In contrast to various discounted cash-flow techniques that attempt to estimate a specific value for a stock based on its estimated growth rates and its discount rate, the relative valuation techniques implicitly contend that it is possible to determine the value of an economic entity(i.e., the market, an industry, or a company) by comparing it to similar entities on the basis of several relative ratios that compare its stock price to relevant variables that effect a stock’s value, such as earnings, cash flow, book value and sales.Consider the following four approaches.1. Earnings Multiplier ModelAssume a stock has an expected dividend payout of 50%, a required rate of return of 12% and an expected growth rate for dividends of 9%. Current earnings are $2.00 per share and theexpected growth rate for earnings is 9%.? Calculate the earnings multiplier and stock priceBriefly explain the following methods (for and against)2. Price/Cash Flow Ratio3. Price/Book Value Ratio4. Price/Sales Ratio
In contrast to various discounted cash-flow techniques that attempt to estimate a specific value for a stock based on its estimated growth rates and its discount rate, the relative valuation techniques implicitly contend that it is possible to determine the value of an economic entity
(i.e., the market, an industry, or a company) by comparing it to similar entities on the basis of several relative ratios that compare its stock price to relevant variables that effect a stock’s value, such as earnings,
Consider the following four approaches.
1. Earnings Multiplier Model
Assume a stock has an expected dividend payout of 50%, a required
expected growth rate for earnings is 9%.
? Calculate the earnings multiplier and stock price
Briefly explain the following methods (for and against)
2. Price/Cash Flow Ratio
3. Price/Book Value Ratio
4. Price/Sales Ratio
Step by step
Solved in 4 steps
