Equity Asset Valuation, Second Edition

CHAPTER 6

MARKET-BASED VALUATION: PRICE AND ENTERPRISE VALUE MULTIPLES

LEARNING OUTCOMES

After completing this chapter, you will be able to do the following:

• Distinguish among types of valuation indicators.

• Distinguish between the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation.

• Define a justified price multiple.

• Discuss the economic rationales for the method of comparables and the method based on forecasted fundamentals.

• List and discuss rationales for each price multiple and dividend yield in valuation.

• Discuss possible drawbacks to the use of each price multiple and dividend yield.

• Define and calculate each price multiple and dividend yield.

• Define underlying earnings and, given earnings per share (EPS) and nonrecurring items in the income statement, calculate underlying earnings.

• Define normalized EPS, discuss the methods of normalizing EPS, and calculate normalized EPS by each method.

• Explain and justify the use of earnings yield (i.e., EPS divided by share price).

• Identify and discuss the fundamental factors that influence each price multiple and dividend yield.

• Calculate the justified price-to-earnings ratio (P/E), price-to-book ratio, and price-to-sales ratio for a stock, based on forecasted fundamentals.

• Calculate a predicted P/E given a cross-sectional regression on fundamentals and explain limitations to the cross-sectional regression methodology.

• Define the benchmark value ...