What is a common disadvantage of using Precedent Transactions for valuation?

What is a common disadvantage of using Precedent Transactions for valuation?

• A. It is simple and quick
• B. Data can be spotty or misleading
• C. It reflects only theoretical prices
• D. It is based on future projections

Answer: (B)

Using Precedent Transactions for valuation acknowledges that the data can be spotty or misleading. This method relies on historical transaction data to infer the value of a company, but the available data may not always be comprehensive or accurate. Transaction details can vary based on the circumstances surrounding each deal, including the strategic rationale, market conditions at the time of the transaction, and the negotiating power of the parties involved. As a result, variances in quality and relevance of the data can lead to skewed valuations. Because not all transactions are public or equally documented, analysts may end up with incomplete information, making it difficult to draw consistent conclusions about a company's worth. This highlights the challenge of relying solely on historical precedent data without considering its context and reliability.

Using Precedent Transactions for valuation acknowledges that the data can be spotty or misleading. This method relies on historical transaction data to infer the value of a company, but the available data may not always be comprehensive or accurate. Transaction details can vary based on the circumstances surrounding each deal, including the strategic rationale, market conditions at the time of the transaction, and the negotiating power of the parties involved. As a result, variances in quality and relevance of the data can lead to skewed valuations. Because not all transactions are public or equally documented, analysts may end up with incomplete information, making it difficult to draw consistent conclusions about a company's worth. This highlights the challenge of relying solely on historical precedent data without considering its context and reliability.