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1.
Imagine that your company has 20 million shares of stock outstanding, the stock is currently trading at $10 per share, the price/earnings ratio is 20, and your sales this year are $5 million. As the chief financial officer, you must calculate your company's market capitalization. What is it?
$200 million. Market cap is stock price multiplied by number of shares outstanding, so the figure is $200 million. Price/earnings ratio and sales do not factor into market cap.
2.
The price/cash flow ratio measures cash rather than paper profits.
True. For this reason, the ratio has a certain reliability that management likes.
3.
Companies in which of the following industries would likely have the highest price/book ratios?
Pharmaceuticals. The highest P/B ratios are in fields such as pharmaceuticals and consumer products, where intangibles are more important.
4.
The three types of a business's profit margins are gross margin, net margin, and _______.
Operating margin.
5.
If a company's P/E is 30, its earnings yield is _______.
3.3%. The earnings yield is calculated by inverting the P/E ratio. In this case the earnings yield is 1/30 or 3.3%.
6.
Earnings per share (EPS) is a company's net income divided by its number of shares outstanding.
True. As such, EPS can give you a quick idea of a company's profitability, though it has its limits.
7.
All else equal, what does a rising dividend yield mean for a stock?
The stock is becoming less expensive. A rising dividend yield means that the stock is becoming less expensive because a higher percentage of the stock price is being paid out in annual dividends.
8.
An advantage to using the price/sales ratio over the price/earnings ratio is that sales are harder to manipulate than earnings.
True. Sales are more straightforward. Also, there are fewer accounting estimates involved than with earnings.
