Thug Life free essay sample

Valuation Based on Comparable Firms Skill: Conceptual 4) Which of the following statements is false? A) Because the enterprise value represents the entire value of the firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made. We will write a custom essay sample on Thug Life or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page B) We can compute a firms P/E ratio by using either trailing earnings or forward earnings with the resulting ratio called the trailing P/E or forward P/E. C) It is common practice to use valuation multiples based on the firm’s enterprise value. D) Using a valuation multiple based on comparables is best viewed as a shortcut to the discounted cash flow method of valuation. Answer: A Explanation: A) Because the enterprise value represents the entire value of the firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows before interest payments are made. A) The fact that a firm has an exceptional management team, has developed an efficient manufacturing process, or has just secured a patient on a new technology is ignored when we apply a valuation multiple. B) Valuation multiples have the advantage that they allow us to incorporate specific information about the firm’s cost of capital or future growth. C) For firms with substantial tangible assets, the ratio of price to book value of equity per share is sometimes used. D) Using multiples will not help us determine if an entire industry is overvalued. Many managers make the mistake of focusing on accounting earnings as opposed to free cash flows. With efficient markets, the accounting consequences of a decision do not directly affect the value of the firm and should not drive decision making. With efficient markets, the firm can sell its shares at a fair price to new investors. Thus, the firm should not be constrained from raising capital to fund positive NPV investment opportunities. Diff: 3 Topic: 9. 5 Information, Competition, and Stock Prices Skill: Conceptual