Coefficients
a,b,c
4.392E02
.005
.199
9.210
.000
.807
.115
.087
7.007
.000
23.747
.466
.876
50.955
.000
.607
.085
.187
7.110
.000
Expected Growth
in EPS: next 5 y
PAYOUT
MARGIN
Beta
Model
1
B
Std. Error
Unstandardized
Coefficients
Beta
Standar
dized
Coefficients
t
Sig.
Dependent Variable: PS RATIO
a.
Linear Regression through the Origin
b.
Weighted Least Squares Regression  Weighted by Market Cap
c.
Aswath Damodaran
160
Cross Sectional Regression for Portugal in June
1999
n
Using data on 74 Portuguese companies from 1999, we regressed PS
ratios against profit margins:
PS
=
0.98
+ 6.96 Margin
(4.34)
(3.07)
R
2
= 45.29%
Aswath Damodaran
161
Value/Sales Ratio: Definition
n
The value/sales ratio is the ratio of the market value of the firm to the
sales.
n
Value/ Sales= Market Value of Equity + Market Value of DebtCash
Total Revenues
Aswath Damodaran
162
Value/Sales Ratio: Cross Sectional Distribution
EV/SALES
1400
1200
1000
800
600
400
200
0
Std. Dev = 2.48
Mean = 2.01
N = 4644.00
Aswath Damodaran
163
Value/Sales Ratios: Analysis of Determinants
n
If pretax operating margins are used, the appropriate value estimate is
that of the firm. In particular, if one makes the assumption that
•
Free Cash Flow to the Firm = EBIT (1  tax rate) (1  Reinvestment Rate)
n
Then the Value of the Firm can be written as a function of the aftertax
operating margin= (EBIT (1t)/Sales
g = Growth rate in aftertax operating income for the first n years
g
n
= Growth rate in aftertax operating income after n years forever (Stable
growth rate)
RIR
Growth, Stable
= Reinvestment rate in high growth and stable periods
WACC = Weighted average cost of capital
Value
Sales
0
= After  tax Oper. Margin *
(1  RIR
growth
)(1+ g)*
1

(1 + g )
n
(1+ WACC)
n
WACC  g
+
(1 RIR
stable
)(1+ g)
n
* ( 1 +g
n
)
(WACC  g
n
)(1+WACC)
n
Aswath Damodaran
164
Value/Sales Ratio: An Example
n
Consider, for example, the Value/Sales ratio of Coca Cola. The
company had the following characteristics:
Aftertax Operating Margin =18.56%
Sales/BV of Capital =
1.67
Return on Capital = 1.67* 18.56% = 31.02%
Reinvestment Rate= 65.00% in high growth; 20% in stable growth;
Expected Growth = 31.02% * 0.65 =20.16% (Stable Growth Rate=6%)
Length of High Growth Period = 10 years
Cost of Equity =12.33%
E/(D+E) = 97.65%
Aftertax
Cost of Debt = 4.16%
D/(D+E) 2.35%
Cost of Capital= 12.33% (.9765)+4.16% (.0235) =
12.13%
Value of Firm
0
Sales
0
=.1856*
(1.65)(1.2016)*
1

(1.2016)
10
(1.1213)
10
.1213.2016
+
(1.20)(1.2016)
10
* (1.06)
(.1213.06)(1.1213)
10
= 6.10
Aswath Damodaran
165
Value Sales Ratios and Operating Margins
Coca Cola: The Operating Margin Effect
0
2
4
6
8
10
12
6%
8%
10%
12%
14%
16%
18%
20%
Operating Margin
Value/Sales Ratio
0
50
100
150
200
250
$ Value
Value/Sales
$ Value
Aswath Damodaran
166
MSEL
GDYS
RET.TO
MLG
MHCO
ZANY
PSRC
FINL
ROSI
FLWS
LVC
TWMC
SPGLA
SAH
RUSH
MDA
DBRN
GADZ
WLSN
CELL
FNLY
JILL
IBI
CLWY
ANIC
VOXX
CHRS
PSS
BKE
Z
MTMC
HMY
PBY
URBN
ROST
AEOS
PGDA
CC
BEBE
ITN
CAO
GBIZ
DAP
RUS
MNRO
SCHS
HLYW
MENS
LE
LIN
MDLK
RAYS
PIR
GLBE
ZQK
MIKE
CWTR
IPAR
ANN
AZO
BBY
LTD
ZLC
ORLY
FOSL
PSUN
CLE
PLCE
JWL
SATH
PCCC
WSM
TLB
HOTT
CPWM
TWTR
SCC
BFCI
TOO
VVTV
MBAY
BID
DABR
ISEE
CHCS
CDWC
LUX
0.0
0.5
1.0
1.5
2.0
0.000
0.075
0.150
0.225
Operating Margin
V
/
S
a
l
e
s
U.S. Specialty Retailers: V/S vs Operating Margin
Aswath Damodaran
167
Brand Name Premiums in Valuation
n
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 Spring '11
 tnaga
 P/E ratio, PEG ratio, Aswath Damodaran