Hello, I was invited to take a test for an M&A boutique. I had a doubt regarding 2 multiple choice questions.
1) The price to book value ratio is a helpful valuation when examine companies: a) That have primarily liquid asset b) With higher ROE c) With similar profitability margins
2) Stock Dividends and Stock splits differ in that: a) Splits are paid in additional shares, whereas a stock div results in a replacement of outstanding shares with new issue of shares b) in a stock split a larger n. of new shares replaces the outstanding shares c) a stock dividend results in a decline of the par value per share
Can someone tell me the answer of the 2 questions and please explain me why? (especially Q.1)
Thanks!
Have you tried asking this question https://www.wallstreetoasis.com/forum/corporate-finance-fldp</a">here?
1 is b since roe and p/b are typically looked at together in balance sheet centric industries (e.g. Banks). They should generally move in the same direction.
2 I guess is b (though the answer is clumsily phrased) since a and c are wrong
Thank you very much. Just one thing: Are you sure about answer 1? B says that the P/BV is a helpful valuation when examine companies "with HIGHER roe", so there could be other industries where ROE is higher. It doesn't really says "valued with ROE". I agree saying that Banks and Insurance comp are usually valued with P/BV and this ratio is often looked at with the ROE, so I initially thought that B was the right answer too coz it was releted to ROE - but is the "HIGHER" that confused me. So I answered A thinking that FI companies like Insurance have a lot of assets invested in the public market (bonds and stocks) that are very liquid. It is probably wrong but tell me if what I thought makes sense for you too.
edit: will circle back later
Yeah this is right and makes sense. illiquid assets are likely to have a big difference between book and market value, which would render p/bk unhelpful.
I kinda still stand behind my view that p/bv is helpful for sanity checking companies with a high RoE
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