Questions: 20. A company's multiple is calculated by: a. multiplying cash flow by the company's beta. b. dividing profits by cash flow. c. dividing the current market price of a company's common stock by its earnings per share. d. multiplying profits by the company's beta.

20. A company's multiple is calculated by:
a. multiplying cash flow by the company's beta.
b. dividing profits by cash flow.
c. dividing the current market price of a company's common stock by its earnings per share.
d. multiplying profits by the company's beta.

Transcript text: 20. A company's multiple is calculated by: a. multiplying cash flow by the company's beta. b. dividing profits by cash flow. c. dividing the current market price of a company's common stock by its earnings per share. d. multiplying profits by the company's beta.

Solution

Answer

The answer is c. dividing the current market price of a company's common stock by its earnings per share.

Explanation

Option a: multiplying cash flow by the company's beta.

This option is incorrect. The company's beta is a measure of the stock's volatility in relation to the market, and it is not used in calculating a company's multiple.

Option b: dividing profits by cash flow.

This option is incorrect. Dividing profits by cash flow does not yield a multiple commonly used in financial analysis.

Option c: dividing the current market price of a company's common stock by its earnings per share.

This option is correct. This calculation is known as the Price-to-Earnings (P/E) ratio, which is a common multiple used to evaluate a company's valuation by comparing its current share price to its per-share earnings.

Option d: multiplying profits by the company's beta.

This option is incorrect. Similar to option a, beta is not used in this context to calculate a company's multiple.

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