Chapter 15: Other Non-DCF Valuation Models (CAIIB – Paper 3)
1. In relative valuation models, a company is typically valued based on:
A. Its future cash flows discounted at WACC
B. Its book value only
C. Multiples of comparable companies
D. Its historical profits only
Relative valuation uses valuation multiples of comparable companies, such as P/E, P/B, EV/EBITDA, to estimate a company's value.
2. Which of the following is a common multiple used in relative valuation?
A. Weighted Average Cost of Capital (WACC)
B. Price-to-Earnings (P/E) ratio
C. Discounted Cash Flow (DCF)
D. Net Present Value (NPV)
The P/E ratio is one of the most commonly used multiples in relative valuation to compare companies within the same industry.
3. A limitation of relative valuation models is that they:
A. Depend on the availability of comparable company data
B. Require precise forecasting of cash flows over 5-10 years
C. Can be applied without any market data
D. Always give the intrinsic value of a company
Relative valuation relies on comparable companies; if market data for comparables is unavailable or unreliable, the valuation may be misleading.
4. Enterprise Value to EBITDA (EV/EBITDA) multiple is preferred in relative valuation because it:
A. Focuses only on net income
B. Ignores debt and cash levels
C. Only works for financial companies
D. Accounts for both debt and operational profitability
EV/EBITDA considers both the company's enterprise value (including debt) and operating profitability, making it a widely used multiple.
5. Price-to-Book (P/B) ratio is particularly useful for valuing:
A. Startups with high growth potential
B. Companies with high intangible assets
C. Asset-heavy industries like banks and manufacturing
D. Companies with unpredictable cash flows
The P/B ratio is useful for industries with significant tangible assets, such as banks and manufacturing companies, to compare market value with book value.
6. The Equity Valuation Multiples model primarily focuses on:
A. Enterprise Value including debt and cash
B. Market value of equity relative to earnings, book value, or dividends
C. Discounted future cash flows to the firm
D. Historical cost of assets only
Equity valuation multiples use market value of equity compared to metrics like earnings (P/E), book value (P/B), or dividends (P/D) to value a company.
7. Which of the following is an example of an equity valuation multiple?
A. EV/EBITDA
B. Debt-to-Equity ratio
C. Price-to-Earnings (P/E) ratio
D. Net Present Value (NPV)
The P/E ratio is a classic equity valuation multiple, comparing the market price of equity to earnings per share.
8. The Price-to-Book (P/B) ratio in equity valuation is most useful for companies that are:
A. Asset-intensive with significant tangible assets
B. Startups with high growth potential
C. Companies with high intangible assets like software firms
D. Companies with volatile earnings
P/B ratio compares market price to book value and is most meaningful for companies with significant tangible assets.
9. A high Price-to-Earnings (P/E) ratio typically indicates that:
A. The company is undervalued
B. Earnings are understated in financial statements
C. The company has no debt
D. Investors expect high future growth
A high P/E ratio usually reflects investors’ expectation of higher future earnings growth for the company.
10. Which of the following is a limitation of equity valuation multiples?
A. Requires detailed discounted cash flow analysis
B. Can be distorted if comparable companies are not truly similar
C. Does not depend on market prices
D. Ignores earnings and dividends
Equity multiples are only meaningful if the selected comparable companies are truly similar in size, industry, and risk profile; otherwise, valuations can be misleading.
11. Enterprise Value (EV) multiples are primarily used to:
A. Value equity only
B. Ignore debt and cash in valuation
C. Value the entire firm including debt and cash
D. Estimate only the book value of assets
EV multiples consider the total firm value including market value of equity, debt, and cash, providing a holistic valuation of the company.
12. A common EV multiple used in valuation is:
A. Price-to-Earnings (P/E) ratio
B. EV/EBITDA
C. Price-to-Book (P/B) ratio
D. Dividend Yield
EV/EBITDA is a widely used multiple in enterprise valuation as it compares total firm value to operating profitability.
13. One advantage of EV multiples over equity multiples is that they:
A. Account for both equity and debt financing
B. Ignore operational profitability
C. Only focus on dividends
D. Are irrelevant for comparing firms of different sizes
EV multiples consider both equity and debt, making them suitable for comparing firms with different capital structures.
14. Which of the following is a limitation of EV multiples?
A. Requires detailed forecasting of cash flows
B. Ignores debt and cash levels
C. Cannot be used for asset-light companies
D. Can be distorted if industry comparables are not similar
EV multiples are meaningful only when comparable companies are similar in industry, size, and capital structure; otherwise, valuation can be misleading.
15. EV/Revenue multiple is most suitable for:
A. Mature companies with stable earnings
B. Startups or companies with negative or volatile earnings
C. Banks and financial institutions
D. Asset-heavy manufacturing firms only
EV/Revenue is useful for valuing companies with negative or highly volatile earnings, as it focuses on top-line performance rather than profits.
16. When choosing the right multiple for valuation, the most important factor to consider is:
A. The comparability of the industry and business model
B. The historical stock price of the company
C. The number of employees in the company
D. The dividend payout of unrelated companies
The chosen multiple should be relevant to the company's industry, size, and business model to ensure meaningful comparison with peers.
17. Which of the following is a limitation of using the Book Value approach for valuation?
A. It accounts for market expectations
B. It captures intangible assets effectively
C. It ignores future growth and earnings potential
D. It adjusts for debt and cash levels
The Book Value approach reflects the accounting value of assets and liabilities and does not capture future growth, profitability, or intangible assets.
18. Book Value per Share (BVPS) is calculated as:
A. Total assets / Number of shares outstanding
B. (Shareholders' equity - Preferred equity) / Number of outstanding common shares
C. Market price per share / Earnings per share
D. Total revenue / Number of shares
BVPS measures the accounting value of common equity per share and is calculated by dividing (shareholders' equity minus preferred equity) by the number of outstanding common shares.
19. A key advantage of the Book Value approach is that it:
A. Captures market sentiment accurately
B. Considers future cash flows
C. Focuses on intangible assets
D. Provides a conservative estimate of the company's net worth
The Book Value approach is based on accounting data and gives a conservative estimate of a company's net worth, useful as a floor valuation.
20. When using multiples based on book value, which industry is most appropriate?
A. Capital-intensive and asset-heavy industries like banks and manufacturing
B. Software startups
C. E-commerce companies with minimal assets
D. Companies with volatile revenue streams and no tangible assets
Book value multiples are most meaningful for asset-heavy industries where tangible assets dominate the balance sheet.
21. The Stock and Debt Approach in valuation primarily focuses on:
A. Valuing only equity based on market price
B. Estimating cash flows for future operations
C. Determining the value of a firm by separately valuing its equity and debt components
D. Using historical cost of assets only
The Stock and Debt Approach values a company by assessing the market value of its equity (stock) and debt separately, then combining them to get the total firm value.
22. Which of the following is an essential requirement for applying the Stock and Debt Approach?
A. Only the book value of equity is needed
B. Market values of both equity and debt
C. Projected dividends only
D. Historical cash flows of the firm
The Stock and Debt Approach requires market values of both equity and debt to accurately determine the total enterprise value of the firm.
23. A limitation of the Stock and Debt Approach is that:
A. Market value of debt may not be easily observable
B. It ignores capital structure entirely
C. It is applicable only to banks
D. It does not account for equity at all
The approach may be limited by the difficulty in determining the market value of debt, especially for privately held or illiquid debt instruments.
24. In the Stock and Debt Approach, which of the following statements is true?
A. Only equity is considered; debt is ignored
B. Only book values are used for debt and equity
C. Only dividends are considered in equity valuation
D. Both equity and debt are valued separately and then summed to get total firm value
The approach separately values equity and debt (preferably at market value) and combines them to determine the total enterprise value.
25. Which type of companies benefit most from the Stock and Debt Approach?
A. Companies with no debt
B. Companies with only short-term liabilities
C. Firms with significant debt and equity financing
D. Companies with only intangible assets
Firms with both significant debt and equity benefit most from this approach because it accounts for all major components of capital structure.
