What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?a.All of them.b.Same growth rates.c.Comparable firms have similar future prospects.d.No fundamental differences between firms.e.Industry is correctly valued.
Question
What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?a.All of them.b.Same growth rates.c.Comparable firms have similar future prospects.d.No fundamental differences between firms.e.Industry is correctly valued.
Solution
The correct answer is a. All of them.
When using multiples based on comparable firms to value a company, several implicit assumptions are made:
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Same growth rates: It is assumed that the firm being valued and the comparable firms have the same growth rates. This is often not the case, as different firms may have different growth prospects.
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Comparable firms have similar future prospects: This assumption is related to the first one. It is assumed that the firm being valued and the comparable firms will have similar future earnings, cash flows, and so on. Again, this may not be true.
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No fundamental differences between firms: This assumption implies that there are no fundamental differences between the firm being valued and the comparable firms in terms of risk, cash flow, growth prospects, and so on. This is a strong assumption and is often violated.
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Industry is correctly valued: This assumption implies that the industry in which the firm operates is correctly valued by the market. If this is not the case, then using multiples based on comparable firms may lead to incorrect valuations.
Similar Questions
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