CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
An analyst selects a benchmark value for a price multiple to value a mature utility. Which benchmark is most likely to be the least useful for judging whether the utility is mispriced relative to its own risk and growth characteristics?
The broad market index multiple that includes high-growth technology firms is least useful. Its constituents differ greatly in growth and risk from a mature utility, whereas industry peers or the utility's own history share more similar fundamentals.
- AThe multiple of the utility's closest industry peers
- BThe utility's own historical average multiple
- CThe multiple of the broad market index including high-growth technology firmsCorrect
Explanation
A broad index containing high-growth firms has very different growth and risk, so its multiple is a poor benchmark for a mature utility. Peers and the firm's own history are more comparable, though each has limits.
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