Question

In: Finance

A. Determine when a cash flow model is an appropriate model to value companies? B. Discuss investment situations when using P/B can be misleading?

A. Determine when a cash flow model is an appropriate model to value companies?

B. Discuss investment situations when using P/B can be misleading?

C. In the table below, compare to assess the value of each stock?

Solutions

Expert Solution

A.

Discounted cash flow models are widely used by analysts to value companies. Cash flow modelling enables companies to manage solvency more proactively. It improves the sustainability of the organisation and it improves the understanding of the impact of drivers on cash flow, leading to better decisions. Modelling facilitates cash driver target setting, and it provides a basis for enhanced analysis and reporting of cash flow performance against targets as well as earlier indicators of expected future cash flows. Cash flow modelling also improves understanding of the cash impact of investment decisions, and it improves access to capital, as capital providers have more confidence.

 

B.

Situation where P/B ratio can be misleading can be as follows-

Capital Intensive Industries

The P/B ratio is only considered useful in practice when applied to capital-intensive businesses, such as energy or transportation firms, large manufacturers, or financial businesses with a significant amount of assets on their books.

Intangible Assets

Book value ignores intangible assets such as a company's brand name, goodwill, patents, and other intellectual property. That means it does not carry much meaning for service-based firms with few tangible assets.

C.

I think peer median has the highest value since the trailing PE is 13.3 which is industry average , growth rate and beta is 11% and 1.3 respectively which again is second best in the industry therefore it is best.


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