ADVANCED TRADING COMPS EXAM
QUESTIONS AND ANSWERS
Why we use trading comps to value companies - CORRECT ANSWER-
The purpose of a trading comps analysis is to determine what is the "appropriate" value of a
company, based on the market values of operationally similar companies.
When you try to gauge the fair value of your house by comparing to the values of houses
nearby, you're doing a comps analysis.
How are comps analyzed? - CORRECT ANSWER-
We don't compare absolute values but rather multiples to account for differences in a company
.
Non-
operational differences that shuld be taqken into account so as to not distort the comparison -
CORRECT ANSWER-• Financial leverage differences
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
• Other accounting differences (lease classification, LIFO vs. FIFO)
• Business life cycle differences
What are examples of measures independent of leverage1 - CORRECT ANSWER-
EV, Revenue, EBITDA, EBIT, Unlevered free cash flow
Nonrecurring items in historical profits - CORRECT ANSWER-
must be taken out of profits in order to exclude the distortion
What to do when companies are in different stages in their life cyucle - CORRECT ANSWER-
Multiples like pEG standardize against different long-term growth rates
, Ev/revenue facilitate comparisons for early stage companies generating loses.
PE ratio defn and description - CORRECT ANSWER-share price/EPS
Equity Value/ Net income
EPS is used as a proxy for economic equity value
Issues with P/E - CORRECT ANSWER-
EPS is a measure of accounting profit only during a particular period
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
Also, high PE valuation relative to peers could be justified when high PE firm has higher growt
h prospects
Less relevant for high growth companies
EPS is most appropriate for - CORRECT ANSWER-• Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
PEG ratio defn and issues - CORRECT ANSWER-PE ratio / long-term growth rate
QUESTIONS AND ANSWERS
Why we use trading comps to value companies - CORRECT ANSWER-
The purpose of a trading comps analysis is to determine what is the "appropriate" value of a
company, based on the market values of operationally similar companies.
When you try to gauge the fair value of your house by comparing to the values of houses
nearby, you're doing a comps analysis.
How are comps analyzed? - CORRECT ANSWER-
We don't compare absolute values but rather multiples to account for differences in a company
.
Non-
operational differences that shuld be taqken into account so as to not distort the comparison -
CORRECT ANSWER-• Financial leverage differences
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
• Other accounting differences (lease classification, LIFO vs. FIFO)
• Business life cycle differences
What are examples of measures independent of leverage1 - CORRECT ANSWER-
EV, Revenue, EBITDA, EBIT, Unlevered free cash flow
Nonrecurring items in historical profits - CORRECT ANSWER-
must be taken out of profits in order to exclude the distortion
What to do when companies are in different stages in their life cyucle - CORRECT ANSWER-
Multiples like pEG standardize against different long-term growth rates
, Ev/revenue facilitate comparisons for early stage companies generating loses.
PE ratio defn and description - CORRECT ANSWER-share price/EPS
Equity Value/ Net income
EPS is used as a proxy for economic equity value
Issues with P/E - CORRECT ANSWER-
EPS is a measure of accounting profit only during a particular period
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
Also, high PE valuation relative to peers could be justified when high PE firm has higher growt
h prospects
Less relevant for high growth companies
EPS is most appropriate for - CORRECT ANSWER-• Mature lifecycle companies
• Companies with positive earnings
• Companies with similar capital structures
PEG ratio defn and issues - CORRECT ANSWER-PE ratio / long-term growth rate
