a Predictors Expected Growth in EPS next 5 y PAYOUT1 Beta b Coefficients abc

A predictors expected growth in eps next 5 y payout1

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a. Predictors: Expected Growth in EPS: next 5 y, PAYOUT1, Beta b. Coefficients a,b,c 4.389 .609 .188 7.212 .000 13.299 .962 .189 13.823 .000 1.014 .039 .608 25.786 .000 Beta PAYOUT1 Expected Growth in EPS: next 5 y Model 1 B Std. Error Unstandardized Coefficients Beta Standar dized Coefficients t Sig. Dependent Variable: Current PE a. Linear Regression through the Origin b. Weighted Least Squares Regression - Weighted by Market Cap c.
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Aswath Damodaran 46 Problems with the regression methodology n The basic regression assumes a linear relationship between PE ratios and the financial proxies, and that might not be appropriate. n The basic relationship between PE ratios and financial variables itself might not be stable, and if it shifts from year to year, the predictions from the model may not be reliable. n The independent variables are correlated with each other. For example, high growth firms tend to have high risk. This multi-collinearity makes the coefficients of the regressions unreliable and may explain the large changes in these coefficients from period to period.
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Aswath Damodaran 47 The Multicollinearity Problem Correlations 1.000 .342** .130** .009 . .000 .000 .594 3303 2085 3027 3290 .342** 1.000 .397** -.078** .000 . .000 .000 2085 2675 2393 2143 .130** .397** 1.000 -.213** .000 .000 . .000 3027 2393 4534 3114 .009 -.078** -.213** 1.000 .594 .000 .000 . 3290 2143 3114 3388 Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Pearson Correlation Sig. (2-tailed) N Current PE Expected Growth in EPS: next 5 y Beta Payout Ratio Current PE Expected Growth in EPS: next 5 y Beta Payout Ratio Correlation is significant at the 0.01 level (2-tailed). **.
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Aswath Damodaran 48 Using the PE ratio regressionnAssume that you were given the following information for Dell. Thefirm has an expected growth rate of 10%, a beta of 1.40 and pays nodividends. Based upon the regression, estimate the predicted PE ratiofor Dell.Predicted PE =(Work with absolute values in regression - 10 for 10% etc.)nDell is actually trading at 18 times earnings. What does the predictedPE tell you?
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Aswath Damodaran 49
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Aswath Damodaran 50
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Aswath Damodaran 51 PE Ratio versus Growth - The Effect of Interest
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  • P/E ratio, PEG ratio, Aswath Damodaran

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