Question

Which of the following statements is FALSE? Consider the case of a new firm that is identical to an existing publicly traded company. If these firms will generate identical cash flows, the Law of One Price implies that we can use the value of the existing company to determine the value of the new firm. A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm. In the method of comparables, we estimate the value of a firm based on the value of other, comparable firms or investments that we expect will generate very similar cash flows in the future. Even two firms in the same industry selling the same types of products, while similar in many respects, are likely to be of different size or scale.

Answer 1

Answer: A valuation multiple is a ratio of some measure of a firm's scale to the value of the firm.

Step-by-step explanation:

The Law of One Price does indeed allow for the determination of the value of the new firm using the value of the existing firm as they are identical. The value of a firm is also estimated based on the value of comparable ones.

It is also true that companies can be similar in many respects but still be different in size and scale.

Valuation multiples however, are not ratios of some measure of a firm's scale to the value of the firm but ratios of financial metrics in the company that can be used for analysis and comparison.