Question #9
Reading: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples
PDF File: Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples.pdf
Page: 4
Status: Correct
Correct Answer: A
Question
Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 38. Based on the method of comparables, an analyst would most likely conclude that PTI should be:
Answer Choices:
A. bought as an undervalued stock
B. sold as an overvalued stock
C. sold short as an overvalued stock
Explanation
The price per dollar of earnings is considerably lower than that for the median of the peer
group, which implies that it may well be undervalued.