Question

Which of the following statements are correct regarding the method of valuation by comparables? (Choose 2). 1. A firm's market value can be estimated by using the share price of any similar sized firm. 2. A firm's market value can be estimated by finding the share price of a similar firm and using that value. 3. A firm's market value can be estimated by multiplying its book value by the market/book ratio for a similar firm. 4. A firm's market value can be estimated by multiplying its earnings per share by the P/E ratio for a similar firm.

Answer 1

Answer:

4. A firm's market value can be estimated by multiplying its earnings per share by the P/E ratio for a similar firm.

Explanation:

A firm's market value can be estimated by multiplying its earnings per share by the P/E ratio for a similar firm is the correct statement. The comparison method for valuation provides a noticeable value for the business which is based on the current worth of the business. This method is a very popular used approach because it is very simple and easy to determine and always current. The method refers that,  when company A sells at a 10 times P/E ratio and company B  has earnings of $2.50 per share then company B’s stock must be worth $25.00 per share.