Financial Valuation Methods (B2:M6-7)

Question 1

what does P/E ratio measure?

Answer 1

the amount that investors are willing to pay for each dollar of earnings per share

Question 2

what does a high P/E ratio indicate?

Answer 2

investors are anticipating more growth

Question 3

what is a key assumption of the dividend growth model?

Answer 3

stock price will grow at the same rate as the dividend

Question 4

what valuation estimate technique does not rely on meaningful earnings figures?

Answer 4

price-to-sales ratio

Question 5

what are the assumptions underlying the Black-Scholes model?

Answer 5

stock prices behave randomly

RF rate and volatility of stock prices are constant

there are no taxes or transaction costs

the stock pays no dividend

the options are European-style (exercisable only at maturity)

Question 6

when preparing accounting estimates, what information must management consider?

Answer 6

historical

market

expected usage

estimates from experts

*industry consensus is the least acceptable information

Question 7

what are the benefits of using the binomial (Cox-Ross-Rubinstein) model over the Black-Scholes model?

Answer 7

can be used for American-style options
AND
can be used for stocks that pay dividends without modifying the model

Question 8

what are the inputs to the Black-Scholes model?

Answer 8

current price of underlying stock

option exercise price

RF interest rate

time until expiration

a measure of risk

Question 9

when using the cost approach to value intangible assets, are sunk costs included or excluded from the calculation?

Answer 9

excluded