Question #13
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
The observation that negative price to earnings (P/E) ratios are meaningless and prices are never negative is used to justify which valuation approach?
Answer Choices:
A. Earnings yield
B. Dividend discount model
C. Dividend yield
Explanation
The observation is used to justify the earnings yield approach. Negative P/E ratios are
meaningless. In such cases, it is common to use normalized earnings per share (EPS)
and/or restate the ratio as the earnings yield or E/P because price is never negative. Price
to earnings (P/E) ranking can then proceed as usual.