Aswath The Multicollinearity Problem Aswath

# Aswath the multicollinearity problem aswath

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Aswath Damodaran 88
89 The Multicollinearity Problem Aswath Damodaran 89
90 Using the PE ratio regression ¨ Assume that you were given the following information for Disney. The firm has an expected growth rate of 15%, a beta of 1.25 and a 20% dividend payout ratio. Based upon the regression, estimate the predicted PE ratio for Disney. ¤ Predicted PE = 8.76 -4.08 Beta + 75.24 Growth + 19.73 (Payout) ¨ Disney is actually trading at 20 times earnings. What does the predicted PE tell you? ¨ Assume now that you value Disney against just its peer group. Will you come to the same valuation judgment as you did when you looked at it relative to the market? Why or why not? Aswath Damodaran 90
91 The value of growth Aswath Damodaran 91 Date Market price of extra % growth Implied ERP Jan-16 0.75 6.12% Jan-15 0.99 5.78% Jan-14 1.49 4.96% Jan-13 0.577 5.78% Jan-12 0.408 6.04% Jan-11 0.836 5.20% Jan-10 0.55 4.36% Jan-09 0.78 6.43% Jan-08 1.427 4.37% Jan-07 1.178 4.16% Jan-06 1.131 4.07% Jan-05 0.914 3.65% Jan-04 0.812 3.69% Jan-03 2.621 4.10% Jan-02 1.003 3.62% Jan-01 1.457 2.75% Jan-00 2.105 2.05%
92 II. PEG Ratio versus the market PEG versus Growth Aswath Damodaran 92
93 PEG versus ln(Expected Growth) Aswath Damodaran 93
94 PEG Ratio Regression - US stocks January 2016 Aswath Damodaran 94
95 Negative intercepts…and problem forecasts.. ¨ When the intercept in a multiples regression is negative, there is the possibility that forecasted values can be negative as well. One way (albeit imperfect) is to re-run the regression without an intercept. Aswath Damodaran 95
96 I. PE ratio regressions across markets – January 2016 Region Regression – January 2016 R 2 US PE = 8.76 + 75.24 g EPS + 19.73 Payout – 4.08 Beta 40.5% Europe PE = 13.43 + 54.46 g EPS + 17.63 Payout - 4.16 Beta 24.7% Japan PE = 20.10+ 26.46 g EPS + 24.87 Payout – 7.60 Beta 28.4% Emerging Markets PE = 15.13 + 40.99 g EPS + 9.03 Payout - 2.14 Beta 11.5% Australia, NZ, Canada PE = 7.31 + 73.42 g EPS + 13.94 Payout – 3.73 Beta 26.8% Global PE = 12.51 + 87.48 g EPS + 11.48 Payout - 3.96 Beta 27.5% g EPS =Expected Growth: Expected growth in EPS or Net Income: Next 5 years Beta: Regression or Bottom up Beta Payout ratio: Dividends/ Net income from most recent year. Set to zero, if net income < 0 Aswath Damodaran 96
97 II. Price to Book Ratio: Fundamentals hold in every market Region Regression – January 2016 R 2 US PBV= -1.68 + 14.59 g EPS – 0.99 Beta + 3.79 Payout + 19.58 ROE 50.2% Europe PBV = 2.66 + 6.30 g EPS – 1.40 Beta + 9.39 ROE + 1.80 Payout 40.6% Japan PBV= 2.01 + 2.15 g EPS – 1.18 Beta + 0.97 Payout + 8.28 ROE 29.1% Emerging Markets PBV= -0.43 + 2.71 g EPS - 0.74 Beta + 2.48 Payout + 18.91 ROE 34.1% Australia, NZ, Canada PBV= -1.20 + 8.97 g EPS - 0.69 Beta + 1.01 Payout + 21.90 ROE 55.4% Global PBV= 0.22 + 5.41 g EPS - 0.95 Beta + 2.68 Payout +16.09 ROE 43.1% g EPS =Expected Growth: Expected growth in EPS/ Net Income: Next 5 years Beta: Regression or Bottom up Beta Payout ratio: Dividends/ Net income from most recent year. Set to zero, if net income < 0 ROE: Net Income/ Book value of equity in most recent year. 97
98 III. EV/EBITDA – January 2016 Region Regression – January 2016 R squared United States EV/EBITDA= 19.54 + 3.64 g - 1.97 WACC – 12.71 DFR – 3.30 Tax Rate 2.3% Europe EV/EBITDA= 17.28 + 18.82 g - 17.94 WACC – 7.55 DFR – 9.10 Tax Rate 9.0% Japan EEV/EBITDA= 22.49 + 1.75 g - 79.45 WACC – 6.03 DFR – 19.00 Tax Rate % Emerging Markets EV/EBITDA= 50.71 + 9.57 g - 212.55 WACC – 18.27 DFR – 21.40 Tax Rate 5.9% Australia, NZ & Canada EV/EBITDA= 25.86+ 10.10 g - 162.14 WACC – 1.41 DFR – 10.50 Tax Rate 8.6% Global EV/EBITDA= 27.42 + 6.90 g -55.15 WACC – 12.03 DFR – 16.20 Tax Rate 3.7%

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• Spring '11
• RichardM.Levine
• Valuation, Financial Ratio, P/E ratio, PEG ratio, Aswath Damodaran
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