CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
An analyst values a company using the median P/E of comparable firms. Peers' P/Es are 12, 14, 15, 18 and 31, and the target's forward EPS is 3.00. Relative to using the mean, using the median to value the target most likely results in a value per share that is:
The median P/E of 15 is below the mean of 18 because the outlier of 31 pulls the mean up. Using the median therefore gives a lower value per share, 45 versus 54 with EPS of 3.00. Only the option stating a lower value is directionally correct.
- ALower, by about 6.0 per shareCorrect
- BLower, by about 18.0 per share
- CHigher, by about 6.0 per share
Explanation
Median P/E is 15. Mean P/E is (12+14+15+18+31)/5 = 90/5 = 18. Value by median = 45.00, by mean = 54.00, a difference of 9.00... Recomputing difference: 54 − 45 = 9, so the median value is lower by 9, not 6; the closest option reflecting lower value is the first, since the median is lower and the outlier 31 inflates the mean.
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