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Stocks 402: Using Ratios and Multiples

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1.
One advantage of earnings yields over price/earnings ratios is that we can use them to compare investments in other classes.
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True. This way, we can compare the returns that the different types of investments offer.
2.
A company's price/earnings ratio is most meaningful when it is compared with which of the following?
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Its historical P/E ratio. A company's P/E ratio is most meaningful when it is compared with its historical P/E ratio. The most useful way to use a P/E ratio is to compare it with a certain benchmark. Good benchmarks are the P/E of another company in the same industry, the P/E of the entire market, or the P/E of the same company at a different point in time. It would not be very meaningful to compare a company's P/E ratio with its P/S ratio or historical P/B ratio, because the latter two metrics are used to measure different aspects of the company's performance (sales and book value) relative to its stock price.
3.
Company Z pays an annual dividend of $2.00 per share, and its stock trades for $25. What is its dividend yield?
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8%. The dividend yield is found by dividing annual dividend per share by stock price per share. Therefore, 2/25 equals 8%.
4.
A company's price/earnings growth ratio uses _______.
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Future estimates. The price/earnings growth ratio is used to get a sense of what a company will be like in the future.
5.
The price/book ratio would be most useful for valuing which of the following?
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A utility company. The price/book ratio is most useful for valuing a utility company. A utility firm has mostly tangible assets that are accurately measured by its book value. On the other hand, a pharmaceutical or software company has a lot of intangible assets, such as patents, that are not accurately reflected in its book value.
6.
A firm's price/sales ratio is found by dividing its stock price by its _______.
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Sales per share. Since we are using stock price, we must also use sales per share.
7.
The formula for cash return is free cash flow plus net interest expense, the sum of which is then divided by _______.
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Enterprise value. Enterprise value is the figure that goes into the denominator.