Relative Valuation: Tests
Aswath Damodaran
1
Information requirements

An analyst tells you that he never does DCF valuation because it
requires too many assumptions (about cash flows, growth and risk). He
argues that it is far simpler to use a multiple (EV/EBITDA, PE etc),
obtained by looking at other firms in the sector, to estimate value. Is he
right?
a. Yes
b. No

Explain.
Aswath Damodaran
2
Distributional assumptions…

If you estimate the PE ratio for all companies and graph out the
frequency distribution, can the distribution be normal?
a. Yes
b. No

Why not? So what?
Aswath Damodaran
3
Controlling variables?

You are trying to decide whether a software company is fairly priced,
based upon its PE ratio. The company trades at a PE ratio of 12 and the
average for the software sector is 20. Based on this comparison, you
would conclude that
a. The stock is cheap
b. The stock is expensive
c. The stock is fairly priced

State your implicit assumptions.
Aswath Damodaran
4