Reading 42: Market-Based Valuation: Price and Enterprise Val 2010, interpret, center, income, style

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Session 12: Equity Investments: Valuation Models
Reading 42: Market-Based Valuation: Price and Enterprise Value Multiples

LOS f: Describe, calculate, and interpret underlying earnings, given earnings per share (EPS) and nonrecurring items in the income statement.

 

 

 

Alpha Software (AS) recently reported a representative annual earnings per share (EPS) of $1.75, which included an extraordinary loss of $0.19 and an expense of $0.10 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $65.00, what is a useful AS’s trailing price to earnings (P/E) for valuation purposes?

A) 37.14.

B) 44.52.

C) 31.86.

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Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $1.75 + $0.19 + $0.10 = $2.04. The resulting trailing P/E = 65.00 / 2.04 = 31.86.

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Glad Tidings Gifts (GTG) recently reported a representative annual earnings per share (EPS) of $2.25, which included an extraordinary loss of $0.17 and an expense of $0.12 related to acquisition costs during the accounting period, neither of which are expected to recur. Given that the most recent share price is $50.00, what is a useful GTG’s trailing price to earnings (P/E) for valuation purposes?

A) 22.22.

B) 25.51.

C) 19.69.

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Using an underlying earnings concept, an analyst would add back the temporary charges against earnings: $2.25 + $0.17 + $0.12 = $2.54. The resulting trailing P/E = 50.00 / 2.54 = 19.69.

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Underlying earnings may be defined as earnings:

A) that include non-recurring components.

B) net of capital expenditures needed to keep the business productive.

C) that exclude non-recurring components.

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Underlying earnings are earnings that exclude non-recurring items. They are also known as persistent, continuing, or core earnings.