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?

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

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

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

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

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

What is the formula for the PEG ratio?

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

What is one advantage of the PEG ratio?

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

What is one disadvantage of the PEG ratio?

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

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

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

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