Reading 44: Market-Based Valuation: Price and Enterprise Val 2011, describe, central, center, median

土豆妮

Session 12: Equity Investments: Valuation Models
Reading 44: Market-Based Valuation: Price and Enterprise Value Multiples

LOS s: Discuss the use of arithmetic mean, the harmonic mean, the weighted harmonic mean, and the median to describe the central tendency of a group of multiples.

 

 

An analyst is preparing a presentation on “Interpreting PE ratios” and has the following data:

	Portfolio %	Stock PE
Stock AAA	60%	10
Stock BBB	40%	15

Which of the following is closest to the weighted harmonic mean of these two PE ratios?

A) 12.49.

B) 11.54.

C) 11.98.

---

 

The weighted harmonic mean of the two PE ratios is a harmonic mean which is weighted by the portfolio weights.

1/[(0.60 × 1/10) + (0.40 × 1/15)] = 11.54

土豆妮

An analyst is calculating the weighted harmonic mean P/E ratio of a 2-stock portfolio. Stocks AAA and BBB have prices of $12 and $15, respectively, and EPS of $1 and $2, respectively. Which of the following is the weighted harmonic mean P/E of the portfolio closest to?

A) 9.23

B) 9.00

C) 9.75

---

The weighted harmonic mean is 1/[(12/27)(1/12) + (15/27)(2/15)] = 27/3 = 9.00 The weighted harmonic mean of the individual stocks P/Es is the best measure of the P/E for a portfolio of stocks.

土豆妮

An analyst is preparing a presentation on “Interpreting PE ratios” and has the following data:

	Portfolio %	Stock PE
Stock AAA	60%	10
Stock BBB	40%	15

Which of the following is the most appropriate measure for calculating the portfolio P/E?

A) Geometric mean of the P/E’s.

B) Arithmetic average of the P/E’s.

C) Weighted harmonic mean of the P/E’s.

---

The weighted harmonic mean of the 10 and 15 will give the result closest to the portfolio earnings divided by the portfolio value.