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

Quizplus · Accepted Answer

All three options (A, B, and C) are correct limitations of the comparable companies' method of valuation. Finding truly comparable companies is difficult as companies can vary widely in terms of size, industry, geography, business model, and growth prospects. The use of market-based methods can result in significant under- or overvaluation during periods of declining or rising stock markets, as the market multiples used in the valuation may not reflect the underlying fundamentals of the company. 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.

Limitations in Applying the Comparable Companies' Method of Valuation Include