Question
Which of the following statements about market-based approaches to valuation is true? a) Under the price earnings (P/E) method, the multiplier for earnings is the
Which of the following statements about market-based approaches to valuation is true?
a) Under the price earnings (P/E) method, the multiplier for earnings is the inverse of the capitalization rate, which reflects the risk of the earnings, so a higher P/E ratio indicates that investors have less confidence in the firm.
b) One of the advantages of using the P/E ratios of similar listed businesses to value an unlisted business is that there is no need to consider their choice of accounting policies.
c) If a firms earnings are $4 per share with no growth expected into the future and its capitalization rate is 10%, based on the P/E method, its value should be $40 per share.
d) One of the advantages of the EV/EBITDA multiplier method is that there is no need to consider the firms future earnings potential when valuing the firm.
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