Topic 6 Flashcards
What is the relative valuation method
an estimate of an assets value relative to that of similar assets
what is the rationale of the relative valuation method
identical assets should all sell at the same price
What are some different valuation indicators
- Share price
- Earnings multiples
- Book value multiples
- sales multiples
- CF multiples
What are the different multiples ratios
- Price/
2. enterprise value/
What are the advantages of P/E
- Most popular
- EPS is chief driver of value
What are the advantages of P/B
- B is more stable than E
- Particularly appropriate for firms which are not expected to continue
What are the advantages of P/S
- S is always positive and more stable than E and B
- S is less affected by accounting differences
What are the advantages of P/CF
- CF is less subject to accounting differences and manipulation
- More linked with valuation theory
What are the disadvantages of P/E
- Not applicable for zero,, small and negative earnings
- Accounting difference
- Management manipulation
What are the disadvantages of P/B
- Not applicable for negative equity
- Carry less information for service and technology firms
- Accounting differences (r&d)
- Stock buybacks and issuances
What are the disadvantages of P/S
- Numerator and denominator not match
- Manangement manipulation
- Sales growth doesn’t necessarily indicate positive E and CF
What are the disadvantages of P/CF
- No applicable for negative CF
- Biased calculation
- Increasingly managed by firms
what is the justified trailing P/E formula
P0/E0 = [(1-b)(1+g)]/r-g
What is the justified leading P/E formula
P0/E1 = 1-b/r-g
What happens to justified (trailing or leading) P/E if payout increases
Increase