Multiplying a company's price-to-book ratio by a company's book value per share is an application of which method to value a business?

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Prepare for UCF's ENT4412 Managing Small Business Finances Final Exam with targeted flashcards and multiple choice questions, complete with detailed hints and explanations. Ace your test with confidence!

Multiplying a company's price-to-book ratio by its book value per share is indeed an application of equity multiples to value a business. The price-to-book ratio reflects how much investors are willing to pay per dollar of a company's book value, and multiplying this ratio by the book value provides a market-based valuation.

In this method, the emphasis is on equity value, which represents the residual interest in the assets of a business after deducting liabilities. This approach is particularly useful for valuing companies that have significant tangible assets or a specific book value that investors are interested in. Equity multiples are widely used in financial analysis because they provide a straightforward way to evaluate a company’s market valuation relative to its equity base.

Other valuation methods, such as earnings multiples, income multiples, and sales multiples, focus on different financial metrics, like profit margins, income projections, or revenue levels, but do not directly relate to the book value and market price combination in the same way that equity multiples do. Thus, the use of price-to-book ratio and book value aligns perfectly with the equity multiples method.