On what concept is the price-earnings multiple valuation approach based? The board of directors of Smith Brothers is planning an initial public offering. Management is trying toestimate the share price for its IPO. The company plans to issue 400,000 shares. The consensus forecastamong analysts who follow the company is for EPS to be $4.75, up from the company's most recentearnings per share of $4.00. Four comparable firms have been identified for which their EPS and shareprices are shown below:FirmEPSShare Price1$3.30$11.5523.5015.752.259.0042.7013.50

Price earning ratio is computed by dividing the market price of the share by the earnings per share.The Price earnings ratio represents the relation of market price of outstanding shares with the earnings per share of the company which helps the company in identifying their value, whether they are undervalued or overvalued. The Price-earning's multiple approaches is used to perform analysis on the similar companies operating in the same industry which helps the company in identifying their stand in the market. The company can also perform horizontal analyzes by comparing current ratio with the previous ones to evaluate the progress in the value of company.

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Business

Accounting

On what concept is the price-earnings multiple valuation approach based?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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