There are multiple stock valuation methods. The price-earnings (PE) method is one of the most popular....

There are multiple stock valuation methods. The price-earnings (PE) method is one of the most popular. The PE method is provided by the Wall Street Journal in all of its stock quotations. The PE logic is that future earnings are important determinants of a firm’s value. The PE method has several variations which can result in different valuations. Discuss the assumptions underlying the calculation of the PE ratio. What are its shortcomings?

Expert Solution

Assumptions of PE valuation in Stock Valuation is Mainly Earning are Expected be Constant and continuous ...

And Growth Rate Expected to Continue:

Growth Rate Expected to Continue: The Profit Earing Growth Ratio is an extension on the P/E Ratio and therefore makes some of the audacious assumptions that the P/E Ratio makes as well. The PEG Ratio assumes that the current rate of growth of the company is expected to continue. However, in reality trends usually last for 4 to 5 years. So by the time the analyst does figure out the trend, it would be affected by the cyclical nature of business and may have changed..

Limitations / Shortcomings are

In case of inflation PE ratio will be lower So we cannot get the clear picture of share valuation

As soon as company manipulates it's earning EPS as well as PE ratio can Falsified...

PE is taking into consideration of the past earing but value is derived for the future so PE ratio may not be ultimate valuation the share ...

jeff jeffy answered 8 months ago

Please discuss the two most common traditional valuation methods: Earnings Multiple, and Discounted Cash Flow Method....

Please discuss the two most common traditional valuation methods: Earnings Multiple, and Discounted Cash Flow Method. How can they be applied to various actual situations? How effective are these methods?

10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic...

10. Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood...

Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value...

Corporate valuation model The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model. Charles Underwood Agency...

What are the pitfalls of using a price/earnings valuation approach? When is it most appropriate?

answer all a) Among all the stock valuation methods, four key methods of stock valuation are...

answer all a) Among all the stock valuation methods, four key methods of stock valuation are sometimes used by the organization, Fifo, Lifo, Weighted Average And Simple Average, explain how the application of each would differ using a company of your choice considering the nature of materials that form the basis of the stock in the selected company. b) Using your choice of the company above and the nature of your stock, explain why there would difference in the closing...

A stock is currently trading for $33. The company has a price–earnings multiple of 10. There...

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A stock is currently trading for $38. The company has a price–earnings multiple of 10. There...

A stock is currently trading for $38. The company has a price–earnings multiple of 10. There are 100 million shares outstanding. Your model indicates that the stock is actually worth $28. The company announces that it will use $350 million to repurchase shares. After the repurchase, what is the value of the stock, according to your model? Do not round intermediate calculations. Round your answer to the nearest cent. $ After the repurchase, what is the actual price–earnings multiple of...

A stock is currently trading for $32. The company has a price–earnings multiple of 10. There...

A stock is currently trading for $32. The company has a price–earnings multiple of 10. There are 100 million shares outstanding. Your model indicates that the stock is actually worth $42. The company announces that it will use $350 million to repurchase shares. After the repurchase, what is the value of the stock, according to your model? Do not round intermediate calculations. Round your answer to the nearest cent. $ After the repurchase, what is the actual price–earnings multiple of...

Discussion : The Price Earnings Ratio or PE ratio is an indicator of how expensive a...

Discussion : The Price Earnings Ratio or PE ratio is an indicator of how expensive a stock is. Some investors will look to invest in stocks with a high PE ratio. Some will look to invest in stocks with a low PE Ratio.' Why do different investors select stocks with such different PE ratios? Thoughts suggestions and ideas welcome, but please make sure you support your arguments with appropriate referencing. One of the things that can be very useful is...

the price-to-earnings ratio (P/E) is one of the most common stock analysis tools used by investors...

the price-to-earnings ratio (P/E) is one of the most common stock analysis tools used by investors and analysts for determining stock valuation. In addition to demonstrating whether a company’s stock is over- or under-valued, what else can P/E tell us?

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