Using the methodologies learned in class, conduct a relative valuation of your company using the following multiples: Price to Earnings (P/E) Price to B
Using the methodologies learned in class, conduct a relative valuation of your company using the following multiples:
- Price to Earnings (P/E)
- Price to Book (P/B)
- Price to Sales (P/S)
- Enterprise Value to EBITDA (EV/EBITDA)
- Any other method deemed appropriate for your company
In your valuation discussion, explain how you determined the appropriate value of the multiple. Include historical charts to reinforce your arguments and provide context.
Evaluate which of these multiples are suitable for your company. Justify your selection. Consider factors such as industry norms, company-specific characteristics, and growth prospects when making your determination.
Submit a detailed report through Brightspace, ensuring clarity in presentation and thoroughness in analysis.
My Instructions
I have attached the presentation of professor and also attaching my Pro-forma statements analysis from which you can take a reference. I just need the excel work for this relative valuation. I can write a report from that.
RELATIVE VALUATION
FI 640
Dr. Alok Nemani
RELATIVE VALUATION
▪ In relative valuation, the value of an asset is compared to the
values assessed by the market for similar assets.
▪ Can’t catch market trends. Assumes market is on average
efficient.
2 © 2024 Alok Nemani All Rights Reserved
CONDUCTING RELATIVE VALUATION
▪ Identify similar assets and obtain market values for these
assets.
▪ Convert these market values into standardized values or
multiples, since the absolute prices cannot be compared.
▪ Multiples for both the assets should be estimated in a
consistent manner (such as accounting rules, periods, ratio
definition etc.)
▪ Compare the multiple for the asset being analyzed to the
multiple for the comparable asset, controlling for any
differences between the firms that might affect the multiple
(example: size, growth rate, profitability etc.).
3 © 2024 Alok Nemani All Rights Reserved
FINDING THE RIGHT MULTIPLE
➢What is the right value of a multiple?
I. Compare the current multiple of the company to its
own historical multiple.
▪ Measured at a comparable point in the business cycle
and macroeconomic environment
II. Compare current multiples to those of other
companies, a sector or a market.
▪ Adjust the multiple for differences in growth, profitability,
lifecycle, dividends, risk profile etc.
▪ Compare the current spread between them to a historical
spread.
4 © 2024 Alok Nemani All Rights Reserved
PE RATIO
▪ Price-to-earnings (PE ratio): stock price divided by EPS
❑ Price: usually the current stock price
❑ EPS is earnings per share
❑ EPS can be of different types.
• Most recent EPS
• Trailing PE: last 12-month EPS
• Forward PE: next 12-month EPS
5 © 2024 Alok Nemani All Rights Reserved
PE RATIO
▪ All else equal, high PE ratio firms are overvalued compared to low
PE stocks. But,
▪ All else is seldom equal.
❑ Firms with high growth, high ROE, low risk (stable earnings), high
dividends typically command high PE ratio.
❑ Determine expected PE ratio using comparable asset and multiply it by
correct EPS to get expected intrinsic value.
▪ Getting the right PE ratio:
❑ Examine past (3-5 year) ratios : Highest PE ratio may be used for best
case, average for base case, lowest for worst case. Assign probability
based on market condition i.e., GDP growth, inflation, interest rates.
❑ Adjust for historic spreads
❑ Regress firm’s PE ratio on industry or competitor PE ratio to predict the
PE ratio.
6 © 2024 Alok Nemani All Rights Reserved
PEG RATIO
▪ PE ratio is higher for high growth firms.
▪ To reconcile high P/E valuation for high growth firms, the
PEG ratio was developed.
▪ It is the ratio of price multiple to the EPS growth rate.
▪ 𝑃𝐸𝐺 = ൗ𝑃/𝐸 𝑔, g is expected earnings growth rate
▪ Allows identification of overvalued stocks by adjusting for
growth.
7 © 2024 Alok Nemani All Rights Reserved
IS PEG SUPERIOR TO P/E?
▪ PEG is more appropriate for high growth firms.
▪ P/E is more appropriate for stable companies.
▪ The main issue is the quality of the growth estimate.
▪ We know that analysts have consistently over-estimated
EPS growth.
▪ PEG is not better or worse than P/E. It is just a different
valuation measure.
8 © 2024 Alok Nemani All Rights Reserved
EV-TO-EBITDA RATIO
▪ Economic value to EBITDA
▪ EV (economic value) = market value of equity + market value of
debt (take book value of market value not available) – cash.
▪ EBITDA: earnings before interest, taxes, and depreciation
▪ Intuition is similar to PE. Firms with high growth, high ROE, low
risk (stable earnings) typically command high multiple.
▪ Firms with high debt (not distressed) commands higher multiple
due to low cost of capital.
▪ EV/EBITDA analysis provides firm value.
▪ EV/EBITDA is preferred for capital intensive and high leverage
businesses.
4-9 © 2024 Alok Nemani All Rights Reserved
PRICE-TO-BOOK RATIO
▪ Price/Book Value = Market Value of Equity / Book Value of Equity
❑ Market value of equity = share price * # shares outstanding
❑ Book value of equity = shareholders’ equity in the balance sheet
▪ High ROE firms typically trade at a higher multiple.
▪ Good for capital intensive businesses.
❑ Examples: Energy companies, Financial services and banks, Transportation companies, manufacturing companies.
▪ Can be used for cyclical businesses.
▪ Should not be used for firms with volatile capital structure or firms with negative equity.
4-10 © 2024 Alok Nemani All Rights Reserved
PRICE-TO-SALES RATIO
❑ Price/ Sales= Market Value of Equity/Total Revenues
❑ Price = PS ratio * sales
❑ Sales are generally less subject to distortion or manipulation
than EPS or book value.
❑ Sales are positive when EPS is negative.
❑ Because sales are more stable than EPS, PS is generally more
stable than PE.
❑ PS is appropriate for valuing the equities of growth companies
yet to turn profitable, firms with temporary setback and when
sales is the most important metric.
❑ Since it does not account for capex or debt, should be used for
companies for which debt ratios or capex is stable.
4-11 © 2024 Alok Nemani All Rights Reserved
CHOOSING THE RIGHT METHODOLOGY
▪ How to determine the right value given there are numerous
multiples?
▪ First approach:
❑ Use simple average of stock price calculated using different multiples.
❑ Use weighted average of stock price calculated using different multiples.
▪ A better approach:
❑ Determine the right multiple for your company and use it for valuation.
❑ Right multiple depends on business dynamics (industry), value drivers
4-12 © 2024 Alok Nemani All Rights Reserved
CHOOSING MULTIPLES
4-13
Sector Right Multiple
Cyclical
Manufacturing – for stable & low leverage
Manufacturing – for high leverage
High Tech, Normal growth
High Tech, High growth
Heavy Infrastructure
Financial services
Retail – for stable & low leverage
Retail – for high leverage
© 2024 Alok Nemani All Rights Reserved
CHOOSING MULTIPLES
4-14
Sector Right Multiple
Cyclical PB
Manufacturing – for stable & low leverage PE, PB, EV/EBITDA
Manufacturing – for high leverage EV/EBITDA, PB
High Tech, Normal growth PE
High Tech, High growth PEG
Heavy Infrastructure EV/EBITDA, PB
Financial services Price to Book
Retail – for stable & low leverage PE, PS
Retail – for high leverage EV to sales
© 2024 Alok Nemani All Rights Reserved
NICE THOUGHTS
▪ The P/E ratio is only a reflection of what most investors expect to
happen at a point in time, and that is neither here nor there in terms
of what actually will happen.” Peter Bernstein
▪ “Just because something is cheap does not mean it is not going to
go down.” Warren Buffett
▪ “There is nothing at all conservative, in my opinion, about
speculating as to just how high a multiplier a greedy and capricious
public will put on earnings.” Warren Buffett
4-15 © 2024 Alok Nemani All Rights Reserved
THANK YOU
16 © 2024 Alok Nemani All Rights Reserved
- Slide 1: Relative valuation
- Slide 2: Relative valuation
- Slide 3: Conducting Relative valuation
- Slide 4: Finding the right multiple
- Slide 5: PE ratio
- Slide 6: PE ratio
- Slide 7: PEG ratio
- Slide 8: IS PEG Superior to P/E?
- Slide 9: EV-to-EBITDA ratio
- Slide 10: Price-to-book ratio
- Slide 11: Price-to-sales ratio
- Slide 12: Choosing the right methodology
- Slide 13: Choosing Multiples
- Slide 14: Choosing Multiples
- Slide 15: Nice thoughts
- Slide 16
,
Daily
| S&P | Risk Free Rate | Oracle | |||||||||||||||||||||
| Date | Price | %Return | YTM | Daily | Market Risk Premium | Price | %Return | observation_date | DGS10 | Date | Price | ||||||||||||
| 03/18/25 | 5,614.66 | -1.07% | 4.31 | 0.0118% | -1.08% | 149.45 | -2.96% | 2024-03-14 | 4.29 | 03/18/25 | 149.45 | ||||||||||||
| 03/17/25 | 5,675.12 | 0.64% | 4.31 | 0.0118% | 0.63% | 154.01 | 3.18% | 2024-03-15 | 4.31 | 03/17/25 | 154.01 | ||||||||||||
| 03/14/25 | 5,638.94 | 2.13% | 4.31 | 0.0118% | 2.11% | 149.27 | 1.09% | 2024-03-18 | 4.34 | 03/14/25 | 149.27 | ||||||||||||
| 03/13/25 | 5,521.52 | -1.39% | 4.27 | 0.0117% | -1.40% | 147.66 | -2.14% | 2024-03-19 | 4.30 | 03/13/25 | 147.66 | ||||||||||||
| 03/12/25 | 5,599.30 | 0.49% | 4.32 | 0.0118% | 0.48% | 150.89 | 4.65% | 2024-03-20 | 4.27 | 03/12/25 | 150.89 | ||||||||||||
| 03/11/25 | 5,572.07 | -0.76% | 4.28 | 0.0117% | -0.77% | 144.18 | -3.10% | SUMMARY OUTPUT | 2024-03-21 | 4.27 | 03/11/25 | 144.18 | |||||||||||
| 03/10/25 | 5,614.56 | -2.70% | 4.22 | 0.0116% | -2.71% | 148.79 | -4.11% | 2024-03-22 | 4.22 | 03/10/25 | 148.79 | ||||||||||||
| 03/07/25 | 5,770.20 | 0.55% | 4.32 | 0.0118% | 0.54% | 155.16 | 2.80% | Regression Statistics | 2024-03-25 | 4.25 | 03/07/25 | 155.16 | |||||||||||
| 03/06/25 | 5,738.52 | -1.78% | 4.29 | 0.0118% | -1.79% | 150.94 | -6.57% | Multiple R | 0.5822825511 | 2024-03-26 | 4.24 | 03/06/25 | 150.94 | ||||||||||
| 03/05/25 | 5,842.63 | 1.12% | 4.28 | 0.0117% | 1.10% | 161.56 | 2.60% | R Square | 0.3390529693 | 2024-03-27 | 4.20 | 03/05/25 | 161.56 | ||||||||||
| 03/04/25 | 5,778.15 | -1.22% | 4.22 | 0.0116% | -1.24% | 157.47 | -2.81% | Adjusted R Square | 0.3363878603 | 2024-03-28 | 4.20 | 03/04/25 | 157.47 | ||||||||||
| 03/03/25 | 5,849.72 | -1.76% | 4.16 | 0.0114% | -1.77% | 162.02 | -2.43% | Standard Error | 0.0194532488 | 2024-03-29 | 03/03/25 | 162.02 | |||||||||||
| 02/28/25 | 5,954.50 | 1.59% | 4.24 | 0.0116% | 1.57% | 166.06 | 0.79% | Observations | 250 | 2024-04-01 | 4.33 | 02/28/25 | 166.06 | ||||||||||
| 02/27/25 | 5,861.57 | -1.59% | 4.29 | 0.0118% | -1.60% | 164.76 | -4.47% | 2024-04-02 | 4.36 | 02/27/25 | 164.76 | ||||||||||||
| 02/26/25 | 5,956.06 | 0.01% | 4.25 | 0.0116% | 0.00% | 172.47 | 2.33% | ANOVA | 2024-04-03 | 4.36 | 02/26/25 | 172.47 | |||||||||||
| 02/25/25 | 5,955.25 | -0.47% | 4.3 | 0.0118% | -0.48% | 168.54 | -0.84% | df | SS | MS | F | Significance F | 2024-04-04 | 4.31 | 02/25/25 | 168.54 | |||||||
| 02/24/25 | 5,983.25 | -0.50% | 4.4 | 0.0121% | -0.51% | 169.96 | 1.28% | Regression | 1 | 0.0481434112 | 0.0481434112 | 127.2191756549 | 4.32996687533767E-24 | 2024-04-05 | 4.39 | 02/24/25 | 169.96 | ||||||
| 02/21/25 | 6,013.13 | -1.71% | 4.42 | 0.0121% | -1.72% | 167.81 | -4.65% | Residual | 248 | 0.0938503643 | 0.0003784289 | 2024-04-08 | 4.42 | 02/21/25 | 167.81 | ||||||||
| 02/20/25 | 6,117.52 | -0.43% | 4.5 | 0.0123% | -0.45% | 176.00 | -3.04% | Total | 249 | 0.1419937756 | <
Collepals.com Plagiarism Free Papers Are you looking for custom essay writing service or even dissertation writing services? Just request for our write my paper service, and we'll match you with the best essay writer in your subject! With an exceptional team of professional academic experts in a wide range of subjects, we can guarantee you an unrivaled quality of custom-written papers. Get ZERO PLAGIARISM, HUMAN WRITTEN ESSAYS Why Hire Collepals.com writers to do your paper? Quality- We are experienced and have access to ample research materials. We write plagiarism Free Content Confidential- We never share or sell your personal information to third parties. Support-Chat with us today! We are always waiting to answer all your questions.  All Rights Reserved Terms and Conditions |