Market-Based Valuation of TechInnovate Corp.

Medium Equity Valuation Applications Market-based Valuation

Abigail is an equity analyst at a prominent securities firm, where she specializes in the valuation of technology companies. She is conducting a market-based valuation of TechInnovate Corp., a small-cap technology firm specializing in software solutions. Abigail is considering using the price-to-earnings ratio (P/E) relative to a peer group of companies recognized for their innovative technology products.

After analyzing the peer group, she finds that TechInnovate's trailing twelve-month (TTM) earnings per share (EPS) is $2.50. The average P/E of the peer group is 25. However, given that TechInnovate has had fluctuating earnings and a recent product recall that caused a drop in stock price, she is unsure whether the industry P/E is the right multiple to apply.

To address this, Abigail considers the following options regarding the application of the market-based valuation on TechInnovate's stock:

Abigail should apply the industry average P/E multiple of 25 to TechInnovate’s TTM EPS to establish a fair value.

Abigail should adjust the P/E multiple downwards to factor in potential earnings volatility and recent negative events.

Abigail should ignore market multiples entirely and utilize a discounted cash flow (DCF) approach instead.

Hint

Submitted3.0K

Correct2.9K

% Correct97%