Question

True or false

In the framework of relative valuation, if two companies have the same P/E ratios
then both firms will generally have different EV/EBITDA ratios.

All else being equal, a company with a large EV/Capital ratio will tend to have a large return on capital (ROC).

In the context of relative firm valuation, a company whose cash holdings are equal to $0
will have an enterprise value (EV) greater than zero. (Assume total assets are positive.)

A firm's EV/EBIT(1-T) ratio will always be greater than the same firm's EV/EBIT ratio. (Assume a positive tax rate T.)

In the context of relative valuation, it makes sense to use the equation PE = 13 + ( 2 × g ) to adjust a company's PE ratio for differences in growth (g). (Assuming statistical significance.)

Answer 1

1)False

P/E ratio=Market price of share/Earning per share

But what about debt; that is also part of capital, so EV/EBITDA comes in..

EV / EBITDA = Enterprise Value / Earnings before interest, tax, depreciation, amortization

Enterprise Value = Market value of equity + Market value of Debt – Cash on hand

• Investors can use both the EV/EBITDA and the price-to-earnings (P/E) ratios as metrics to analyze a company's potential as an investment.
• Thus if if two companies have the same P/E ratios then thay may genrally have similar EV/EBITDA ratio also

2) True

EV/Capital=Return on capital employed(ROCE)*EBIT MULTIPLE

ROCE=EBIT/CAPITAL EMPLOYED(Numerator)

AND EV/EBIT Multiple IS Denominator.

So higher ratio means higher ROCE.

3)TRUE

EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents

IF CASH IS ZERO EV IS POSITIVE.