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89
The Multicollinearity Problem
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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?
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91
The value of growth
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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
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93
PEG versus ln(Expected Growth)
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94
PEG Ratio Regression - US stocks
January 2016
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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.
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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
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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.
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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