Series 79 practice questionmediumComparable Company Analysis
A banker is screening for comparable companies to value a mid-cap manufacturing firm. One potential peer operates in a similar industry but derives 60% of its revenue from highly cyclical commodity sales, while the target derives 90% from stable, long-term contracts. Which is the best course of action for the banker regarding this peer, and why?
- AInclude the peer without adjustment, because industry classification is sufficient.
- BConsider excluding or adjusting the peer, since differences in revenue stability can distort valuation multiples.✓ Correct answer
- CInclude the peer but only use forward-looking metrics for comparison.
- DExclude all peers with any commodity exposure regardless of size or segment mix.
Explanation
Why B — Consider excluding or adjusting the peer, since differences in revenue stability can distort valuation multiples.
Significant differences in revenue cyclicality can meaningfully impact valuation multiples, so peers with distinct business models should be excluded or adjusted. Including such a peer without consideration could lead to misleading conclusions, which is a common trap for less careful analysts.
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