CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
An analyst values Lumen Corp using the average forward P/E of five peers, which is 14.0. Lumen's forecast EPS for next year is EUR 2.50. Lumen currently trades at EUR 38.00. Based on the method of comparables, Lumen is most likely:
Lumen is overvalued by about EUR 3.00 per share. The peer forward P/E of 14.0 times forecast EPS of EUR 2.50 gives an implied value of EUR 35.00, which is below the market price of EUR 38.00.
- Aovervalued by about EUR 3.00 per shareCorrect
- Bfairly valued
- Cundervalued by about EUR 3.00 per share
Explanation
Implied value = 14.0 x 2.50 = EUR 35.00. The market price of EUR 38.00 exceeds this by EUR 3.00, so the stock is overvalued relative to peers. Undervalued would require a price below EUR 35.00.
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