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

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

FINANCIAL ACCOUNTING
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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  1. 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 to estimate the share price for its IPO. The company plans to issue 400,000 shares. The consensus forecast among analysts who follow the company is for EPS to be $4.75, up from the company's most recent earnings per share of $4.00. Four comparable firms have been identified for which their EPS and share prices are shown below: Firm EPS Share Price 1 $3.30 $11.55 2 3.50 15.75 2.25 9.00 4 2.70 13.50
Transcribed Image Text:The board of directors of Smith Brothers is planning an initial public offering. Management is trying to estimate the share price for its IPO. The company plans to issue 400,000 shares. The consensus forecast among analysts who follow the company is for EPS to be $4.75, up from the company's most recent earnings per share of $4.00. Four comparable firms have been identified for which their EPS and share prices are shown below: Firm EPS Share Price 1 $3.30 $11.55 2 3.50 15.75 2.25 9.00 4 2.70 13.50
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