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

An analyst values a company using the method of comparables. The analyst's benchmark is the price-to-earnings ratio of a peer group of firms in the same industry. The most appropriate way to apply this method is to:

Multiply the company's earnings per share by the peer group's price-to-earnings multiple. The method of comparables infers value by applying a benchmark multiple to the subject company's fundamental, rather than discounting cash flows or dividing price by an unrelated measure.

  1. Amultiply the company's earnings per share by the peer group's multiple to estimate a valueCorrect
  2. Bdivide the company's market price by the peer group's average dividend yield
  3. Cdiscount the peer group's earnings at the company's required return

Explanation

The method of comparables applies a benchmark multiple, such as the peer P/E, to the company's fundamental, here EPS, to get an implied value. The other options mix up inputs or describe a discounted cash flow approach instead.

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