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CFA Level I · CFA Level I Exam · Industry and Competitive Analysis

An analyst values Company Z using a peer group median P/E of 14.0. One peer is a conglomerate with 55% of revenue from an unrelated shipping business and a P/E of 24.0. The other four peers have P/Es of 12, 13, 14 and 15. The most appropriate action is to:

The analyst should remove the conglomerate and use the median of the four remaining peers, 13.5. The conglomerate's main revenue source is unrelated, so it is not comparable, and including it, or using the mean of 15.6, would distort the valuation multiple.

  1. Aretain the conglomerate because the median reduces its effect
  2. Bremove the conglomerate and use a median of 13.5Correct
  3. Cuse the mean of all five peers, which is closest to 15.6

Explanation

The conglomerate's principal activity differs from Company Z's, so it is not a comparable peer and should be removed. The remaining peers 12, 13, 14 and 15 have a median of (13+14)/2 = 13.5. The mean of all five is 78/5 = 15.6, which is inflated by the outlier, and retaining a non-comparable firm is poor practice even if the median limits its effect.

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