CFA Level I · CFA Level I Exam · Equity Analyst Research Reports
An analyst values a company at 12 times forecast earnings per share (EPS). Base-case EPS is $4.00. In a downside scenario, EPS is 20% lower and the multiple falls to 10. Assume probabilities of 70% base and 30% downside. The probability-weighted value per share is closest to:
The probability-weighted value is $43.2 per share, which is closest to $44.4. The base value is $48 (12 x $4.00), the downside value is $32 (10 x $3.20), and weighting 70/30 gives 33.6 plus 9.6.
- A$44.4
- B$46.1Correct
- C$48.0
Explanation
Base value = 12 x 4.00 = 48.00. Downside EPS = 3.20, value = 10 x 3.20 = 32.00. Weighted = 0.7 x 48 + 0.3 x 32 = 33.6 + 9.6 = 43.2. This is closest to 44.4 (A) rather than 46.1, so the key is A.
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