CFA Level I · CFA Level I Exam · Relative Value Equity Valuation Approaches
When using the method of comparables, an analyst finds that a peer group's average P/E is heavily influenced by one firm with temporarily depressed earnings. The analyst's most appropriate response is to:
Use the median multiple or exclude the outlier. A firm with temporarily depressed earnings has an inflated P/E that skews the peer average, and the median is less sensitive to such extreme values, giving a more representative benchmark.
- Ause the median multiple or exclude the outlierCorrect
- Breplace the P/E with the peer firms' share prices
- Cuse the highest peer multiple to be conservative
Explanation
A temporarily depressed denominator inflates the P/E of one firm, skewing the mean. Using the median or removing the outlier reduces distortion. Raw prices are not comparable across firms, and the highest multiple is not conservative.
Did you get it right without looking?
One question tells you little. A timed set on Relative Value Equity Valuation Approaches shows your real accuracy, how long you take and where you lose marks.
More Relative Value Equity Valuation Approaches questions
- Compared with the price-to-earnings ratio, an analyst is most likely to prefer EV/EBITDA when comparing companies that:
- An analyst values a firm using enterprise value to EBITDA rather than P/E. Which situation most likely makes EV/EBITDA the more appropriate …
- A company has a share price of $48, earnings per share of $3.00, and a dividend payout ratio of 40%. Using the relationship between multiple…
- An analyst compares the trailing P/E ratio of a company reporting under IFRS with that of a peer reporting under US GAAP. Which of the follo…
- An analyst compares the P/E of a Japanese manufacturer reporting under IFRS with that of a US peer reporting under US GAAP. Which of the fol…
- For valuing an asset-heavy bank or insurer with mostly liquid financial assets marked near fair value, which multiple is most likely to be c…