Market-based Valuation: Price & EV multiples

Question 1

Method of historical average EPS

Answer 1

Normalized EPS estimated as average EPS over some recent period, usually most recent business cycle

Question 2

Method of average ROE

Answer 2

Normalized EPS calculated as average ROE times current BVPS.
Average ROE often measured over the most recent business cycle.
Reliance on BVPS reflects the effect of firm size changes more accurately than does the method of historical average EPS.

Question 3

Fed model

Answer 3

Considers the overall market to be overvalued (undervalued) when the earnings yield (i.e., E/P ratio) on the S&P 500 Index is lower (higher) than the yield on 10-year US Treasury bonds

Question 4

Justified P/B

Answer 4

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

Question 5

Leading price to sales ratio

Answer 5

Po/S1 = [(profit margin * payout ratio)*(1+g)] / (r-g)