Question #12
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: 5
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
One disadvantage of using the price/sales (P/S) multiple for stock valuation is that:
Answer Choices:
A. sales are relatively stable and might not change even though earnings and value might change significantly
B. profit margins are not consistent across firms within an industry
C. P/S multiple does not provide a framework to evaluate the effects of corporate policy decisions and price changes
Explanation
The stability of sales (relative to earnings and book value) can be a disadvantage. For
example, revenues may remain stable but earnings and book values can drop significantly
due to a sharp increase in expenses.