CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
For valuing an asset-heavy bank or insurer with mostly liquid financial assets marked near fair value, which multiple is most likely to be commonly used?
Price to book value is most commonly used. A bank's or insurer's assets are mostly financial and carried near fair value, so book value approximates the value of equity. Enterprise value multiples and price to sales fit poorly because debt is an operating input and sales are hard to define.
- AEnterprise value to EBITDA
- BPrice to book valueCorrect
- CPrice to sales
Explanation
Financial institutions' assets are mostly liquid and carried near market value, so book value is a meaningful measure of equity value. EV/EBITDA is awkward because debt is operating input for such firms, and sales are poorly defined.
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