Market-Based Valuation of ABC Corporation

Easy Equity Valuation Applications Market-based Valuation

In the realm of equity valuation, analysts often employ market-based valuation techniques to derive the estimated value of a company based on its comparables. One of the popular methods is the use of the Price-to-Earnings (P/E) ratio, which compares a company's current share price to its earnings per share (EPS). However, this approach also requires some caution as industry norms and market conditions can significantly affect those ratios.

ABC Corporation is a company that operates in the technology sector. Analysts have identified three comparable companies within the same sector with the following trailing twelve months (TTM) P/E ratios: Company 1: 18, Company 2: 22, and Company 3: 20. Given that ABC Corporation has a TTM EPS of $5, what would be a reasonable estimate for ABC Corporation's value using market-based valuation?

Calculate a target price using an average P/E ratio of 20 and determine the value as $100.

Use the highest P/E ratio of 22 to determine a value of $110.

Estimate value using a median P/E ratio of 20 to arrive at $100.

Hint

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