CPFM Corporate Valuation Methods 3 — Questions and Answers
Question 1: Which valuation approach values a company by comparing it to similar publicly traded firms?
- Comparable company analysis (trading comps) (Correct answer)
- Discounted cash flow
- Liquidation value
- Replacement cost method
Correct answer: Comparable company analysis (trading comps)
Trading comps derive value from market multiples of similar public companies.
Question 2: The EV/EBITDA multiple is preferred over P/E in cross-company comparisons primarily because it is:
- Capital-structure neutral (Correct answer)
- Always lower in value
- Based on net income
- Unaffected by depreciation
Correct answer: Capital-structure neutral
EV/EBITDA ignores differences in financing and is therefore comparable across firms with different leverage.
Question 3: In precedent transaction analysis, valuation multiples typically include a:
- Control premium reflecting acquisition prices (Correct answer)
- Minority discount
- Liquidity discount only
- Zero premium by definition
Correct answer: Control premium reflecting acquisition prices
Precedent transactions reflect prices paid to acquire control, which include a control premium.
Question 4: Which multiple would be most appropriate for valuing an early-stage company with negative earnings?
- EV/Revenue (Correct answer)
- P/E
- EV/EBITDA
- Price/Book based on income
Correct answer: EV/Revenue
EV/Revenue works when earnings are negative because revenue remains positive.
Question 5: When selecting comparable companies, the most important criterion is similarity in:
- Industry, size, and growth profile (Correct answer)
- Stock ticker alphabetical order
- Number of employees only
- Headquarters location only
Correct answer: Industry, size, and growth profile
Strong comparables share business model, industry, size, and growth characteristics.
Question 6: A company trades at an EV/EBITDA of 8x while peers average 12x. This may indicate the company is:
- Potentially undervalued relative to peers (Correct answer)
- Definitely overvalued
- Identical to peers
- Free of any debt
Correct answer: Potentially undervalued relative to peers
Trading below the peer multiple suggests possible undervaluation, though further analysis is needed.
Question 7: What is a key disadvantage of relying solely on comparable company analysis?
- Market mispricing of peers distorts the valuation (Correct answer)
- It requires detailed multi-year cash flow forecasts
- It ignores the equity market entirely
- It cannot produce a valuation range
Correct answer: Market mispricing of peers distorts the valuation
Comps inherit any over- or under-valuation present in the peer group's market prices.
CPFM Corporate Valuation Methods 3
Which valuation approach values a company by comparing it to similar publicly traded firms?