chapter 3

# chapter 3 - E3.8. A Stab at Equity Valuation Using...

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E3.8. A Stab at Equity Valuation Using Multiples: Automobiles The exercise applies the method of comparables. It also introduces you to the calculation of P/E and price-to-book ratios and the effects of dividends on both. (a) 1992 1993 P/E P/B d/P P/E P/B d/P Daimler-Benz AG (NYSE) 76.6 2.2 .165 Federal Signal Corp (NYSE) 21.7 4.1 .020 24.8 4.8 .017 Ford Motor of Canada Ltd. (AMEX) --- 1.3 .000 --- 2.40 .000 Ford Motor Corp. (NYSE) --- 1.4 .037 14.5 2.1 .025 General Motors Corp. (NYSE) --- 3.8 .043 27.5 7.1 .015 Honda Motor Ltd. (NYSE) 38.4 1.4 .009 69.5 1.7 .008 Navistar Intl. (NYSE) --- 5.1 .000 --- 3.8 .000 Paccar Inc. 30.3 1.9 .023 14.5 1.9 .000 Mean 30.1 2.7 .019 37.9 3.3 .029 Chrysler Estimated Actual 30.125 14.86 2.71 1.27 0.189 0.019 37.9 ---- 3.26 2.76 0.029 0.012 Note: P/E = (price + dps)/eps Estimated price (P/E) = (mean P/E × eps) – dps b)Calculation problems: i. Effects of one large number --e.g., the “outlier” P/E for Daimler-Benz in 1993. ii. Should one use (P/E, P/B, P/d or (E/P, B/P, d/P)? Using the inverse of pricing multiples reduces effects of ouliers. For P/ d, multiples can be very large, so use d/P (“dividend yield”). How Financial Statements are Used in Valuation – Chapter 3 p. 37

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iii. Losses for the matched firms or the target firms are a problem with P/E calculations. Should one include them? They have been excluded in the mean P/E calculation above because they are very large losses relative to price in most cases. If the target firm has losses, a positive P/E calculation is useless as price
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## This homework help was uploaded on 02/24/2008 for the course MBA 860 taught by Professor Zayaty during the Spring '08 term at University of Findlay.

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chapter 3 - E3.8. A Stab at Equity Valuation Using...

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