"04-1618_Equity_handout

"04-1618_Equity_handout - IU Purdue E(EPS1)1 $5 $5...

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Macroeconomic/Industry Analysis Equity Valuation Chapters: 12-13 (8th edition of BKM) Solutions to examples [discussed in slides] will be posted on Katalyst Special Topics III: Equity - Continued 11
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22 - Overview - Macroeconomic and Industry Analysis - Fundamental Analysis - Continued Lecture Outline:
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P/E Ratio = price paid for a share relative to the annual net income per share If a company were currently trading at a P/E Ratio of 20, an investor is Equity: Valuation via Price- Ratios P/E Ratio – Valuation Approach : Use appropriate P/E Ratio to get ‘right’ price: P = E * appropriate P/E How do you find the ‘appropriate P/E’? And why do the P/E-Ratios differ so much across companies anyway??? 33
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Equity: Stock Prices and Investment Opportunities Consider two firms: IU is inferior to Purdue in the sense that you expect Purdue’s EPS to grow at a faster rate than IU’s.
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Unformatted text preview: IU Purdue E(EPS1)1 $5 $5 Discount Rate 12.5% 12.5% 1 EPS=earnings-per-share 44 Equity: Stock Prices and Risk Consider two firms: You expect IUs and Purdues EPS to grow at the same rate. IU Purdue E(EPS1)1 $5 $5 Discount Rate 20.0% 12.5% 1 EPS=earnings-per-share 55 Equity: Valuation via Price-Ratios So when choosing the appropriate P/E-ratio, make sure its from a company/industry with similar growth opportunities and similar discount rate (i.e., similar level of risk)! 66 Equity: Valuation Note that your estimates are highly sensitive to changes in your inputs! e.g., constant dividend-discount-model with E(D1)=$1 discount rate growth rate 8% 9% 10% 11% 12% 5% $ 33.33 $ 25.00 $ 20.00 $ 16.67 $ 14.29 6% $ 50.00 $ 33.33 $ 25.00 $ 20.00 $ 16.67 7% $ 100.00 $ 50.00 $ 33.33 $ 25.00 $ 20.00 77...
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This note was uploaded on 04/09/2011 for the course MGMT 411 taught by Professor Clarke during the Winter '09 term at Purdue University-West Lafayette.

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"04-1618_Equity_handout - IU Purdue E(EPS1)1 $5 $5...

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