Quiz: Valuation Metrics and Performance¶
Test your understanding of valuation frameworks, performance metrics, and benchmarking with these questions.
1. What does the price-to-earnings (P/E) ratio measure?¶
- Stock price relative to annual earnings per share
- Total company debt relative to equity
- Revenue growth rate over time
- Dividend payout as percentage of earnings
Show Answer
The correct answer is A. The P/E ratio measures the stock price relative to annual earnings per share, indicating how much investors are willing to pay for each dollar of earnings. A P/E of 20x means investors pay $20 for every $1 of earnings. Option B describes the debt-to-equity ratio. Option C describes revenue growth metrics. Option D describes the dividend payout ratio.
Concept Tested: P/E Ratio Insights
Bloom's Level: Remember
2. Which metric represents a company's total worth including debt and excluding cash?¶
- Market Capitalization
- Book Value
- Enterprise Value
- Free Cash Flow
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The correct answer is C. Enterprise Value (EV) represents a company's total worth calculated as market capitalization plus total debt minus cash and equivalents. EV is useful for comparing companies with different capital structures. Market capitalization (A) only reflects equity value. Book value (B) is accounting-based net assets. Free cash flow (D) is a performance metric, not a valuation measure.
Concept Tested: Enterprise Value Metrics
Bloom's Level: Remember
3. What does "beta" measure in the context of risk assessment?¶
- A company's credit rating
- The probability of bankruptcy
- Management's risk tolerance
- A security's volatility relative to the broader market
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The correct answer is D. Beta quantifies a security's volatility relative to the broader market (typically measured against the S&P 500). A beta of 1.0 means the stock moves in line with the market, >1.0 indicates higher volatility, and <1.0 indicates lower volatility. Option A describes credit ratings from agencies like Moody's or S&P. Option B relates to default risk models. Option C is a qualitative assessment, not a quantitative metric.
Concept Tested: Beta Risk Measurement
Bloom's Level: Understand
4. A company's stock trades at $50 with 100 million shares outstanding. What is its market capitalization?¶
- $500 million
- $5 billion
- $50 billion
- $100 million
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The correct answer is B. Market capitalization is calculated as stock price × outstanding shares = $50 × 100 million = $5 billion. Option A incorrectly calculates as $5 × 100M. Option C multiplies by 1 billion instead of 100 million. Option D uses only the share count.
Concept Tested: Market Capitalization
Bloom's Level: Apply
5. What is "free float" in the context of stock ownership?¶
- Shares readily available for public trading
- Shares held by company insiders
- Treasury shares repurchased by the company
- Shares pledged as collateral for loans
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The correct answer is A. Free float represents shares readily available for public trading, excluding shares held by insiders, controlling shareholders, and restricted stock. Higher free float generally means better liquidity and less price volatility. Option B describes insider holdings (which reduce free float). Options C and D represent shares not available for trading.
Concept Tested: Free Float Metrics
Bloom's Level: Remember
6. When comparing two companies in the same industry, Company A has institutional ownership of 85% while Company B has 45%. What does this ownership concentration difference potentially indicate?¶
- Company A is necessarily more valuable than Company B
- Company B has better growth prospects
- Company A will always have lower stock volatility
- Company A may have greater credibility with professional investors but potentially lower retail participation
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The correct answer is D. High institutional ownership (85% for Company A) suggests greater credibility with professional investors who conduct extensive due diligence, but may indicate lower retail investor participation and reduced liquidity in some cases. Option A is incorrect—ownership structure doesn't determine value. Option B can't be inferred from ownership alone. Option C is wrong—institutional concentration can sometimes increase volatility if large holders trade simultaneously.
Concept Tested: Institutional Share Trends
Bloom's Level: Analyze
7. What is the primary purpose of peer benchmarking in investor relations?¶
- To copy competitors' strategies exactly
- To compare company metrics and practices against similar organizations for context and competitive positioning
- To determine executive compensation levels
- To set stock price targets
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The correct answer is B. Peer benchmarking compares company metrics (valuation multiples, growth rates, margins, etc.) and practices against similar organizations to provide context for investors and assess competitive positioning. Option A mischaracterizes benchmarking—it informs strategy but doesn't dictate copying. Option C is one application but not the primary IR purpose. Option D confuses benchmarking (company comparisons) with valuation target-setting.
Concept Tested: Peer Benchmarking Tools
Bloom's Level: Understand
8. In a DCF (discounted cash flow) valuation, what happens to the present value of future cash flows when the discount rate increases?¶
- Present value increases
- Present value remains unchanged
- Present value becomes negative
- Present value decreases
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The correct answer is D. In DCF valuation, when the discount rate increases, the present value of future cash flows decreases because future cash flows are discounted more heavily. This inverse relationship reflects higher required returns (higher discount rates) reducing what investors will pay today for future cash. Option A is backwards. Option B ignores the mathematical relationship. Option C is incorrect—positive cash flows always have positive present value, though it approaches zero with very high discount rates.
Concept Tested: DCF Valuation Tools
Bloom's Level: Understand
9. What does a declining "dividend yield" indicate when the stock price is rising and dividends remain constant?¶
- The company is in financial distress
- The company is cutting dividend payments
- The stock price appreciation is outpacing the fixed dividend, lowering the yield percentage
- Investors expect bankruptcy
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The correct answer is C. Dividend yield = Annual Dividend / Stock Price. When the stock price rises and dividends remain constant, the yield percentage declines. For example, a $2 dividend on a $40 stock = 5% yield, but the same $2 dividend on a $50 stock = 4% yield. Option A is incorrect—rising stock prices suggest confidence, not distress. Option B contradicts the premise (dividends remain constant). Option D misinterprets—rising prices indicate optimism, not bankruptcy concerns.
Concept Tested: Dividend Yield Trends
Bloom's Level: Analyze
10. What does "earnings per share (EPS) growth" measure?¶
- Total company revenue changes
- Rate of change in profits allocated to each outstanding share over time
- Number of shares issued each quarter
- Dividend increases year-over-year
Show Answer
The correct answer is B. EPS growth measures the rate of change in company profits allocated to each outstanding share over time, calculated as (Current Period EPS - Prior Period EPS) / Prior Period EPS. It's a key metric investors use to assess profitability improvement. Option A describes revenue growth, not EPS growth. Option C describes share count changes (which affect EPS but aren't EPS growth itself). Option D describes dividend growth, a separate metric.
Concept Tested: Earnings Per Share Growth
Bloom's Level: Remember
Quiz Statistics¶
- Total Questions: 10
- Bloom's Taxonomy Distribution:
- Remember: 4 questions (40%)
- Understand: 4 questions (40%)
- Apply: 1 question (10%)
- Analyze: 1 question (10%)
- Answer Distribution:
- A: 2 questions (20%)
- B: 3 questions (30%)
- C: 2 questions (20%)
- D: 3 questions (30%)
- Concepts Covered: 10 of 26 chapter concepts (38%)
- Estimated Completion Time: 15-20 minutes
Next Steps¶
After completing this quiz:
- Review the Chapter Summary to reinforce valuation concepts
- Work through the Chapter Exercises for hands-on calculation practice
- Proceed to Chapter 5: AI and Machine Learning Fundamentals