Exam 4 Flashcards
A technique for identifying underpriced or overpriced stocks based on ratios of the stock price to accounting fundamentals, like book value per share or EPS
Stock valuation using multiples
Stock Valuation using multiples:
Set a ____. If the ratio of price to fundamental is below average, the stock is considered relatively ___, and if above average, relatively ___.
Benchmark
Cheap
Expensive
Price to book value is the ratio of the market value of the ____ to its latest quarterly ____
Common stock
Book value
A low P/B is an indicator of a possibly ____ stock, while a high P/B might indicate that the stock price is well ___ the cost of replacing the company’s assets, and hence _____.
Undervalued
Above
Overvalued
In an efficient market, the P/B ratio will exceed 1 if the company is able to earn a ____ that exceeds the cost of _____.
Return on equity
Equity capital
Return on equity is ___ divided by ___, or the net income “return” as a percentage of book value
Net income divided by beginning book value
If net income return exceeds r, then the company is able to earn a higher return on its investments than the stockholder could earn elsewhere on comparable risk investments. Thus, the company is generating economic value, sometimes called “____”, on its available assets, and its stock will be priced ____ of book value
Residual income
In excess
If book value accurately measures replacement cost, there must be some _______ (government regulations, high fixed costs, economies of scale) for the long-term average P/B ratio to ___ one. Otherwise, if a company was able to earn an ROE above the cost of equity, you would expect increased ____ in the business, that would drive down ROE in the future
Barriers to entry
Exceed
Competition
Can the P/B be less than one in an efficient market?
Yes
If an industry is in decline, and there is little or no new investment into the industry, ____ often do not accurately reflect _____
Book values
True asset values
When book value does not accurately measure replacement cost, then the long-run or “_____” P/B is not equal to one. Book value differs from replacement cost because of _____ and _____
Equilibrium
Hidden assets and inflation
internally-developed patents and trademarks, past research and development expenditures, past advertising and other marketing expenditures, past start-up costs for employee training, customer relationships, and developed managerial expertise
Hidden assets
P/B’s should logically be ____ after a period of sustained inflation than after a period of stable or falling prices
Higher
Companies with long-lived “real” assets, particularly land and buildings, are most subject to this ___ bias
Inflation
Hidden assets of an acquired company are captured in ____, whereas hidden assets of a comparison firm without acquisitions are left out of ____
Goodwill
Book value
Merger-related comparability problem can be avoided by using ____ as an alternative to P/B
Price/Tangible Book Value
Tangible book value excludes ___ and other ____ assets from book value, so is unaffected by merger purchase accounting
Goodwill
Intangible
Historically, stocks with relatively ___ P/B ratios have earned higher future returns than stocks with relatively ___ P/B ratios
Low
High
Stocks with ___ book-to-market value, tend to outperform stocks with ___ book-to-market ratios
High
Low
Different measures of EPS in the P/E ratio (4):
- Most recent 12 months trailing EPS
- EPS forecast for the current fiscal year
- EPS forecast for a future fiscal year
- GAAP earnings versus ‘operating’ earnings
All else equal, it is better to have a ____ EPS and hence a ___ P/E, than to have ___ EPS and hence a ____ P/E
Positive and positive
Negative and negative
If EPS is negative for two different stocks, the ____ is not a meaningful tool for comparison between them
P/E ratio
The P/E ratio measures the cost of buying a stock as a multiple of the ____ or ___ per share
Earnings or profits
a stock with a P/E of 15 costs $___ to buy for every $__ of per share profits
$15
$1