Stock Advisor Stock Valuation Techniques 1 — Questions and Answers
Question 1: What is 'intrinsic value' in stock valuation?
- The current market price of a stock
- The estimated true worth of a stock based on fundamental analysis, independent of its market price (Correct answer)
- The book value of a company's assets
- The average of analyst price targets
Correct answer: The estimated true worth of a stock based on fundamental analysis, independent of its market price
Intrinsic value is the calculated or estimated true worth of a stock based on fundamentals like earnings, cash flows, and assets, which may differ from its current market price.
Question 2: What does 'EV/EBITDA' measure and why is it used?
- Enterprise value relative to earnings before interest, taxes, depreciation, and amortization — useful for comparing companies regardless of capital structure (Correct answer)
- Equity value relative to earnings before taxes — used for financial companies only
- Total enterprise value divided by annual revenue — used only for startups
- Earnings value divided by total assets — used to compare return on assets
Correct answer: Enterprise value relative to earnings before interest, taxes, depreciation, and amortization — useful for comparing companies regardless of capital structure
EV/EBITDA compares enterprise value to EBITDA, making it useful for comparing companies with different debt levels and tax situations across industries.
Question 3: What is 'dividend discount model' (DDM) used for?
- Calculating total dividends received over a period
- Valuing a stock based on the present value of expected future dividends (Correct answer)
- Comparing dividend yields across peer companies
- Estimating ex-dividend date price adjustments
Correct answer: Valuing a stock based on the present value of expected future dividends
The DDM values a stock by discounting its expected future dividends back to the present, making it most applicable to companies with stable, predictable dividend streams.
Question 4: What is 'precedent transaction analysis' in stock valuation?
- Reviewing past earnings revisions to project future growth
- Valuing a company by looking at prices paid in similar M&A deals (Correct answer)
- Analyzing historical insider trades for valuation signals
- Comparing past P/E ratios to current ones
Correct answer: Valuing a company by looking at prices paid in similar M&A deals
Precedent transaction analysis values a company by examining the multiples paid in similar past M&A transactions, often incorporating a control premium.
Question 5: What is the 'PEG ratio' and what does it add over the standard P/E?
- Price-to-Earnings-Growth ratio — adjusts the P/E for the company's earnings growth rate to better assess valuation (Correct answer)
- Profit-to-Equity-Growth ratio — measures earnings growth versus shareholder equity growth
- Price-to-EBITDA-Growth ratio — adjusts EV/EBITDA for revenue growth
- Portfolio-to-Earnings-Guidance ratio — compares portfolio returns to company guidance
Correct answer: Price-to-Earnings-Growth ratio — adjusts the P/E for the company's earnings growth rate to better assess valuation
The PEG ratio divides the P/E by the earnings growth rate, helping investors determine whether a high P/E is justified by strong growth — a PEG below 1 is often considered attractive.
Question 6: What is 'enterprise value' (EV)?
- A company's stock market capitalization only
- The total value of a company including market cap, debt, and minus cash — representing what an acquirer would pay (Correct answer)
- Total assets minus total liabilities on the balance sheet
- Annual revenue multiplied by the industry average P/E
Correct answer: The total value of a company including market cap, debt, and minus cash — representing what an acquirer would pay
Enterprise value is calculated as market cap plus total debt minus cash and equivalents, representing the theoretical takeover price of a business regardless of capital structure.
Stock Advisor Stock Valuation Techniques 1
What is 'intrinsic value' in stock valuation?