Determine the market value of a "comparable" firm based on the following information: value of target firm = $4,000,000; net income of target firm = $200,000; and net income of "comparable" firm = $500,000.

Question

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The market value of the comparable firm can be determined using the price-to-earnings (P/E) ratio of the target firm. The P/E ratio is calculated as the market value of the target firm divided by its net income, which is $4,000,000 / $200,000 = 20. Applying this P/E ratio to the comparable firm, the market value is 20 * $500,000 = $10,000,000.

Determine the Market Value of a "Comparable" Firm Based on the Following