MARKET-BASED VALUATION: PRICE AND ENTERPRISE VALUE MULTIPLES
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 ...