Evaluating Price Multiples for Valuation

Very Hard Equity Valuation Techniques Price Multiples

Investors often utilize price multiples to evaluate the valuation of equities. Suppose a company, XYZ Corp, engages in various business segments and currently has a trailing earnings per share (EPS) of $5 with a market price per share of $100. Assume the sector average price-to-earnings (P/E) ratio is 20x, and XYZ Corp is expected to grow its EPS at a rate of 10% per annum for the next five years.

Based on these indicators, which of the following price multiples would most accurately reflect the fair value of XYZ Corp relative to its growth potential?

Using a P/E ratio based on trailing earnings only.

Applying the sector average P/E ratio adjusted for growth expectations.

Calculating the P/E ratio based on future projected earnings.

Hint

Submitted819

Correct595

% Correct73%