Reading 20
Market Based Valuation: Price and Enterprise Value Multiples
4 modules 34 min
0/4
Exam Focus
This topic review covers the estimation of P/E, P/B, PEG, P/S, P/CF, and enterprise value/EBITDA ratios. The justified price multiple models draw heavily on the previous two topic reviews on dividend discount models and free cash flow models. You should be able to estimate justified price multiples for individual firms and to apply the method of comparables to estimate their (relative) values.
Recovered source visuals
Modules
- Module 20.1P/E MultipleContrast the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation and explain economic rationales for each approach. · Calculate and interpret a justified price multiple. · Describe rationales for and possible drawbacks to using alternative · Calculate and interpret alternative price multiples and dividend yield.4 min · 4 LOS
- Module 20.2P/B Multiple2 min
- Module 20.3P/S and P/CF Multiple2 min
- Module 20.4EV and Other AspectsCalculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS. · Explain and justify the use of earnings yield (E/P). · Describe fundamental factors that influence alternative price multiples and dividend yield. · Calculate and interpret the justified price to earnings ratio (P/E), price to book ratio (P/B), and price to sales ratio (P/S) for a stock, based on forecasted fundamentals. · Calculate and interpret a predicted P/E, given a cross sectional regression on fundamentals, and explain limitations to the cross sectional · Evaluate whether a stock is overvalued, fairly valued, or undervalued based on comparisons of multiples. · Evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables. · Calculate and interpret the P/E to growth (PEG) ratio and explain its use in relative valuation. · Calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model. · Explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition. · Calculate and interpret EV multiples and evaluate the use of EV/EBITDA. · Explain sources of differences in cross border valuation comparisons. · Describe momentum indicators and their use in valuation. · Explain the use of the arithmetic mean, the harmonic mean, the weighted harmonic mean, and the median to describe the central tendency of a group of multiples.26 min · 14 LOS