Question #96
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: 33
Status: Unattempted
Correct Answer: A
Question
Enhanced Systems, Inc., (ESI) has a leading price to sales (P/S) of 0.18 while the median leading P/S of a peer group of companies within the industry is 0.10. Based on the method of comparables, an analyst would most likely conclude that ESI should be:
Answer Choices:
A. sold or sold short as an overvalued stock
B. bought as an undervalued stock
C. bought on margin as an undervalued stock
Explanation
The price per dollar of sales is considerably higher than that for the median of the peer
group, which implies that it may well be overvalued.