SD18-ADDITIONAL ISSUES IN MULTIPLES ANALYSIS

SD18-ADDITIONAL ISSUES IN MULTIPLES ANALYSIS - CHAPTER 18...

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CHAPTER 18 ADDITIONAL ISSUES IN MULTIPLES ANALYSIS LEARNING OBJECTIVES 1. How capital structure affects the PE ratio and how to adjust for this difference in a PE valuation. 2. How to adjust for accounting differences in a PE valuation. 3. How to perform multiples valuation on a firm with losses or near-zero earnings. 4. How to use multiples valuation on firms with several lines of business. 5. How analysts use the market/book ratio to value firms. TRUE/FALSE QUESTIONS 1. As a general rule, two otherwise similar firms with different capital structures will have different PE ratios. (easy, L.O. 1, Section 1, true) 2. One of the simplest ways for an analyst to deal with differences created by capital structure is to use the unlevered, pretax PE ratio in a multiples valuation. (moderate, L.O. 1, Section 1, true) 3. The denominator of any valuation multiple must be the same measure as the value driver by which it is multiplied. (difficult, L.O. 1, Section 1, true) 4. The unlevered pretax PE is highly sensitive to leverage. (moderate, L.O. 1, Section 1, false) 5. When using the unlevered PE ratio, the analyst must be aware that the ratio of the two values, debt plus equity, divided by EBIT, will vary with leverage. (moderate, L.O. 1, Section 1, false) 6. “Accounting doesn’t matter” is a justifiable argument for ignoring reporting differences in multiples valuation. (moderate, L.O. 2, Section 1, false) 7. If two firms are not similar in terms of financial reporting choices, then a PE valuation can be severely flawed. (moderate, L.O. 2, Section 1, true) 8. One way to deal with accounting differences is to adjust the comparable firm’s reported earnings as if the firm used the target’s reporting choices, or adjust the target to the comparable firm’s reporting choices. (moderate, L.O. 2, Section 1, true) 9. When adjusting earnings for accounting differences, the important concept is to use an earnings number and a PE that are determined using the same reporting choices for both firms. (moderate, L.O. 2, Section 1, true) 10. Some research has shown that current period earnings is a better predictor of future cash flows than is current period cash flow. (difficult, L.O. 2, Section 1, true) 11. Multiples valuation is relatively simple for firms with zero earnings or losses and start-up firms whose earnings are extremely low. 122
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(moderate, L.O. 3, Section 3, false) 12. When firms operate more than one line of business, each line is likely to have its own PE ratio. (easy, L.O. 4, Section 4, true) 13. PE decomposition cannot be used to value firms with marketable securities. (easy, L.O. 4, Section 4, false) 14. Valuing a firm using the market/book (MB) ratio is considerably different than using the price/earnings (PE) ratio.
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This note was uploaded on 11/22/2010 for the course CAC BSA taught by Professor Kairus during the Spring '10 term at Korea University.

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SD18-ADDITIONAL ISSUES IN MULTIPLES ANALYSIS - CHAPTER 18...

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