Choose wisely. There is only one correct answer to each question.
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1.
Which stock valuation approach is more straightforward?
Intrinsic value. Intrinsic value does not require much context to understand, as the ratio-based approaches do.
2.
If Acme Company has $5 million in cash and long-term debt of $12 million and a market capitalization of $300 million, what is the firm's enterprise value?
$307 million. Enterprise value is equal to market cap plus long-term debt, minus cash. In Acme's case, that's $300 million + $12 million - $5 million, which yields $307 million.
3.
Suppose you have found an incredibly good company to invest in, but its stock price on the market is much higher than its valuation suggests it should be. Is this a good investment, financially speaking?
Probably not. Generally, any stock that is priced higher than its valuation suggests is probably not a good investment.
4.
When valuing a business, which is easier to measure?
Actual assets and liabilities. These can be gleaned in current time from financial statements.
5.
With a P/E of 35, Acme Corp. is which of the following?
It can't be determined with the information provided. Simply knowing that Acme has a P/E of 35 does not provide you with enough context to determine much about its valuation. To use a ratio-based valuation method, you would need other data points such as the P/E of the market as a whole, the P/Es of the company's main competitors, and the company's historical P/Es.
