Intrinsic valuation approaches value a firm relative to how similar firms are valued.

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Let’s examine what intrinsic valuation means and how it contrasts with relative valuation.
Option 1: 'Intrinsic valuation approaches value a firm relative to how similar firms are valued.' This description actually matches relative (or comparable) valuation, which assesses a firm by comparing it to peers in the market to infer value. Intrinsic valuation, by contrast, builds value from the firm’s own fundamentals (such as cash flows, growth, risk) without direct reference to how peers are priced. Therefore, this statement misstates intrinsic valuation.
Option 2: 'Intrinsic valuation approaches value a firm relative to its own fundamentals, not to how similar firms are valued.' While not quoted here verbatim, the essence of intrinsic valuation is evaluating intrinsic worth based on the firm’s own characteristics (discounted cash flow analysis, asset-based methods, etc.) rather than market multiples of similar firms. This aligns with the standard definition of intrinsic valuation and explains why it is not about peer comparison.
In summary, the first option describes a relative valuation concept, which uses external benchmarks to gauge value, whereas intrinsic valuation relies on internal financial factors and projections. The second option correctly contrasts intrinsic valuation with relative methods by emphasizing evaluation based on the firm’s own fundamentals rather than peer comparisons.

ACCT10001_2025_SM1 Tutorial Preparation Quiz Topic 6: Cash Flows and Intrinsic Valuation

Intrinsic valuation approaches value a firm relative to how similar firms are valued.

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