Seeing is believing!

Before you order, simply sign up for a free user account and in seconds you'll be experiencing the best in CFA exam preparation.

Basic Question 1 of 4

Which statement(s) is (are) false regarding the two ways in which price multiples can be used?

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
You need to log in first to add your comment.
Thanks again for your wonderful site ... it definitely made the difference.
Craig Baugh

Craig Baugh

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.