• Business life cycle differences
TRADING COMPS MODELING EXAM WALL
STREET PREP QUESTIONS AND ANSWERS 4. What are examples of measures independent of leverage1:
1. Why we use trading comps to value companies: EV, Revenue, EBITDA, EBIT, Unlevered free cash flow
The purpose of a trading comps analysis is to determine what is the 5. Nonrecurring items in historical profits:
"appropriate" value of a
company, based on the market values of operationally similar companies. must be taken out of profits in order to exclude the distortion
When you try to gauge the fair value of your house by comparing to the values of
6. What to do when companies are in different stages in their life cyucle:
houses
nearby, you're doing a comps analysis.
Mul- tiples like pEG standardize against different long-term growth rates
2. How are comps analyzed?:
Ev/revenue facilitate comparisons for early stage companies generating loses.
We don't compare absolute values but rather multi- ples to account for differences
in a company. 7. PE ratio defn and description:
3. Non-operational differences that shuld be taqken into account so as to not share price/EPS Equity Value/ Net income
distort the comparison:
• Financial leverage differences
EPS is used as a proxy for economic equity value
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
8. Issues with P/E:
• Other accounting differences (lease classification, LIFO vs. FIFO)
1/ 2/
17 17
, EPS is a measure of accounting profit only during a particular period Less relevant for high growth companies
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
9. EPS is most appropriate for:
Also, high PE valuation relative to peers could be justified when high PE firm has • Mature lifecycle companies
higher growth prospects • Companies with positive earnings
• Companies with similar capital structures
10. PEG ratio defn and issues:
PE ratio / long-term growth rate
Standardizes PE ratios against companies' expected growth rates (g)
• Higher PEG ratio companies are considered overvalued
11. Issues with PEG ratio:
• 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 (such as historical vs.
market costing), and can be manipulated
12. PEG ratio is most appropriate for:
3/ 4/
17 17
TRADING COMPS MODELING EXAM WALL
STREET PREP QUESTIONS AND ANSWERS 4. What are examples of measures independent of leverage1:
1. Why we use trading comps to value companies: EV, Revenue, EBITDA, EBIT, Unlevered free cash flow
The purpose of a trading comps analysis is to determine what is the 5. Nonrecurring items in historical profits:
"appropriate" value of a
company, based on the market values of operationally similar companies. must be taken out of profits in order to exclude the distortion
When you try to gauge the fair value of your house by comparing to the values of
6. What to do when companies are in different stages in their life cyucle:
houses
nearby, you're doing a comps analysis.
Mul- tiples like pEG standardize against different long-term growth rates
2. How are comps analyzed?:
Ev/revenue facilitate comparisons for early stage companies generating loses.
We don't compare absolute values but rather multi- ples to account for differences
in a company. 7. PE ratio defn and description:
3. Non-operational differences that shuld be taqken into account so as to not share price/EPS Equity Value/ Net income
distort the comparison:
• Financial leverage differences
EPS is used as a proxy for economic equity value
• Accounting differences (depreciation method, useful life assumptions)
• Temporary distortions (nonrecurring items)
8. Issues with P/E:
• Other accounting differences (lease classification, LIFO vs. FIFO)
1/ 2/
17 17
, EPS is a measure of accounting profit only during a particular period Less relevant for high growth companies
Accounting profits can be misleading because they include noncash and
nonrecurring items, and accounting assumptions , and can be manipulated
9. EPS is most appropriate for:
Also, high PE valuation relative to peers could be justified when high PE firm has • Mature lifecycle companies
higher growth prospects • Companies with positive earnings
• Companies with similar capital structures
10. PEG ratio defn and issues:
PE ratio / long-term growth rate
Standardizes PE ratios against companies' expected growth rates (g)
• Higher PEG ratio companies are considered overvalued
11. Issues with PEG ratio:
• 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 (such as historical vs.
market costing), and can be manipulated
12. PEG ratio is most appropriate for:
3/ 4/
17 17
