Question #131
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: 47
Status: Unattempted
Correct Answer: B
Question
The value of a firm, calculated using the discounted cash flow (DCF) method, will be closest to the valuation using P/E multiples when P/E multiples are estimated using:
Answer Choices:
A. fundamental data
B. P/E multiples of comparable firms
C. historical P/E multiples
Explanation
In the DCF valuation method, an analyst makes specific assumptions about each variable,
such as growth, risk, payout, etc. The valuation using P/E multiples will be closest to the
one obtained using the DCF approach when fundamental data -- for growth, risk, payout,
etc. -- is used to estimate P/E multiples.