Question #118 - Reading 22 Market-Based Valuation - Price and Enterprise Value Multiples

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: 41

Status: Unattempted

Shared Context

- Which of the following is the normalized earnings figure for 2x10, which will be calculated by Pedroia using the average return on equity method? A) $2.63. B) $2.72. C) $2.59.

Question

Which of the following is least likely to be a limitation of the predicted P/E used by Pedroia to calculate the terminal value in his "FCF Valuation Using Forecasted Cash Flows" valuation?

Answer Choices:

A. The predictive power of the estimated regression for a different time period is uncertain

B. The relationship between P/E and the fundamental variables examined will be static

C. Multicollinearity is often a problem in time series regressions such as the one Pedroia has used

Explanation

A common limitation is that the relationships may change over time rather than remain static.

Actions

Practice Flashcards