"Equity Investments":Forward price-earnings ratio method

来源: 正保会计网校编辑：小鞠橘桔 2020/12/09 14:21:13　字体：大小

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Questions 1:

Which of the following statements concerning different valuation approaches is most accurate?

A 、One advantage of the three-stage dividend discount model (DDM) model is that it is equally appropriate to young companies entering the growth phase and those entering the maturity phase.

B 、It is advantageous to use asset-based valuation approaches rather than forward-looking cash flow models in the case of companies that have significant intangibles.

C、 The justified forward price-to-earnings ratio (P/E) approach offers the advantage of incorporating fundamentals and presenting intrinsic value estimations.

Questions 2:

An industry experiencing intense competitive rivalry among incumbent companies is best characterized by:

A 、differentiated products and low exit barriers.

B 、a small number of competitors and low fixed costs.

C 、customers basing purchase decisions largely on price.

View answer resolution

【Answer to question 1】C

【analysis】

C is correct. The justified forward P/E approach offers the advantage of incorporating fundamentals and presenting intrinsic value estimations.

A is incorrect. The three-stage DDM model is appropriate to young companies entering the growth phase but not those entering the maturity phase. For such companies, the two-stage DDM model is appropriate.

B is incorrect. In the case of companies that carry significant intangibles, the use of forward looking cash flow models is more advantageous than the asset-based valuation models.

【Answer to question 2】C

【analysis】

C is correct. The factor that most influences customer purchase decisions is likely to also be the focus of competitive rivalry in the industry. In general, industries in which price is a large factor in customer purchase decisions tend to be more competitive than industries in which customers value other attributes more highly.

A is incorrect. Industries experiencing more intense rivalry among incumbent companies are characterized by undifferentiated products and high exit barriers.

B is incorrect. Industries experiencing more intense rivalry among incumbent companies are fragmented among many small competitors and they tend to have high fixed costs.

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