Question
You are estimating the price/earnings multiple to use to value company A by looking at the average price/earnings multiple of comparable firms. Suppose the following
You are estimating the price/earnings multiple to use to value company A by looking at the average price/earnings multiple of comparable firms. Suppose the following are the price/earnings ratios of firms in the industry:
| Firm | Share Price | Total Earnings | Share outstanding |
| B | 130 | 5,000,000 | 1,000,000 |
| C | 30 | 6,000,000 | 2,000,000 |
| D | 168 | 30,000,000 | 5,000,000 |
| E | 100 | 12,000,000 | 3,000,000 |
- What is the average P/E ratio?
- Would you use all the comparable firms in calculating the average? Why or why not?
- What assumptions are you making when you use the industry-average P/E ratio to value company A?
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Multinational Financial Management
Authors: Shapiro A.C.
9th International Edition
8126536934, 9788126536931
