Determine the market value of a comparable firm based on the following information: value of the target firm = $4,000,000; net income of the target firm = $200,000; and net income of the comparable firm = $500,000.

Question

Quizplus · Accepted Answer

To determine the market value of the comparable firm, we can use the price-to-earnings (P/E) ratio of the target firm. P/E ratio = Market value of target firm / Net income of target firm = 20. Then, we can use the P/E ratio to calculate the market value of the comparable firm: Market value of comparable firm = P/E ratio x Net income of comparable firm = 20 x $500,000 = $10 million.

Determine the Market Value of a Comparable Firm Based on the Following