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#5&6

5. Explain why we use expected earnings rather than last periods earnings in the PE multiple approach to earnings. 6. What i
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Answer #1

A) A company's past performance is not necessarily indicative of the future behavior
of firm.Secondly EPS remains constant but stock prices are quite volatile and if there
is an major event in company that fluctuates its stock prices,Past earnings won't be able
to reflect those changes,hence expected earnings is a better approach.

B) Price to sales ratio doesn't account for company's earnings,instead its the value placed
on each dollar of a company's sales.It's basically obtained by dividing the stock price by
total sales/no. of share outstanding.

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