Question

5. Firms that do not pay any dividends cannot be valued using dividend discount model but can be valued using residual income model. 6. A company's cost of debt is the contracted rate that it pays on its outstanding debt. 7. Enterprise value (EV) to EBITDA ratio is better than price to earnings ratio for relative valuation. 8. Price to EBITDA ratio should not be used for relative valuation.

state true or false and briefly explain your answer

Answer 1

5) True.

A firm that is not paying dividends can not be valued using divvidend discount model but it can be valued using residual income model. In residual income, one need to find residual income which is nothing but net income less Equity charge.

6) True

Cost of debt is nothing but the interest rate the company is paying on it's outstanding debt. If long term loan carried 8% interest rate than cost of debt is 8%

7) True

EV to EBIDTA ratio is better than P/E ratio as it values the worth of entire company. PE ratio gives equity a multiple where as EV to EBIDTA gives the firm multiple

8) False

Price to EBIDTA is used for relative valuation. It is used to find undervalued stock amoung peers.