When Attempting to Value One Firm Using P/E Comps from a Few

question 65

Multiple Choice

When attempting to value one firm using P/E comps from a few similar firms,

• A)a value-weighted average of the comparable P/Es should be used.
• B)it is better to use the median P/E ratio, not the mean P/E ratio of the comparable firms.
• C)it is better to average the earnings yields, rather than the P/E ratios, and then invert the average earning yield back to a P/E ratio.
• D)Both B and C are reasonable methods to use.

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Definitions:

Law of Demand

The principle stating that, all else being equal, as the price of a good increases, its demand falls and vice versa.

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The transitional period from the warm summer months to the cooler autumn season, often marked by changes in weather, fashion, and consumer behavior.

Substitute Good

A product or service that can be used in place of another to satisfy similar needs or demands.