indicate?

    <p>The company is overvalued relative to its earnings.</p> Signup and view all the answers

    Which of the following is a potential limitation of using the price-to-book (P/B) ratio for valuation?

    <p>All of the above.</p> Signup and view all the answers

    What is the formula for calculating the price-to-earnings (P/E) ratio?

    <p>Market capitalization / Earnings per share</p> Signup and view all the answers

    Which of the following is a potential advantage of using the price-to-earnings (P/E) ratio for valuation?

    <p>It provides a direct comparison of a company's market value to its earnings.</p> Signup and view all the answers

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