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.

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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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Question

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

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