TRADING COMPS MODELING EXAM WALL
STREET PREP
1.Why we use trading comps to value companies:
The purpose of a trading comps analysis is to determine what is the
"appropriate" value of a
company, based on the market values of operationally similar
companies.
When you try to gauge the fair value of your house by comparing to the
values of houses
nearby, you're doing a comps analysis.
2.How are comps analyzed?:
We don't compare absolute values but rather multi- ples to account for
differences in a company.
3.Non-operational differences that shuld be taqken into account so as to
not distort the comparison:
must be taken out of profits in order to exclude the distortion
6.What to do when companies are in different stages in their life cyucle:
Mul- tiples like pEG standardize against different long-term growth rates
Ev/revenue facilitate comparisons for early stage companies generating
loses.
7.PE ratio defn and description:
share price/EPS Equity Value/ Net income
EPS is used as a proxy for economic equity value
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, 8.Issues with P/E:
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 , and can be
manipulated
Also, high PE valuation relative to peers could be justified when high PE
firm has higher growth prospects
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