- CFA Exams
- CFA Level I Exam
- Study Session 11. Equity Valuation (3)
- Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples
- Subject 2. Price to earnings: determining earnings

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**CFA Practice Question**

Chris is working on relative valuation analysis for Toyota. Below is the data he gathered for this purpose:

Under the method of historical average EPS, Toyota's EPS should be ______.

A. $5.04

B. $1.10

C. $0.86

**Explanation:**Historical EPS method gives the normalized figure around $5. Note that average ROE method gives EPS = Current BVPS x Median ROE = $5.24 x 0.21 = $1.1. Such huge difference in normalized earnings per share can be explained by a significant fall in book value per share during the last economic cycle.

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**User Contributed Comments**
6

User |
Comment |
---|---|

MGM13 |
I thought it was the Current BVPS times Median ROE (5.24*.21 = 1.1). The answer doesn't make sense to me. What am I missing here? Thanks. |

art1997 |
Average = MEAN |

volkovv |
Historical Method: use simple Mean EPS = 5.04, B is the answer Average ROE Method: Current BVPS x Median ROE = 5.24 * .21 = 1.10 (if the question asked about average ROE method, C would been the answer) |

volkovv |
Normalized EPS can also be calculated by Total Assets * Average ROA |

kwanlo3 |
this question will be more challenging if we are asked to use the "appropriate method" |

cminor |
This is not a great question because you are supposed to use the average from the most recent "business cycle" which is not clear in questions like this. |