Market-Based Valuation: Price and Enterprise Value Multiples

Question 1

P/E Formula for inflation pass through

Answer 1

1/ (ρ + (1- λ)I

λ - pass through rate
ρ - Real interest rate
I - Inflation rate

Question 2

How can we obtain a higher P/E by the pass through formula

Answer 2

Lower Inflation I
or
Higher pass through rate λ

Question 3

Formuala for Book value

Answer 3

Total assets - Total liabilities

Question 4

Formula for BV/Share

Answer 4

Shareholder equity - Equity claims (Senior to common) / # Shares outstanding

Question 5

Formula for Price to book value

Answer 5

(ROE - g) / (rr-g)

Question 6

What justifes a higher P/B

Answer 6

Higher ROE or g
Lower rr

Question 7

formula for price to sale ratio

Answer 7

P/E x profit margin

Question 8

Formula for justifed Price to sale ratio

Answer 8

[E0/s0 x (1-RR)(1+g)] / (rr-g)

Question 9

What is the benefit of using P/S

Answer 9

• Less subjected to manipluation
• Sales is always positive, so its better to use when EPS is 0.
• Sales is more stable than EPS
• Suitible for Mature, cyclical, zero profit firms

Question 10

What causes higher P/S

Answer 10

• Higher net profit margin
• Higher g
• Lower rr

Question 11

Formula for didivend yield

Answer 11

(r-g) / (1+g)

Question 12

Formula for trailing PE

Answer 12

P0/E0

DPR(1+g) / (rr-g)

Question 13

Formula for leading PE

Answer 13

P0/E1

DPR / rr-g

Question 14

Formual for dividend yield

Answer 14

r - g / (1+g)

Question 15

Explain the moldofsky effect

Answer 15

High PE at the bottom of the business cycle due to low EPS
and
Low EPS at the top of the business cycle due to high EPS

Question 16

Define normalized EPS

Answer 16

Normalized EPS is the level of earnings per share that the company could currently achieve under mid-cyclical conditions.