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1.
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.
2.
Stock valuation ratios compare a company's market value with what?
Any of the above. Valuation ratios compare market value with any of several figures about the company's finances.
3.
You should determine a company's valuation before buying its stock because doing so will help you see whether its stock is overpriced or underpriced
True. Valuation should be standard procedure for all investors. Buying an overpriced stock is ultimately not very profitable.
4.
Which of the following would not be part of a business's assets and liabilities?
Future cash flow. Future cash flow is not a part of assets and liabilities; it is the value of future expected profits.
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.
