L7 - Fundamental Principles and Earnings Multiple_2001s2

ଵ ? ௦? ሺ ଵ ሻሺ ଵ ? pe ሺ ? ሺ ?

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ଵା௚ ିࢍ = ௌ௔௟௘௦ൈ௣௥௢௙௜௧௠௔௥௚௜௡ൈ ଵି௕ ሻሺ ଵା௚ ିࢍ PE = ࡱࡼࡿ ૚ି࢈ ൈሺ૚ାࢍ ିࢍ ; PBV = ࡮ࢂ ࡾࡻࡱൈ ૚ି࢈ ൈሺ૚ାࢍ ିࢍ ; PS = ࡿࢇ࢒ࢋ࢙ ࢖࢘࢕ࢌ࢏࢚࢓ࢇ࢘ࢍ࢏࢔ൈ ૚ି࢈ ൈሺ૚ାࢍ ିࢍ b) Value of firm = V 0 = ࡲ࡯ࡲࡲ ିࢍ = ࡱ࡮ࡵࢀ ଵି௧ ଵା௚ ଵି௥௘௜௡௩௘௦௧௠௘௡௧௥௔௧௘ ିࢍ ; hence ࡱ࡮ࡵࢀ ૚ି࢚ ൈሺ૚ାࢍ ሻൈሺ૚ିࢍ ࡾࡻ࡯ ିࢍ ; ࢇࢌ࢚ࢋ࢘ି࢚ࢇ࢞ࡱ࡮ࡵࢀ ሺ૚ାࢍ ሻൈሺ૚ିࢍ ࡾࡻ࡯ ିࢍ ; ii) Establish the relationship between the fundamentals and the multiples Firms with higher growth, lower risk and better asset quality (ability to sustain lower reinvestment needs/ higher payout ratios, larger ROE and ROC) are expected to have larger multiples iii) Conduct sensitivity analysis to study how changes in the fundamentals will affect the multiples Should not always expect a linear impact, i.e., if firm A has twice the growth rate of firm B, it will generally not trade at twice its PE ratio.
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