LOS j, (Part 1): Evaluate a stock by the method of comparables using each of the price multiples.

Q1. Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 38. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

A)   bought as an undervalued stock.

B)   sold as an overvalued stock.

C)   sold short as an overvalued stock.

Q2. Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

A)   sold or sold short as an overvalued stock.

B)   bought as an undervalued stock.

C)   viewed as a properly valued stock.

Q3. Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 38 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

A)   viewed as a properly valued stock.

B)   sold or sold short as an overvalued stock.

C)   bought as an undervalued stock.

LOS j, (Part 1): Evaluate a stock by the method of comparables using each of the price multiples. fficeffice" />

Q1. Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 38. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

A)   bought as an undervalued stock.

B)   sold as an overvalued stock.

C)   sold short as an overvalued stock.

 Correct answer is A)     

The price per dollar of earnings is considerably lower than that for the median of the peer group, which implies that it may well be undervalued.

Q2. Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 28 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

A)   sold or sold short as an overvalued stock.

B)   bought as an undervalued stock.

C)   viewed as a properly valued stock.

Correct answer is C)

The price per dollar of earnings is the same as that for the median of the peer group, which implies that it is likely properly valued.

Q3. Proprietary Technologies, Inc., (PTI) has a leading price-to-earnings (P/E) ratio of 38 while the median leading P/E of a peer group of companies within the industry is 28. Based on the method of comparables, an analyst would most likely conclude that PTI should be:

A)   viewed as a properly valued stock.

B)   sold or sold short as an overvalued stock.

C)   bought as an undervalued stock.

Correct answer is B)

The price per dollar of earnings is considerably higher than that for the median of the peer group, which implies that it may well be overvalued.

THK

thanks