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Unformatted text preview: ACC 411  Ch. 11 1 Valuation Ratios q Measures for comparing relative values of similar companies q Indicators of the markets expectations for future Examples of Valuation Ratios n Common Equity Valuation q Price/NI (Priceearnings ratio) (inverse is earning yield) q Price/CE (Market to Book ratio) q Price/Cash Flow per Share q Price/Dividend (inverse of dividend yield) n Enterprise Valuation (total company: equity + debt) q EBIT/Enterprise Value q EBITDA/Enterprise Value q Sales/Enterprise Value q Industry Specific Ratios n Enterprise Value/SQ FT n Enterprise Value/subscriber n Enterprise Value/patent n Enterprise Value/berth (?) 2 ACC 411  Ch. 11 3 ACC 411  Ch. 11 MarkettoBook Ratio: How much will you pay for a $ of book value in the company? Pe/CEo Where: Pe = Current market value of common equity CEo = Current book value of common equity MarkettoBook ratios should be equal for companies with identical profiles for: Risk (cost of capital); Growth; and Profitability (ROE) [this implies identical capital structure and dividend policies] 4 ACC 411  Ch. 11 MarkettoBook Ratio (assuming accounting values = economic values & no growth) If ROEt= re then Pe= Ceo Therefore Pe/CEo = 1 where: ROEt = NIt/CEt1 & re = cost of capital Market Capitalization = Book Value of Equity (ROE constant; cost of capital constant & no growth) MarkettoBook Ratio > 1.0 if the market expects ROE > re in the future 5 ACC 411  Ch. 11 MarkettoBook Ratio: With Growth If forecasted ROE and growth rate, g , are constant forever, we have this simple relationship for the markettobook ratio: Pe/CEo = 1 + (ROE re) / (re g ) MarkettoBook ratios increase with 1) Increasing profitability (ROE) 2) Higher growth (g) 3) lower cost of capital (re) 6 ACC 411  Ch. 11 Why are MarkettoBook Ratios Often Greater than 1.0?...
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 Spring '08
 hancock

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