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CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches

A Swiss firm trades at a P/E of 18.0. Its industry peers in the same country trade at a mean P/E of 15.0. The analyst notes that the firm's sales are mostly in emerging markets, where operating risk is higher. Which conclusion is most appropriate?

The premium is more puzzling because higher emerging-market risk would normally justify a lower multiple, not a higher one. The analyst must check whether superior growth explains it. Simply labeling the firm overvalued ignores fundamentals, and sharing a home country does not equalize revenue risk.

  1. AThe firm is overvalued relative to peers because its P/E exceeds 15.0
  2. BThe premium should be disregarded because all firms are in one country
  3. CThe premium is more puzzling because higher risk would normally justify a lower multipleCorrect

Explanation

Higher risk raises the required return and normally lowers the multiple, so a premium needs explanation through higher growth. Option A ignores risk and growth differences. Option B ignores that revenue exposure, not listing country, drives risk.

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