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Basic Question 4 of 11
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.
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
explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables
calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value
CFA® 2024 Level I Curriculum, Volume 3, Module 8.