L8 - Book Value_ Revenue and Sector-Specific Multiples 2011s2

L8 - Book Value_ Revenue and Sector-Specific Multiples 2011s2

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Unformatted text preview: Prepared by Henry Yip 1 FINS3641 SECURITY ANALYSIS AND VALUATION PART 3: RELATIVE VALUATION MODELS Week 9: Book Value and Revenue Multiples Topics: Price to book value Firm value to book value Price to Sales Value to Sales Learning Outcomes: Learn how best to apply book value and revenue multiples Reading: Damodaran Chapters 19, 20 FINS3641 SAV Week 9: Book Value and Revenue Multiples 2 Price to Book Value Definition Test: What does the Price to Book Value (PBV) multiple measure? How do we define the PBV multiple? PBV = OR = when there are multiple classes of shares and different prices for different classes of shares; On consistency, i) The measure is fundamentally consistent the numerator and denominator are both equity values ii) if there is more than one class of common equity, include all classes in the measure, e.g., NCP has A class shares without voting rights and B class shares with voting rights iii) if a firm issues employee share options (as evidenced by documents filed to ASX or SEC) and hybrid securities with embedded conversion options (e.g., CBAs PERLS ) add the market values of these options to market value of equity, otherwise, a firm that uses more employee share options will have the lower PBV and look cheaper than another firm that uses less employee share options iv) Never include preferred stocks which are debt like instruments and are not common equity On uniformity, the book value of equity should be measured the same way across all firms, e.g., R&D expenses if some capitalize while others dont, recapitalize and amortise the expensed item. Otherwise, the latter will have smaller BV, higher PBV and look dearer than the former. Share buybacks add back the market value of all buybacks to the book value of equity for those firms that have a buyback program. Otherwise, these firms (smaller denominator) may look expensive. Goodwill acquired from acquisition if some include goodwill in book value of equity while others dont, remove the goodwill. Otherwise, the former will have smaller PBV and look cheaper. FINS3641 SAV Week 9: Book Value and Revenue Multiples 3 Price to Book Value Description Test: What sort of values/distributions do we expect from PBV multiples, across markets in different countries and across firms in the US? In the US, the median PBV multiple (1.85 in July 2000) is about half the mean (3.25) There are less firms with negative book value of equity than firms with negative earnings A larger portion of stocks trade at below book value in Europe, emerging markets and Japan than do in the United States, but there are also far more outliers with very high PBV ratios in the US. United States, but there are also far more outliers with very high PBV ratios in the US....
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L8 - Book Value_ Revenue and Sector-Specific Multiples 2011s2

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