Exam 10: Common Stock Valuation Lessons for All Investors

Which of the following statements concerning price to book value is true?

The higher the payout ratio, the higher the P/E is expected to be, other things being equal. However, other things might not be equal. Give an example of something that might not be equal and how it would affect the P/E.

A firm has net income of $1 million with 250,000 shares outstanding with a total market value of $8 million. What is its P/E ratio?

EVA analysis reflects an emphasis on risk-adjusted return on capital.

Companies with significant intangible assets on their balance sheets may receive a slightly lower P/E ratio versus companies with assets.

You calculate the intrinsic value of a stock to be $27. You check The Wall Street Journal and find the actual price to be $30. What could differ in your analysis and the market's valuation? If you are confident about your analysis, should you buy or not?

Why have dividends historically been important in the valuation of common stock?

A number of companies that formerly experienced rapid growth were unable to sustain high growth rates. These companies included Cisco, Dell, Yahoo, and Google.