PP Equity Valuation

To ie roe k roe profit marginasset turnovera e

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Unformatted text preview: rate investment, if those investments add value to the firm. to i.e: ROE >K ROE =(Profit Margin)(Asset Turnover)(A/ E leverage) Example: Example: An industry analysis reveals that firms have been paying An out 55% of their earnings in dividends, asset turnover = 2; Asset-to-equity = 2 and profit margins are 17%. What is the industry’s projected growth rate? the First we need to find ROE: ROE = profit margin x asset turnover x A/E = ROE = 0.17 x 2 x 2 = .68 0.17 g = ROE x b = 0.68 x 0.45 = 31% ROE Commonly Used Price Multiples Commonly Price to earnings (P/E) Price to book value (P/BV) Price to sales (P/S) Earnings Multiplier Model (P/E Ratio) To convert the dividend discount model to an earnings multiplier model -Divide both sides of the DDM by E1 and we have: the P0/E1 = (D1/E1) / (k – g) Use expected P/E, not trailing The difference between k and g drives the P/E i.e: the smaller the difference, the higher the P/E i.e: Any variables that influence stock prices in the Any DDM will have the same impact on the P/E ratio. DDM The P/E ratio is inversely related to changes in the The market capitalization rate. market Growth stock have high P/E ratios. Value stocks have low P/E ratios. Value When P/E increases, ROE increases because high ROE When implies the firm has good opportunity for growth. implies Riskier stocks will have lower P/E multiples, because k Riskier is high...
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This document was uploaded on 02/05/2014.

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