Question

T/F question

1,A company forecast to have zero economic value added (EVA) forever, will be trading at
EV/Capital ratio equal to one. (All else equal.)

2,In the context of relative valuation, it makes sense to use the equation PB = 3
−
(2
× β
)
to adjust a company's PB ratio for differences in
β
. (Assuming statistical significance.)

3,In practice, we can find a firm's net profit margin by dividing the firm's PS ratio by the
firm's PB ratio.

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

5,A firm's EV/EBITDA ratio will always be greater than the same firm's EV/EBIT ratio.

Answer 1

1. EVA is a measure of company financial performance based on the residual wealth calculated by deducting its cost of copital from its operating profits adjusted for taxes on a cash basis.Zero EVA means that there is no value generated from the invested capital and it is forever therefore EV will be equal to capital always as there is no economic benifit.Therefore trading at EV/capital will be equal to one. The statement is correct.

2.Under the relative valuation PB ratio is the price to book value ratio use to calculate the valuation of the firm.Beta(B) is basically rate of change in the market therefore to consider changes it should be included in the calculation.Therefore the given statement is correct.

3.The PB ratio measures the market valuation of the company relative to its book values whereas PS ratio is the sales multiple that looks at a company stock price relative to the sales.By dividing both ratios we get Sales/book value and it does not give the net profit margin therefore the statement is incorrect.

4. The stament is correct because having the same EV/S ratio imply that firms to have different P/S ratios.

5. The statement is incorrect because EBITDA is either equal or greater than EBIT therefore EV/EBITDA will always be equal or smaller than EV/EBIT.