Which of the following statements are correct when conducting a market multiples

Question

Which of the following statements are correct when conducting a market multiples valuation analysis:
I. Peer firms should have similar future growth, profitability, and risk characteristics.
II.Forward multiples such as the Forward P/E ratio are preferred to backward multiples.
III. Higher leverage at peer firms will bias their equity multiples downward.
IV. A large sample of peer firms is required to get an accurate valuation.

I only

I and IV only

I, II, and IV only

II and III only

I, II, III, and IV

I only

I and IV only

I, II, and IV only

II and III only

I, II, III, and IV

Explanation / Answer

I. It is a useful exercise to look at companies in the same industry, or companies that have similar business characterstics in terms of growth, profitability and risk.

II. If the company has a fuller services or project backlog looking into the future, it may be best to evaluate its valuation using a forward multiple.

III. The companies which trade at typical enterprise value multiples, the price-to-earnings ratio drops for the company with higher leverage.

IV. With many larger companies, it is easy to access what other analysts following the stock think about these companies.

Thus, I, II, III and IV are correct.

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