EPS is based on book value of the share while P/E is based on the market value

CFA Level II
#1

see this EOC question

You are researching the valuation of the stock of a company in the food-processing industry. Suppose you intend to use the mean value of the forward P/Es for the food-processing industry stocks as the benchmark value of the multiple. This mean P/E is 18.0. The forward or expected EPS for the next year for the stock you are studying is $2.00. You calculate 18.0 × $2.00 = $36, which you take to be the intrinsic value of the stock based only on the information given here. Comparing $36 with the stock’s current market price of $30, you conclude the stock is undervalued.

Give two reasons why your conclusion that the stock is undervalued may be in error.

(Institute 471)

Institute, CFA. 2016 CFA Level II Volume 4 Equity. CFA Institute, 07/2015. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

The issue I am concerned here is the calculation of EPS is based on book value of the share while P/E is based on the market value, isnt that the case? Thats what I think should be the answer , am I wrong?

#2

EPS is earnings per share, P/E is price per earnings. The E in P/E is EPS, on a share basis.

Reasons it might be wrong is that earnings might not be normalized, the industry is overvalued, earnings are manipulated, I can’t think of anything else at the moment.

#3

I’m not sure what you mean by “based on book value of the share”. EPS is based on net income and shares outstanding.