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Market-Based Valuation: Price and Enterprise Value Multiples - PowerPoint PPT Presentation


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Market-Based Valuation: Price and Enterprise Value Multiples. Presenter Venue Date. Valuation Indicators. Methods for Price & Enterprise Value Multiples. Price-to-Earnings Multiple Rationales & Drawbacks. Price-to-Earnings Multiple Definitions. Example: Forward P/E. Example: Forward P/E.

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Presentation Transcript
method of comparables using peer company multiples
Method of ComparablesUsing Peer Company Multiples
  • Law of one price
  • Risk and earnings growth adjustments
  • PEG limitations:
    • Assumes linear relationship
    • Does not account for risk
    • Does not account for growth duration
method of comparables using industry and market multiples
Method of ComparablesUsing Industry and Market Multiples
  • Industry or Sector Index
    • Mean vs. median
    • Check industry valuation against market
  • Broad Market Index
    • Adjust for differences in fundamentals & size
    • Use relative values on a historical basis
method of comparables valuing the market
Method of ComparablesValuing the Market
  • Fed Model: Earnings Yield vs. T-Bond Yield
    • Does not account for inflation correctly
    • Relationship between earnings yield & interest rates is nonlinear
    • Small rate s → large s in P/E
  • Yardeni Model
method of comparables using own historical multiples
Method of ComparablesUsing Own Historical Multiples
  • Rationale: Regression to the Mean
  • Approaches:
    • Average of four middle values over past 10 years
    • Five-year average trailing P/E
  • Potential Problems from Changes in
    • Firm business
    • Firm financial leverage
    • Interest rate environment
    • Economic fundamentals
    • Inflationary environment