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

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

LOS k: Calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology.

 

 

 

An analyst is valuing a company with a dividend payout ratio of 0.35, a beta of 1.45, and an expected earnings growth rate of 0.08. A regression on comparable companies produces the following equation:

Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) ? (0.70 × beta)

What is the predicted P/E using the above regression?

A) 7.65.

B) 9.18.

C) 11.21.

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Predicted P/E = 7.65 + (3.75 × 0.35) + (15.35 × 0.08) ? (0.70 × 1.45) = 9.1755

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An analyst is valuing a company with a dividend payout ratio of 0.55, a beta of 0.92, and an expected earnings growth rate of 0.07. A regression on comparable companies produces the following equation:

Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) ? (0.70 × beta)

What is the predicted P/E using the above regression?

A) 11.43.

B) 10.14.

C) 7.65.

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Predicted P/E = 7.65 + (3.75 × 0.55) + (15.35 × 0.07) ? (0.70 × 0.92) = 10.14

土豆妮

An analyst is valuing a company with a dividend payout ratio of 0.65, a beta of 0.72, and an expected earnings growth rate of 0.05. A regression on comparable companies produces the following equation:

Predicted price to earnings (P/E) = 7.65 + (3.75 × dividend payout) + (15.35 × growth) ? (0.70 × beta)

What is the predicted P/E using the above regression?

A) 10.35.

B) 7.65.

C) 11.39.

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Predicted P/E = 7.65 + (3.75 × 0.65) + (15.35 × 0.05) ? (0.70 × 0.72) = 10.35