CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
An analyst's report states a target price based on a discounted dividend model. In the final draft, she removes the discussion of how sensitive the value is to the discount rate because it makes the valuation appear less certain. Her action is most likely:
Removing the sensitivity discussion is most likely a breach of the Standards. Communication requirements call for disclosing the key assumptions and limitations that affect a recommendation. Discount-rate sensitivity is material, so omitting it to appear more certain misleads readers, and rounding the target price does not fix that.
- Aa breach of the duty to distinguish facts from opinion and communicate limitationsCorrect
- Bacceptable if the target price is rounded to the nearest dollar
- Cacceptable because sensitivity analysis belongs only in internal models
Explanation
Standard V(B) requires including the important factors and limitations of the analysis that affect the recommendation. Sensitivity to key inputs such as the discount rate is such a factor. Rounding or keeping it internal does not cure the omission.
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