Guideline Transaction method (GTM)

Olsen justifies her choice of the GTM approach in the following three statements: 1. The GTM approach works well for valuing FDF because it uses a multiple that specifically relates to sales of entire companies. SFAS No. 157 presents a fair value hierarchy that gives the highest priority to market-based evidence. 2. Most appraisers readily accept the valuation from GTM approach because of the reliability of transactions data. 3. The market approach to determine the value of equity is appropriate even for companies with highly leveraged financial conditions or significant volatility expected in future financial performance. Source : 2013 CFA mock. Can anyone please explain why the 2 & 3 are wrong? I didn’t get the idea behind it. Thanks in advance.

I don’t get why number (2) is wrong can someone elaborate ?

2 can be wrong because they’re saying “readily accept.” When using Guideline Transaction Method you are using past transactions as the basis for the multiple. Problem is no 2 transactions will be the same in the sense that they have different levels of risk, growth levels, etc. Also if transactions are infrequent they wouldn’t represent the true economic nature of the business at that time. So adjustments are required which is why they wouldn’t “readily accept” it.

Thanks Mike!