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Basic Question 1 of 4
Which statement(s) is (are) false regarding the two ways in which price multiples can be used?
II. A P/E ratio of 10 indicates that each dollar invested in the company generates $0.1 of earnings.
III. If a stock is relatively undervalued based on the method of comparables, it implies that it is absolutely cheaper to buy than other stocks.
I. The economic rational behind the method based on forecasted fundamentals is the law of one price.
II. A P/E ratio of 10 indicates that each dollar invested in the company generates $0.1 of earnings.
III. If a stock is relatively undervalued based on the method of comparables, it implies that it is absolutely cheaper to buy than other stocks.
User Contributed Comments 6
| User | Comment |
|---|---|
| danlan2 | I: economic rational behind the method of comparables is the law of one price. |
| broadex | Why not B |
| rana1970 | Word "absolutely" makes C incorrect. It's relatively cheaper. |
| gregsob2 | @broadex: a P/E of 10 represents at each $1 invested generates $0.10 (10 = 1/.1) |
| vadfir | Read the question again. It asks for FALSE statement. Word "absolutely" makes C false, therefore correct answer. |
| davidt876 | thats what rana meant vad |
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Learning Outcome Statements
contrast the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation, and explain economic rationales for each approach;
calculate and interpret a justified price multiple;
describe rationales for and possible drawbacks to using alternative price multiples and dividend yield in valuation;
CFA® 2024 Level II Curriculum, Volume 4, Module 25.