Market-Based Valuation of XYZ Corp

Very Hard Equity Valuation Applications Market-based Valuation

XYZ Corp is being evaluated for investment using a market-based valuation approach. Currently, XYZ Corp has a price-to-earnings (P/E) ratio of 15, while its closest competitors have P/E ratios ranging from 12 to 18. Additionally, XYZ Corp’s historical 5-year average P/E ratio has been 14. An analyst decides to apply a relative valuation method to determine the fair value of XYZ Corp's stock based on its P/E ratio. Based on the data provided, which of the following statements correctly identifies the implications of using the market-based valuation method for XYZ Corp?

XYZ Corp is overvalued given its P/E ratio is above the industry average.

The market-based valuation is reliable only if all firms in the industry have similar growth prospects.

XYZ Corp's current P/E suggests it is fairly valued compared to its competitors.

Hint

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