Question

Despite being less quantitatively rigorous, relative valuation is often used because it is quicker and easier to explain to non-finance people.

True

False

Answer 1

Hi,

In relative valuation, an analyst takes the industry average or some companies specific average to find out the valuation. It is an easy and quick process and very easy to explain to non finance person also as compared to DCF.

For example let say you want to know the estimated current share value of a company. You will calculate the industry P/E ratio for this and then multiply that by your company EPS and you will find the estimated current share value of company.

Hence answer is True here.

Thanks