Which type of valuation model is viewed as having the disadvantage of producing
results that may not be comparable across firms?
A. Asset-based models.
B. Price multiple models.
C. Discounted cash flow models
Why isen’t it A? I mean we use multiples to compare firms? That’s why it is called relative valuation…What am I misinterpreting here…
“5. B Results that may not be comparable across firms are considered a
disadvantage of valuation models based on price multiples. (LOS 48.f)”
Kaplan 2024 p.350
Hey gneger, although price multiples model is quick and easy way to compare across firms to determine whether it’s relatively overvalued or undervalued, the price (numerator) is subject to change for a myriad of reasons. Think of corporate actions or irrational behavior of market participants that affect the price of stock regardless of fundamentals.
DCF and asset based models are based on somewhat what fundamental factors - assets and cash flows so I picked B for having the least reliable for comparing firms across the board. That’s not to say people don’t use it, it’s used very much so.
lack of comparability across firms? Like differences in accounting policies, capital structures, growth rates etc? And cyclicality, which economic cycle the firm currently is in?
That is very clear to me, it is just how the question is written, it is pretty tricky. But thanks for your response! It makes sense when I think of it in this way.