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Principles of Finance

Multiple Choice

Principles of FinanceMultiple Choice
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1 .
The price-to-earnings (P/E) ratio is _______________.
  1. used to calculate a company’s book value
  2. a multiplier used in enterprise valuation
  3. only applied when valuing preferred stock
  4. a metric for showing the expectations of the market
2 .
The price-to-book (P/B) ratio is also called the _______________ ratio.
  1. market-to-book
  2. enterprise-to-book
  3. asset-to-price
  4. liability-to-book
3 .
The two primary types of stock valuation multiples are _______________.
  1. enterprise value multiples and comparable company value multiples
  2. equity multiples and enterprise value multiples
  3. asset value multiples and liability value multiples
  4. None of the above
4 .
Dividend yield is a form of equity multiple that is primarily used when _______________.
  1. the subject company is operating at a loss
  2. conducting comparisons between companies in different industries
  3. conducting comparisons between cash returns and investment types
  4. analyzing mature companies that have been paying dividends for several years
5 .
Dividend yield is computed as the proportion of dividend per share to _______________.
  1. share price
  2. earnings per share
  3. market value per share
  4. book value per share
6 .
Which of the following statements about enterprise value metrics is NOT true?
  1. EV to revenue can be used to assess companies with negative cash flows or firms that are currently experiencing financial losses.
  2. ROCE is a profitability ratio that measures the return on the equity in a company in comparison to its financing over a short period of time.
  3. EBIT allows investors to assess the core operations of the business without worrying about the costs of the capital structure.
  4. EBITDAR is a metric that is used in businesses that have substantial rental and least expenses.
7 .
If an investor’s required rate of return increases and all other characteristics of a stock remain the same, the value of the stock will _______________.
  1. remain the same
  2. increase
  3. decrease
  4. None of the above
8 .
A major limitation of the dividend discount model (DDM) is that _______________.
  1. it is extremely complicated to use
  2. it cannot be used with companies that do not pay dividends
  3. it must always be used in conjunction with another metric
  4. None of the above
9 .
In which of the following ways does preferred stock differ from common stock?
  1. Preferred stock carries voting rights for its ownership.
  2. Preferred stock must be purchased through a broker dealer.
  3. Preferred stock may have a cumulative dividend feature.
  4. In the event of corporate liquidation, preferred stockholders are paid last.
10 .
The term efficient markets refers to the idea that _______________.
  1. publicly traded companies always file their financial reports on time
  2. investors are able to identify underpriced stocks for purchase
  3. stocks trade with minimal costs and prices are current and fair to all traders
  4. financial information on companies and their stock is only available to efficient traders
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