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Relative Valuation IV

Analyzing three companies in the same business with different ROEs to determine their PBV ratios, judging management, comparing revenue multiples for retail firms, and evaluating the strength of brand names in smart phone companies.

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Relative Valuation IV

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  1. Relative Valuation IV

  2. PBV and ROE You are looking at three companies in the same business, all with a cost of equity of 10%. Company A has an ROE of 12%, company B has an ROE of 10% and company C has an ROE of 8%. Which one is most likely to be trading at below book value? • Company A • Company B • Company C If you were to make a judgment of which of these companies is best managed, which one would you pick?

  3. Accounting impact on PBV and ROE Now assume that company C (which had an ROE of 8%) decides to take a major write off that reduces their book equity by 50%. What will happen to the P/BV ratio? What will happen to the ROE?

  4. Revenue Multiples and ? You are comparing the revenue multiples of retail firms. If you pick companies based just upon the revenue multiple (low is good), which of the following is most likely to look cheap to you? • Department Stores • Discount retailers • Luxury retailers • None of the above

  5. The Power of a Brand Name Which smart phone company has the strongest brand name? Why?

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