Skip to content

CFA Level I · CFA Level I Exam · Company Analysis: Past, Present, and Future

An analyst values a firm at 12.0 times earnings and considers a governance deficiency that raises the required return. Holding constant expected growth and payout, the deficiency most likely results in:

The deficiency most likely lowers the justified P/E. Justified P/E equals the payout ratio divided by required return minus growth, so a higher required return with unchanged growth and payout widens the denominator and reduces the multiple, reflecting greater governance risk.

  1. Aa lower justified P/E multiple.Correct
  2. Bno change in the justified P/E multiple.
  3. Ca higher justified P/E multiple.

Explanation

The justified P/E equals payout divided by (r minus g). A higher required return r with g and payout unchanged increases the denominator and lowers the multiple. Governance risk is therefore reflected through a lower valuation.

Did you get it right without looking?

One question tells you little. A timed set on Company Analysis: Past, Present, and Future shows your real accuracy, how long you take and where you lose marks.

Practise Company Analysis: Past, Present, and FutureFree diagnostic mock

More Company Analysis: Past, Present, and Future questions