lec15-16-valuationRatios-3pp

lec15-16-valuationRatios-3pp - Fin406 Spring 2010 Smeal...

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Fin406 – Spring 2010 Smeal College of Business Penn State University 3/3/2010 ©2010 JingZhi Huang 1 Relative Valuation Fin 406 - Spring 2010 Professor Jingzhi Huang Smeal College of Business Penn State University Copyright © 2010 JZH I. Relative Valuation The value of an asset is determined relative to comparable (and marketable ) assets The relative valuation process: identify comparable assets and obtain 2 identify comparable assets and obtain market values for these assets choose a valuation multiple (ratio) as the basis for valuation estimate the value of the asset being analyzed and/or determine its cheapness relative to other assets Comparable Assets Typically firms in the same sector are considered to be comparable assets Based on NAICS or S&P GICS codes, Yahoo industry page, etc. Can narrow down the list and focus on competitors 3 Identified in equity research reports or Yahoo Use a stock screener (say, Yahoo’s) to search for firms with similar fundamentals (risk, growth, cash flow characteristics) The sector or market itself is sometimes used as the benchmark, especially when an analyst evaluates the cheapness or richness of a stock
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Fin406 – Spring 2010 Smeal College of Business Penn State University 3/3/2010 ©2010 JingZhi Huang 2 Valuation Ratios Standardized stock prices or firm values Earnings or Cash flows Multiples P/E, P/FCFE, P/E to growth (PEG) Value/EBITDA, Value/EBIT, Value/FCFF Book Value Multiples Price/Book Value of Equity (PBV or P/B) 4 Revenues Multiples Price/Sales per Share (P/S) Value/Sales Sector-Specific Multiples ( Shorthand Ratios) V/EBITDAR (E before ITDA and Rent Expense): Casinos, Restaurants, Retail Value or Price per Customer, Subscriber, Unique Visitor, Movie Screen Price per square foot Ex 1. Target Price on Google Zacks Report on 2/10/2010 puts a $565 target price on the Google stock (whose closing on 2/9/2010 was $536.44) with a horizon of 3~6 months. Where did this target price come from? Zacks forecasts that Google’s price-to-2010 5 earnings will be 23.26 x in 3~6 months. Namely, (Predicted) PE = 23.26 Google’s EPS 2010 = $24.29 (estimate); (Target) price = (Predicted) PE * EPS 2010 = 23.26*$24.29 = $565 Ex 2. Value A Private Company A Business Week article on 9/13/04 discusses the valuation of NYSE (when it’s still private) Comparables: Other listed exchanges and the sector average Valuation multiples used: P/E and P/B Valuation: $900M or $2.85B An merger with Archipelago Holdings announced on 4/20/05 values NYSE at ~ $2 45 billion (WSJ 4/21/05) 6 $2.45 billion (WSJ, 4/21/05) In the biggest IPO in China this year, Huatai Securities raised $2.3B on 2/26/10 (WSJ, 2/28/10) Comparables: the industry average Valuation multiples used: P/E The indicative price range values the shares (2/8/10)
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This note was uploaded on 04/06/2010 for the course FIN 100 taught by Professor Staff during the Fall '08 term at Penn State.

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lec15-16-valuationRatios-3pp - Fin406 Spring 2010 Smeal...

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