Chapter 7: equity valuation part 4 using multiples to value shares

Question 1

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

P/E

Answer 1

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

Question 2

P/E ratio using constant growth DDM

Answer 2

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

Question 3

How do you calculate the market to book ratio

M/B

Answer 3

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

Question 4

How do you calculate the price to share ratio

P/S ratio

Answer 4

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

Question 5

how do you calculate the price to cash flow ratio

P/CF

Answer 5

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

Question 6

how do you calculate Market (enterprise) value to EIT or EBITDA ratio

Answer 6

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