Flashcards in Chapter 7: equity valuation part 4 using multiples to value shares Deck (6)

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1

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how do you calculate the price earnings ratio using multiples to value shares

P/E

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PO = estimated EPS1 x Justified P/E ratio = EPS1 x Po / E1

- the number of times that the earnings of the company are embedded in the price

- tells us how long you have to hold a company to make back your investment

2

## P/E ratio using constant growth DDM

### Po/ EPS 1 = P/E = (D1/EPS1)/ (Kc - g)

3

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How do you calculate the market to book ratio

M/B

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market price per share / book value per share

- multiply the justifiable M/B ratio by the firm's book value per share to estimate intrinsic value per share

- fell out of favour in 1980s - 1990s

4

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How do you calculate the price to share ratio

P/S ratio

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price per share / revenue per share

- multiply the justifiable P/S ratio by the firm's sales per share to estimate intrinsic value per share

5

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how do you calculate the price to cash flow ratio

P/CF

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price per share/ cash flow per share

- cash flow per share can be estimated as net income plus depreciation, amortization and deferred taxes

- multiply the justifiable P/CF ratio by the firm's cash flow per share to estimate intrinsic value per share

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