Justified Price Mutiples

Dear all,

I am reading the CFA Curriculum 2015, Reading #35 - Equity Page 376 regarding justified price mutiples (e.g. P/E , P/S, P/B)

Can I say that whether a price mutiple is justified is rather subjective? In other words, if an analyst think that the mutiple is reflecting fair value, the mutiple is justified? If method of comparable is being used, for example the industry median P/E is 22x then the justified P/E is 22x.

Can I say that justified mutiples are not necessarily deduced from a valuation model?

I’m confused.



They’re deduced from a valuation model: Gordon Growth.

Yes, they’re subjective. One has to use judgment in applying them.


So if I use method of comparable to determine the P/E and I think it is reflecting fair value, the P/E is justified?

I suppose that it is.

But on the exam, if they ask for a justified multiple, they mean the one derived from Gordon Growth.