The Price/earnings Ratio, or Multiplier Approach, May Be Used for Stock

question 127

Essay

The price/earnings ratio, or multiplier approach, may be used for stock valuation.Explain this process and describe how the "multiplier" varies from the one available in the stock market quotation pages.

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Definitions:

Accounting Basis

The method by which accounting transactions are recognized and recorded, such as cash basis or accrual basis accounting.

Financial Break-even

The point at which total revenues equal total expenses, and the company makes no profit or loss.

Discounted Basis

A method of purchasing or selling a financial instrument (e.g., a bond) for a price that is below its nominal or face value, reflecting the present value of its future cash flows.

Cash Basis

An accounting method where revenues and expenses are recorded only when cash is received or paid, respectively.