Aswath Damodaran 540
Relative Valuation Assumptions
! Assume that you are reading an equity research report where a buy
recommendation for a company is being based upon the fact that its PE ratio
is lower than the average for the industry. Implicitly, what is the underlying
assumption or assumptions being made by this analyst?
# The sector itself is, on average, fairly priced
# The earnings of the firms in the group are being measured consistently
# The firms in the group are all of equivalent risk
# The firms in the group are all at the same stage in the growth cycle
# The firms in the group are of equivalent risk and have similar cash flow
patterns
# All of the above
All of the above.
