CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Which of the following statements is (are) true with respect to the use of "multipliers" in evaluating the attractiveness of particular investments?

I. Price/sales ratio would be a more ideal choice in evaluating mature companies, as opposed to young companies.
II. Price/book value ratios may be used if the return on equity for a firm is very volatile.
III. Price/cash flows is really useful when there is a wide discrepancy in the accounting methods that are employed by the companies that are being compared.
IV. These multipliers are only effective if they are used to rank the attractiveness of stocks of companies that are fairly similar in risk and growth potential.
A. II and III
B. III and IV
C. I, II, III, and IV
Explanation: I is incorrect because young companies generally do not have any earnings on which a multiple can be based. Consequently, a sales multiplier would be suitable for a young company, because then the stock price could reflect the growth rate that is captured in sales.

II is incorrect because Price/book value ratios may be used only if the return on equity for a firm is assumed to be very stable. With a stable ROPE, earnings would become a constant proportion of a firm's book value. Only then would the book value serve as a good proxy for a company's earnings.

User Contributed Comments 2

User Comment
somk I've got this very wrong. now am confident that am at the same level of knowledge as wall street analysts who make USD 1M/yr. if i got it right, i would joing University academics and earn USD 80K/yr.
shettyp lol
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