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1.
After finding a great business, determining the company's valuation is _______.
Fundamental. Valuing a stock is a fundamental component of the investing process. Even the greatest company in the world might not be an attractive investment if the stock is priced too high.
2.
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.
3.
Which stock valuation approach is more straightforward?
Intrinsic value. Intrinsic value does not require much context to understand, as the ratio-based approaches do.
4.
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.
5.
What are the two parts to the value of a business?
The current value of the business's assets and liabilities, and the value of the business's expected future profits. Investors take both into account when valuing a company.
