Question

Which of the following is an inconsistency of using market multiples to determine value? A) Using a market multiple assumes that the target company is correctly priced, while comparable companies are mispriced. B) Using a market multiple assumes that the target company is mispriced, while comparable companies are correctly priced. C) Using a market multiple assumes that all companies are mispriced. D) Using a market multiple assumes that the target company can be fully described by its summary performance measure.

Answer 1

Answer:

B) Using a market multiple assumes that the target company is mispriced, while comparable companies are correctly priced.

Explanation:

Market Multiple, also known as trading multiples, is used to compare two financial measures, to determine the value of a company. It is another name for Price to Earnings Ratio (also called P/E Ratio).

Using the market multiple approach, investors can determine whether stocks in their portfolios will increase or decrease in price through the next term. Investors may then buy or sell stocks in order to maximize their expected gains calculated.