Limitations in applying the comparable companies' method of valuation include which of the following?

A) Finding truly comparable companies is difficult

B) The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets
C) Market-based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows.
D) A, B, & C
E) A & B only

Question

Limitations in applying the comparable companies' method of valuation include which of the following?

A) Finding truly comparable companies is difficult

B) The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets
C) Market-based methods can be manipulated easily, because the methods do not require a clear statement of assumptions with respect to risk, growth, or the timing or magnitude of future earnings and cash flows.
D) A, B, & C
E) A & B only

Quizplus · Accepted Answer

All three options listed (A, B, and C) are limitations of applying the comparable companies' method of valuation. Finding truly comparable companies can be difficult due to differences in industry, size, and operations. Market-based methods, such as this one, can result in significant under- or overvaluation during periods of market volatility. Lastly, market-based methods can be manipulated easily because they do not require clear assumptions regarding risk, growth, or future earnings and cash flows.

Limitations in Applying the Comparable Companies' Method of Valuation Include