22: Market-Based Valuation Flashcards
method of comparables
values a stock based on the average price multiple of the stock of similar companies
method of forecasted fundamentals
values a stock based on the ratio of its value from a discounted cash flow (DCF) model to some fundamental variable (e.g., earnings per share)
justified price multiple
is what the multiple should be if the stock is fairly valued
The following two methods are used to normalize earnings:
Under the method of historical average EPS, the normalized EPS is estimated as the average EPS over some recent period
Under the method of average return on equity, normalized EPS is estimated as the average return on equity (ROE) multiplied by the current book value per share (BVPS).
PEG Ratio
PEG RATIO = P/E / G
justified trailing price-to-earnings ratio (P/E)
justified leading price-to-earnings ratio (P/E)
Example: Calculating justified P/E ratio
A stock has a payout ratio of 40%. The shareholders require a return of 11% on their investment, and the expected growth rate in dividends is 5%. Calculate the trailing and leading P/E multiple based on these forecasted fundamentals.
Justified P/B Multiple
Example: Calculating justified P/B ratio
A firm’s ROE is 14%, its required rate of return is 8%, and its expected growth rate is 4%. Calculate the firm’s justified P/B based on these fundamentals.
Justified P/S Multiple
Example: Calculating justified P/S ratio
A stock has a dividend payout ratio of 40%, a return on equity (ROE) of 8.3%, an EPS of $4.25, sales per share of $218.75, and an expected growth rate in dividends and earnings of 5%. Shareholders require a return of 10% on their investment. Calculate the justified P/S multiple based on these fundamentals.
Justified P/CF Multiple
Justified Dividend Yield
Cross-sectional regression
refers to a regression in which the explained and explanatory variables are all based on the same point in time.
Yardeni model
