Which of the following statements is false?
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A. B. C. D.A
Let's analyze each statement one by one to determine which one is false:
A. The price-to-book value ratio is seldom greater than one for industrial firms. This is caused by the fact that due to accounting rules, book value will exceed market value in most firms.
The price-to-book value ratio (P/B ratio) is calculated by dividing the market price per share by the book value per share. It is used to assess whether a stock is undervalued or overvalued by comparing its market price to its book value.
The statement suggests that the P/B ratio is seldom greater than one for industrial firms because, due to accounting rules, book value will exceed market value in most firms. However, this statement is false. The P/B ratio can be greater than one for industrial firms if the market values their assets, earnings potential, or growth prospects higher than their accounting book value. The P/B ratio is influenced by various factors such as market sentiment, industry dynamics, and growth expectations.
B. Since cash flows are more stable than earnings, the price-to-cash flow ratio should be used in conjunction with the P/E ratio.
The price-to-cash flow ratio (P/CF ratio) is used to assess the valuation of a company by comparing its market price per share to its cash flow per share. Cash flows are considered more stable than earnings because they reflect the actual cash generated by a company's operations, while earnings can be influenced by accounting rules and non-cash items.
The statement suggests that the P/CF ratio should be used in conjunction with the price-to-earnings ratio (P/E ratio) due to the stability of cash flows. This statement is generally true. By considering both the P/CF ratio and the P/E ratio, investors can gain a more comprehensive understanding of a company's valuation. The P/CF ratio provides insights into the cash generation capability of a company, while the P/E ratio reflects the market's perception of a company's earnings potential. Using both ratios together can provide a more balanced view of a company's valuation.
C. Economic value added (EVA) is a present value technique used to measure management's ability over time to add value to the firm through their investment decisions.
Economic value added (EVA) is a financial metric that measures a company's profitability after considering the cost of capital. It is calculated by deducting the company's cost of capital from its net operating profit after tax (NOPAT) and multiplying the result by the invested capital. EVA aims to assess whether a company's management has created value for shareholders through their investment decisions.
The statement suggests that EVA is a present value technique used to measure management's ability over time to add value to the firm. This statement is true. EVA takes into account the company's future cash flows and discounts them to the present value to determine the value added by management over time. By considering the cost of capital, EVA provides a measure of how effectively management has utilized the firm's resources to generate returns for shareholders.
D. Market Value Added equals the market value of the firm's capital minus the adjusted book value of the firm's capital.
Market Value Added (MVA) is a financial metric that represents the difference between the market value of a company's capital (equity and debt) and the adjusted book value of its capital. MVA indicates whether a company has created value for its shareholders based on the market's valuation of its assets.
The statement suggests that MVA equals the market value of the firm's capital minus the adjusted book value of the firm's capital. This statement is true. MVA is calculated by subtracting the adjusted book value of a company's capital from its market value. The adjusted book value accounts for any accounting adjustments or impairments that may