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1.
What does a company's price/sales ratio measure?
Its stock's market price divided by its sales per share. As such, it is a very useful ratio for businesses.
2.
The price/book ratio would be most useful for valuing which of the following?
A utility company. The price/book ratio is most useful for valuing a utility company. A utility firm has mostly tangible assets that are accurately measured by its book value. On the other hand, a pharmaceutical or software company has a lot of intangible assets, such as patents, that are not accurately reflected in its book value.
3.
A stock with a high dividend yield is a good bargain for an income investor to buy.
Maybe. A dividend yield can be high for many reasons, either good or bad. On the bad side, the stock price might be dropping deeply due to financial troubles; that could proportionately raise the dividend yield. Caution is always key.
4.
A company's price/earnings growth ratio uses its stock's current price in the calculation.
False. The ratio uses forward price/earnings ratio, which is a future estimate.
5.
One advantage of earnings yields over price/earnings ratios is that we can use them to compare investments in other classes.
True. This way, we can compare the returns that the different types of investments offer.
6.
Why should you be wary of using the cash return measurement for evaluating foreign companies?
They may have different definitions of cash flow. In other words, what they call cash flow and what we call cash flow may be two different things, thus skewing the usefulness of the measurement.
7.
A price/earnings ratio that uses future earnings estimates to calculate the ratio is normally called _______.
A forward price/earnings ratio. As opposed to a trailing price/earnings ratio, which looks at past earnings, the forward one uses estimates of future earnings.
