CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
An analyst compares two firms in the same industry using trailing P/E. Firm X's earnings include a large one-time gain from the sale of a subsidiary, while Firm Y's earnings are recurring only. The analyst most likely should:
The analyst should exclude the one-time gain from Firm X's EPS and use underlying earnings. Nonrecurring items do not reflect sustainable earnings power, and leaving them in would understate Firm X's P/E and make the comparison with Firm Y misleading.
- Ause Firm X's reported EPS because it is audited.
- Bexclude the gain from Firm X's EPS to use underlying earnings.Correct
- Capply a higher P/E to Firm X to reflect the gain.
Explanation
Trailing P/E should use earnings normalized for nonrecurring items, since one-time gains do not reflect sustainable earnings power. Including the gain would understate X's P/E and distort comparability.
Did you get it right without looking?
One question tells you little. A timed set on Relative Value Equity Valuation Approaches shows your real accuracy, how long you take and where you lose marks.
More Relative Value Equity Valuation Approaches questions
- An analyst values an early-stage software company that has negative earnings and is investing heavily in growth. Which multiple is most like…
- An analyst values a company in a country with a much higher risk-free rate and inflation than the country of its peer group, using the P/E r…
- Compared with the price-to-earnings ratio, an analyst is most likely to prefer EV/EBITDA when comparing companies that:
- A company has a share price of $48, earnings per share of $3.00, and a dividend payout ratio of 40%. Using the relationship between multiple…
- An analyst compares the trailing P/E ratio of a company reporting under IFRS with that of a peer reporting under US GAAP. Which of the follo…
- For valuing an asset-heavy bank or insurer with mostly liquid financial assets marked near fair value, which multiple is most likely to be c…