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Stock Valuation: Relative Valuation & PEG Ratio

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Questions and Answers

Which of the following enterprise value multiples is the most commonly used?

EV/EBIT
EV/Revenue
EV/EBITDA (correct)
EV/Invested Capital

What is the main reason EBITDA is used as a substitute for free cash flows in enterprise value calculations?

EBITDA is more readily available than free cash flows
EBITDA is less affected by accounting differences
EBITDA is a better measure of a company's profitability
EBITDA is a flow to both equity and debt holders (correct)

Which of the following is included in the calculation of enterprise value (EV)?

Market value of common stock, preferred equity, and debt
Market value of common stock only
Market value of common stock, preferred equity, debt, and minority interest, less cash and investments (correct)
Market value of common stock and preferred equity

How is EBITDA calculated according to the information provided?

EBITDA = recurring earnings from operations + interest + taxes + depreciation + amortization (C) Signup and view all the answers

Which enterprise value multiple is typically used for capital-intensive industries?

EV/Invested Capital (B) Signup and view all the answers

What is the formula for the justified trailing P/E ratio?

$\frac{P_o}{E_1} = \frac{(1-b)(1+g)}{r-g}$ (D) Signup and view all the answers

What is the formula for the PEG ratio?

$\frac{P/E}{g}$ (A) Signup and view all the answers

What is one advantage of the PEG ratio?

The PEG ratio standardizes the P/E ratio for stocks with different expected growth rates. (B) Signup and view all the answers

What is one disadvantage of the PEG ratio?

The PEG ratio is linear, making comparisons difficult. (C) Signup and view all the answers

When would enterprise value (EV) multiples be more appropriate to use than price multiples?

When assessing the valuation of a merger and acquisition. (D) Signup and view all the answers

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