Which of the following statements is FALSE?
A)Because the enterprise value represents the entire value of the firm before the firm pays its debt, to form an appropriate multiple, we divide it by a measure of earnings or cash flows after interest payments are made.
B)We can compute a firm's price-earnings ratio by using either trailing earnings or forward earnings with the resulting ratio called the trailing price-earnings or forward price-earnings.
C)Using a valuation multiple based on comparables is best viewed as a 'shortcut' to the discounted cash flow method of valuation.
D)It is common practice to use valuation multiples based on the firm's enterprise value.

Question

Quizplus · Accepted Answer

Explanation: The statement in A is false because when calculating multiples based on enterprise value, we use earnings or cash flows before interest payments (not after). This is because enterprise value includes both equity and debt, representing the total value of the firm to all investors, not just equity holders. Therefore, the appropriate measure of earnings or cash flows to use is before interest payments, such as EBIT or EBITDA, to reflect the firm's total earnings available to both debt and equity holders.

Which of the Following Statements Is FALSE