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Stocks 401: Understanding Value

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1.
With a P/E of 35, Acme Corp. is which of the following?
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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.
2.
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
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True. Valuation should be standard procedure for all investors. Buying an overpriced stock is ultimately not very profitable.
3.
Acme Company's shares trade at $15 and the firm has a total of 20 million shares outstanding. What is Acme's market capitalization?
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$300 million. Acme's market capitalization is $300 million. Recall that market capitalization is calculated by multiplying a company's share price by its number of shares outstanding.
4.
When valuing a business, which is easier to measure?
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Actual assets and liabilities. These can be gleaned in current time from financial statements.
5.
Which stock valuation approach is more straightforward?
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Intrinsic value. Intrinsic value does not require much context to understand, as the ratio-based approaches do.