The price-earnings method used to value stock is limited because it assumes that the firm has the same P/E ratio as its competitors.

Question

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The price-earnings method uses the P/E ratio of similar firms in the industry to value a stock, but it does not assume that the firm being valued has the same P/E ratio as its competitors. Rather, it assumes that the firm's P/E ratio will be similar to its peers, but there may be differences due to factors such as differences in growth prospects, management quality, and risk profile. Therefore, the method is not limited by assuming that the P/E ratio will be the same as competitors.

The Price-Earnings Method Used to Value Stock Is Limited Because