- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 8. Equity Valuation: Concepts and Basic Tools
- Subject 5. Multiplier Models
CFA Practice Question
Which statement is false regarding the two ways in which price multiples can be used?
B. A P/E ratio of 10 indicates that each dollar invested in a company generates $0.10 of earnings.
C. If a stock is relatively undervalued based on the method of comparables, it implies that it is absolutely cheaper to buy than other stocks.
A. The economic rationale behind the method of comparables is the law of one price.
B. A P/E ratio of 10 indicates that each dollar invested in a company generates $0.10 of earnings.
C. If a stock is relatively undervalued based on the method of comparables, it implies that it is absolutely cheaper to buy than other stocks.
Correct Answer: C
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 |