The average trailing PE ratio of publicly traded auto parts companies in the US is 20.0. You own a regional auto parts firm in the Northwest that is privately held and has no debt. In the last year, the firm earned $1.5 million.

You are looking to sell your firm to a private equity firm and are arguing the valuation of the firm should be 20 * $1.5 million = $30 million dollars.

• Why might this be a biased estimate of the value of the firm?
• What are one or two reasons why the estimate might be biased?