Market-Based Valuation (Price and EV Multiples) Flashcards

1
Q

Uses

A

Price Multiples = value equity

EV Multiples = value firm

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2
Q

P/E Ratio

A

trailing P/E = market price per share / EPS over PREVIOUS 12 months

leading P/E = market price per share / EPS forecast over NEXT 12 months

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3
Q

P/B Ratio

A

P/B = MV(equity) / BV(equity)

P/B = market price per share / book value per share

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4
Q

Book Value of Equity

A

Book Value of Equity = Common Shareholders Equity

Book Value of Equity = ( Total Assets - Total Liabilities ) - Preferred Stock

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5
Q

P/S Ratio

A

P/S = MV(equity) / Total Sales

P/S = market price per share / sales per share

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6
Q

Dividend Yield (D/P)

A

Trailing D/P = 4 * most recent quarterly dividend / market price per share

Leading D/P = 4 * forecasted dividends over next 4 quarters / market price per share

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7
Q

Underlying Earnings

A

Underlying Earnings = Earnings adjusted for and non-recurring components including:

(a) gains and losses from sales of assets
(b) asset write-downs
(c) provision for future losses
(d) changes in acctg estimates

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8
Q

Normalized Earnings

A

Normalized Earnings = earnings adjusted for cyclicality. Two methods:

(1) historical average EPS
(2) average return on equity ( ROE * BVPS )

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9
Q

Earnings Yield (E/P)

A

High E/P = cheap security

Low E/P = expensive security

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10
Q

Justified Trailing P/E Multiple

A

Trailing P/E = P0/E0 = [ D0 * (1+g) / E0 ] / (r - g) = (1 - b) * (1 + g) / (r - g)

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11
Q

Justified Leading P/E Multiple

A

Leading P/E = P0/E1 = D1/E1 / (r - g) = (1-b) / (r-g)

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12
Q

Why will Trailing P/E be LARGER than Leading P/E?

A

Earnings are assumed to be growing, which means LEADING P/E will have a LARGER denominator (and thus a smaller ratio)

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13
Q

Justified P/B Multiple

A

P/B = ( ROE - g ) / ( r - g )

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14
Q

Justified P/S Multiple

A

P/S = P0/S0 = [ (E0/S0) * (1-b) * (1+g) ] / (r - g)

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15
Q

What is E0/S0?

A

Net Profit Margin

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16
Q

How does Net Profit Margin influence P/S?

A

Two ways:
(1) directly

(2) indirectly through its effect on g:

g = retention ratio * net profit margin * (S/A) * (A/E)

17
Q

P/S as a function of TRAILING P/E

A

P0/S0 = (E0/S0) * Trailing PE

P0/S0 = (E0/S0) * [ (1-b)*(1+g) / (r-g) ]

18
Q

Justified P/CF Multiple

A

V0 = FCFE0 * (1+g) / ( r-g )

Increases if:

  • r decreases
  • g increases
19
Q

Justified EV/EBITDA Multiple

A

Increases if:
* g increases

Decreases if:

  • risk level increases
  • WACC increases
20
Q

Justified Dividend Yield

A

D0/P0 = (r - g) / (1 + g)

21
Q

PEG Ratio

A

PEG ratio = P/E ratio / g

Lower is better
PEG “standardizes” P/E for stocks with different expected growth rates

22
Q

Calculating Terminal Value using Multiples and DCF

A

Terminal Value in year n = leading PE * forecasted earnings in year n+1

Terminal Value in year n = trailing PE * forecasted earnings in year n

23
Q

Four definitions of cash flow for use in P/CF

A

(a) earnings + non-cash charges
(b) adjusted cash flow (adjusted CFO)
(c) free cash flow to equity (FCFE)
(d) EBITDA

24
Q

CF (Earnings + non-cash charges)

A

CF = NI + Dep + Amort

25
CF (Adjusted CFO)
CF = adjusted CFO = CFO + [ net cash interest outflow * (1-tax) ]
26
CF (FCFE)
CF = FCFE = CFO - FcInv + net borrowing
27
Enterprise Value (EV)
EV = MV(common stock) + MV(pfd equity) + MV(debt) + MI - Cash and Investments
28
EV/EBITDA Ratio
EV/EBITDA = enterprise value / EBITDA
29
Total Invested Capital (TIC)
An alternate measure of a company's overall value. TCI = MV(equity) + MV(debt) Includes cash and short-term investments, unlike EV
30
When to use EV/S instead of P/S
When comparing companies with significantly different capital structures.
31
Earnings Surprise
Earning surprise = reported EPS - expected EPS
32
Standardized Earnings Surprise (SUE)
SUE = earnings suprise / stddev(analyst earnings surprise estimates) Analysts disagree --> higher stdev --> lower SUE. Analysts agree --> lower stdev --> higher SUE
33
When to use Harmonic Mean
Useful for calculating P/Es of a portfolio or index
34
Weighted Harmonic Mean
weighted harmonic mean = 1 / [ SUM(wi/Xi) ] where: Xi = P/E wi = weight of i
35
Weighted Harmonic Mean
Divide X into weight, take sum for all X, divide into 1.