Reading 42: Market-Based Valuation: Price and Enterprise Val statements, 2010, following, involved, multiple

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Session 12: Equity Investments: Valuation Models
Reading 42: Market-Based Valuation: Price and Enterprise Value Multiples

LOS l: Explain the benchmark value of a multiple.

 

 

 

Which of the following statements relating to factors involved in the choice of an appropriate benchmark is FALSE?

A) The mean price-to-earnings (P/E) ratio does not reflect the impact of outliers while the median does.

B) The stocks composing the benchmark may or may not be efficiently priced.

C) The Fed Model postulates that the market is overvalued when the market’s current earnings yield is less than the 10-year Treasury bond yield.

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The median P/E does not reflect the impact of outliers, while the mean does.

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Which of the following statements concerning the choice of an equity index benchmark is least accurate?

A) Price-to-earnings (P/E) ratios differ significantly across firms of various size.

B) For large-cap stocks, the mean P/E should be used as a benchmark.

C) The Yardeni model utilizes historical bond yields.

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The Yardeni model relates the current earnings yield on the market to both the current yield on A-rated corporate bonds and the consensus 5-year earnings growth rate.

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When valuing equity, the price-to-earnings (P/E) approach involves the selection of the appropriate benchmark, and comparing the company’s P/E to the benchmark. All of the following are appropriate P/E benchmarks EXCEPT:

A) the P/E of an equity index.

B) an average historical P/E of the stock.

C) the P/E of other firms that are comparable in size.

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The P/E of other firms that are comparable in size alone is not appropriate unless these firms are otherwise comparable, such as all being in the same industry.