Question #64
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: 22
Status: Correct
Correct Answer: A
Question
An argument against using the price-to-earnings (P/E) valuation approach is that:
Answer Choices:
A. earnings power is the primary determinant of investment value
B. research shows that P/E differences are significantly related to long-run average stock returns
C. earnings can be negative
Explanation
Negative earnings render the P/E ratio useless. Both remaining factors increase the
usefulness of the P/E approach.