Equity valuations in today’s market are arguably too high. Many analysts assert that price-to-earnings ratios are so high as to constitute an irrational valuation “bubble” that is bound to burst and drag valuations down. Skeptics are especially wary of the valuations for high-tech and Internet companies. Proponents of the “new paradigm” argue that the unusually high price-to-earnings ratios associated with many high-tech and Internet companies are justified because modern business is fundamentally different. In fact, many believe these companies are still, on average, undervalued. They argue that these companies have invested great sums in intangible assets that will produce large future profits. Also, research and development costs are expensed.This means they reduce income each period and are not reported as assets on the balance sheet.Consequently, earnings appear lower than normal and this yields price-to-earnings ratios that appear unreasonably high.
Required:
Assess and critique the positions of both the skeptics and proponents of this new paradigm