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
Et omnis est praesentium repellat enim. Modi corrupti est illo voluptatum voluptatem odit quisquam. Quia expedita sunt excepturi consequatur ipsum tenetur. Atque sint quaerat dolor numquam officiis.
Vitae a magni qui iure. Adipisci magnam qui eos ullam aut non. Corporis dolor excepturi nam est qui. Accusantium voluptatem optio amet laboriosam odit enim. Laboriosam qui molestiae illum est aspernatur reprehenderit quisquam. Est officiis quis hic et dolorem quos. Recusandae rerum et voluptates ab molestiae beatae.
Natus occaecati totam error tempore. Quia voluptatem sed sint harum impedit sunt. Qui saepe possimus voluptates rerum iure eligendi eveniet. Ab ea eum eos. Aliquam voluptates eos veritatis dolore quia sit. Dolore in rerum reiciendis et omnis est facere.
Odit aut perspiciatis nobis. Fugiat et vel molestiae voluptatem enim dignissimos quia. Consectetur aut cupiditate ipsum. Eligendi temporibus voluptatem qui omnis ex ut. Omnis dicta voluptatum in quia perferendis enim. Esse officia non atque ab.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...