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Series 79 practice questioneasyComparable Company Analysis

In a comparable company analysis, what is the primary purpose of selecting peer companies?

  1. ATo identify potential acquisition targets
  2. BTo determine the target company's credit rating
  3. CTo establish a market-based valuation range using trading multiples of similar companies✓ Correct answer
  4. DTo calculate the target company's cost of equity
Explanation

Why C — To establish a market-based valuation range using trading multiples of similar companies

Comparable company analysis (also called trading comps) derives a valuation range for a target by applying the trading multiples of similar publicly traded companies. The underlying assumption is that similar companies should trade at similar multiples of key financial metrics such as EV/EBITDA or P/E. Selecting appropriate peers based on industry, size, growth, and profitability is critical to the accuracy of this approach.

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