Page 16 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 31.j: Evaluate a stock by the method of comparables READING 31: MARKET-BASED VALUATION: PRICE AND
and explain the importance of fundamentals in using the ENTERPRISE VALUE MULTIPLES
method of comparables.
LOS 31.r: Evaluate whether a stock is overvalued, fairly MODULE 31.4: EV AND OTHER ASPECTS
valued, or undervalued based on comparisons of
multiples.

EXAMPLE: Evaluating P/E ratios with the method of comparables: An analyst has gathered P/E information on two stocks,
Allbright Interiors and Basic Designs.

Evaluate the value and P/E of each stock based on the method of comparables.

• Allbright is undervalued relative to benchmark (Peer Median) : it has a lower P/E than the peer median, despite the fact that it
has a comparable growth rate and beta

• Basic Designs, is overvalued; it has a higher P/E, despite lower expected growth and a higher beta,