Question

The authors of the paper “What Valuation Models Do Analysts Use” state:

… contrary to our expectations, some analysts who construct explicit multiperiod valuation models still adopt a comparative valuation model as their preferred model.

Based on the material we have covered in the course, describe the differences in the two approaches and explain why an analyst would prefer a comparative model.

Answer 1

Comparative Valuation models means comparing a company with similar companies in the industry. Whereas in explicit multiperiod valuation model it values a company with the help of future period cash flows. Since the multiperiod valuation model depends on the forecast of a company which can be manipulated and depends on the judgement of the person, an analyst would prefer comparative valuation model since it gives more accurate valuation and it is based on real calculations (not dependent on forecast)