When evaluating a firm based on price/earnings multiples, the evaluator must determine the price/earnings multiple for _____.
A) the general market
B) the S&P 500
C) firms in the same industry
D) small capitalization firms

Question

Quizplus · Accepted Answer

When evaluating a firm based on price/earnings multiples, it is important to look at firms in the same industry. This helps to provide a more accurate comparison since different industries may have different typical P/E ratios. Comparing a firm's P/E ratio to the general market or S&P 500 may not provide an accurate representation of the firm's valuation. Similarly, evaluating based on small capitalization firms may also not be appropriate since these firms may have different growth prospects and risk factors compared to the firm being evaluated.

When Evaluating a Firm Based on Price/earnings Multiples, the Evaluator