Determine which valuation ratios is most appropriate

Assignment Help Portfolio Management

Reference no: EM13924210

Cara Partners has a client who has inquired about the valuation method best suited for comparison of companies in an industry that has the following characteristics:

• Principal competitors within the industry are located in the United States, France, Japan, and Brazil.

• The industry is currently operating at a cyclical low, with many firms reporting losses.

• The industry is subjected to rapid technological change.

Jones recommends that the client consider the following valuation ratios:

1. Price to earnings

2. Price to book value

3. Price to sales

a. Determine which one of the three valuation ratios is most appropriate for comparing companies in this industry. Support your answer with two reasons that make that ratio superior to either of the other two ratios.

The client also has expressed interest in economic value added (EVA) as a measure of company performance. Clarence Jones asks his assistant to prepare a presentation about EVA for the client. The assistant's presentation includes the following statements:

1. EVA is a measure of a firm's excess shareholder value generated over a long period of time.

2. In calculating EVA, the cost of capital is the weighted average of the after-tax yield on long-term bonds with similar risk and the cost of equity as calculated by the capital asset pricing model.

3. EVA provides a consistent measure of performance across firms.

b. Determine whether each of the statements is correct or incorrect and, if incorrect, explain why.

Explanations cannot repeat the statement in negative form but must indicate what is needed to make the statement correct.

Reference no: EM13924210

Questions Cloud

Discuss the basic elements of a professional code of ethics : Discuss the basic elements of a professional code of ethics. Compare these elements to the code of ethics for your employer or current profession

Calculate the three components of the dupont formula : Identify and calculate the three components of the DuPont formula. calculate the ROE for 2011, using the three components of the DuPont formula. calculate the sustainable-growth rate for 2011.

Diseconomies of scope between two products : When there are diseconomies of scope between two products that are separately produced by two firms, merging into a single firm can:

How would you explain the risk to the public : Imagine that you are the spokesperson for a facility that just spilled a chemical into the local waterway, that supplies the town's drinking water. How would you explain the risk to the public

Determine which valuation ratios is most appropriate : Determine which one of the three valuation ratios is most appropriate for comparing companies in this industry. Support your answer with two reasons that make that ratio superior to either of the other two ratios.

A web session can be protected against the eavesdroping : Inside the utility is code that that will erase the server's hard drive contents on January 1st, 2016.

Information technology strategic plan : Imagine that a company has recently hired you as a senior business consultant. The company is seeking to gain better traction with regard to customer satisfaction and loyalty. The company hired you because of your expertise with mobile apps, socia..

Failure of the firm accounting information system : Based on the information you researched, assess the failure of the firm's accounting information system to prevent the related fraud / embezzlement.

Significant economic effects of the researched issues : Provide a detailed description of the issues that you have researched. Analyze the most significant economic effects of the researched issues on healthcare industry. Provide at least two (2) examples of these issues to support your response.

User Account

All Pages