Lecture 3 Flashcards
What are some implicit assumptions when assessing comparable firms?
- Similar growth rates
- Similar profitability
- Similar cost of capital or cost of equity
- Similar payout ratios
Multivariate regression approach
Please explain this Stata output and what the equation for P/E would look like
Interestrate: (-7.9376, p = 0.581)
A higher interest rate is associated with a decrease in the PE ratio, but the coefficient is not statistically significant (p > 0.05).
GDPrealgrowth: (154.3989, p = 0.013)
A higher real GDP growth is associated with a significant increase in the PE ratio.
The coefficient is positive and statistically significant at the 1% level (p < 0.05).
Countryrisk: (-0.1116, p = 0.077)
Higher country risk is associated with a decrease in the PE ratio.
The p-value (0.077) suggests that this effect is marginally significant (slightly above the 0.05 threshold).
Intercept (_cons): (16.1562, p = 0.001)
When all independent variables are zero, the expected PE ratio is 16.1562.
The average PE of Singapore appears to be overvalued as 24>23.1
Alpha Inc. has a historical beta of 0.56 from the regression for the period between 2010 and 2019. Assume that the average debt/equity ratio is 15.56% between 2010 and 2019, and the corporate tax rate is 35%. If Alpha Inc. decreases its debt/equity ratio to 10%, what will the equity beta be?
Price is equal to value. Value is equal to 1+g. Because D/E is the payout ratio the final P/E ends up being Payout ratio * (1+g)/(r-g). Get it????
