Question

Which of the following is a disadvantage of using the comparable-multiple method to value a firm?...

Which of the following is a disadvantage of using the comparable-multiple method to value a firm?
A) It reflects what the market is willing to pay for a comparable firm or a set of comparable firms.
B) It does not take long-term profitability and growth into consideration.
C) It can be used when the firm is not in steady state.
D) It is simple and convenient to use.

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Answer #1

A)

Market multiples can diverge a lot from the investment value , which we cannot know by looking at relative multiples only . For eg. if the overall industry is undervalued, we would not know simply by comparing multiples of similar companies what is the approproate value as the valuation will be depressed than the actual intrinsic value of the company. Similarly if sector multiples are too high the value derived will be too high than the intrinsic or true value of the company.

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