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NISM Certifications · NISM-Series-XV: Research Analyst · Qualities of a Good Research Report

A research analyst's report on Sundaram Textiles uses a target price based on a P/E multiple. Which practice most improves the transparency of the valuation?

The valuation is most transparent when the report discloses the earnings estimate, the multiple applied, the peer set and the key assumptions. This lets readers trace and test how the target price was derived, whereas a bare target price or unnamed peers prevents any verification.

  1. AStating the target price only, without the multiple used
  2. BStating the earnings estimate, the multiple applied, the peer set used and the key assumptions behind themCorrect
  3. CQuoting the peer multiples without naming the peers
  4. DReplacing the assumptions with a statement that the analyst is confident

Explanation

Transparency requires that a reader can trace how the target price was derived. This needs the earnings estimate, the multiple, the comparables and the assumptions. The other options hide inputs and prevent reproduction of the result.

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