Question #105

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: 36

Status: Unattempted

Correct Answer: A

Part of Context Group: Q105-107 First in Group
Shared Context
- Barnes is contemplating the use of a price/earnings ratio to value a start-up medical technology firm. Which of the following is the most compelling reason not to use the P/E ratio? A) P/E ratios for medical-technology firms with different specialties are not comparable. B) The company is likely to be unprofitable. C) Earnings per share are not a good determinant of investment value for medical- technology companies.
Question
Based on their responses to Powell, which of the analysts is most likely concerned about earnings volatility?
Answer Choices:
A. Lincoln
B. Barnes
C. Bosley
Explanation
Book value tends to be more stable than earnings. Therefore, Lincoln's favorite valuation tool, the P/B ratio, is less volatile than the P/E. The P/S ratio tends to be less volatile than the P/E as well, but Bosley's other favorite, earnings yield, is just as volatile. The method preferred by Barnes is likely to be more volatile than the P/B ratio.
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