Question #78
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: 28
Status: Unattempted
Correct Answer: B
Question
P/E multiples are often computed using the average of the multiples of comparable firms, because:
Answer Choices:
A. it is very easy to find comparable firms that have the same business mix and risk and growth profiles
B. it is conceptually very straightforward
C. it provides the most accurate results
Explanation
The use of comparable firms is quite common, because it is conceptually very
straightforward. Also, it does not require the analyst to make specific assumptions
regarding growth, risk, and other variables. However, it is often difficult to find
comparable firms, since even within the same industry different firms can have different
business mixes and risk and growth profiles.