Question #122
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: 42
Status: Unattempted
Question
A firm is better valued using the discounted cash flow approach than the P/E multiples approach when:
Answer Choices:
A. dividend payout is low
B. expected growth rate is very high
C. earnings per share are negative
Explanation
P/E multiples are not meaningful when the earnings per share are negative. While this
problem can be partially offset by using normalized or average earnings per share, the
problem cannot be eliminated.