Understanding Price to Earnings and Enterprise Value

The video explores the price to earnings conundrum by comparing two entrepreneurs who purchase identical assets but finance them differently. It highlights how capital structure impacts net income and market valuation. The video introduces enterprise value as a more comprehensive metric than the price to earnings ratio, explaining its calculation and application. It concludes with a discussion on using enterprise value to operating profit as a valuation metric.

What is the main difference in how the two entrepreneurs financed their pizzerias?

• One used a mix of equity and debt, the other used only equity.

• Both used a mix of equity and debt.

• Both used only equity.

• One used only equity, the other used only debt.

How does leverage affect the growth of earnings per share?

• Leverage stabilizes the growth of earnings per share.

• Leverage decreases the growth of earnings per share.

• Leverage has no effect on the growth of earnings per share.

• Leverage increases the growth of earnings per share.

Why might the price to earnings ratio be misleading for companies with different capital structures?

• It does not account for differences in revenue.

• It ignores the impact of non-operating income.

• It only considers short-term growth.

• It overlooks how companies are capitalized.

What components are considered when calculating enterprise value?

• Equity, cash, and liabilities.

• Market cap, revenue, and cash.

• Market cap, debt, and cash.

• Revenue, debt, and equity.

Why is cash subtracted when calculating enterprise value?

• Cash is considered a liability.

• Cash is not part of the operating assets.

• Cash is irrelevant to the calculation.

• Cash increases the enterprise value.

What is a better metric than price to earnings for evaluating companies with different capital structures?

• Net income.

• Operating profit.

• Gross profit.

• Revenue.

What does EBITDA stand for?

• Earnings Before Interest, Taxes, Depreciation, and Amortization.

• Earnings Before Interest, Taxes, Dividends, and Amortization.

• Earnings Before Income, Taxes, Dividends, and Amortization.

• Earnings Before Income, Taxes, Depreciation, and Amortization.

How is the enterprise value to operating profit ratio used?

• To evaluate the company's profitability.

• To assess the company's market share.

• To estimate the company's enterprise value.

• To determine the company's revenue growth.

What is the significance of applying a multiple to operating profit?

• It calculates the company's cash flow.

• It estimates the enterprise value.

• It determines the company's market cap.

• It helps in calculating the company's debt.

What is the purpose of introducing EBITDA in the next video?

• To explain a new method of calculating revenue.

• To provide a deeper understanding of enterprise value.

• To discuss a new type of asset.

• To introduce a new financial statement.