The Price-Earnings valuation model estimates the price of a share of stock today as the:
A)sum of a forward looking P/E multiple and the EPS in the next period.
B)product of the firm's historic P/E multiple and the EPS in the next period.
C)product of a forward looking P/E multiple and the EPS in the next period.
D)product of a forward looking P/E multiple and the current EPS.

Question

Quizplus · Accepted Answer

The Price-Earnings valuation model estimates the price of a share of stock today as the product of a forward looking P/E multiple and the EPS in the next period. This model takes into account the expected growth rate of EPS and the market's expectations for the future earnings potential of the firm, making it a more accurate estimate than using historic P/E multiples. Choice A and B are incorrect because they do not use forward looking P/E multiples. Choice D is incorrect because it uses the current EPS, which may not be a good predictor of future earnings potential.

The Price-Earnings Valuation Model Estimates the Price of a Share