CIRO Peer Benchmarking & Valuation 3 — Questions and Answers
Question 1: Which of the following best describes the 'football field' valuation chart used in IR presentations?
- A graph of stock price versus NFL team performance
- A visual displaying valuation ranges from multiple methodologies side by side (Correct answer)
- A chart comparing revenue across four fiscal quarters
- A ranking of peers by market capitalization
Correct answer: A visual displaying valuation ranges from multiple methodologies side by side
A 'football field' chart presents valuation ranges from DCF, comparable companies, and precedent transactions on a single horizontal bar chart.
Question 2: A company's EV/EBITDA multiple expanded from 8x to 12x over two years while EBITDA grew 10%. What is the primary driver of stock price appreciation?
- EBITDA growth alone
- Multiple expansion (Correct answer)
- Debt reduction
- Share buybacks
Correct answer: Multiple expansion
When the multiple expands from 8x to 12x (50% increase) versus 10% EBITDA growth, multiple re-rating is the dominant driver of value creation.
Question 3: Precedent transaction multiples are typically higher than public company trading multiples because they include:
- A liquidity discount
- A control and synergy premium (Correct answer)
- A tax shield adjustment
- A minority interest deduction
Correct answer: A control and synergy premium
Acquirers pay a control premium and expect to capture synergies, inflating transaction multiples above standalone trading levels.
Question 4: Which valuation method is most appropriate for a capital-intensive company with stable, predictable free cash flows?
- EV/Revenue
- Discounted Cash Flow (DCF) (Correct answer)
- Price-to-Sales
- EV/DAU (daily active users)
Correct answer: Discounted Cash Flow (DCF)
DCF analysis is ideal for stable, cash-generative businesses where long-term cash flows can be reliably projected.
Question 5: An IR officer notices the company's Price-to-Book ratio is 0.8x versus peers at 1.5x. What is the most likely investor concern?
- The company is growing too fast
- The company's assets are overvalued or returns on equity are insufficient (Correct answer)
- The dividend is too high
- The company has too little debt
Correct answer: The company's assets are overvalued or returns on equity are insufficient
A P/B below 1.0x suggests the market values the company below its net assets, often indicating concerns about asset quality or inadequate return on equity.
Question 6: In benchmarking, 'normalizing' earnings means:
- Adjusting financials to remove one-time or non-recurring items for a cleaner comparison (Correct answer)
- Averaging earnings over five years regardless of growth
- Restating historical results to match current accounting standards
- Converting all figures to a common currency
Correct answer: Adjusting financials to remove one-time or non-recurring items for a cleaner comparison
Normalizing removes non-recurring charges or gains so that ongoing earnings power is comparable across the peer group.
Question 7: What is the primary risk of using a peer group that is too large and diverse?
- It creates legal liability for the IR officer
- Median multiples become meaningless because the peers are not truly comparable (Correct answer)
- It requires SEC disclosure of each peer company
- It automatically triggers a proxy advisor review
Correct answer: Median multiples become meaningless because the peers are not truly comparable
An overly broad peer group dilutes comparability; the resulting median valuation metric may not reflect any single company's true comparable universe.
CIRO Peer Benchmarking & Valuation 3
Which of the following best describes the 'football field' valuation chart used in IR presentations?