Reading 42: Market-Based Valuation: Price and Enterprise Val 2010, face, discounted, determine, center

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

LOS p: Calculate and explain the use of price multiples to determine terminal value in a multistage discounted cash flow model.

 

 

 

Precision Tools is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.00, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A) 7.14.

B) 6.00.

C) 9.00.

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P₅/E₅ = (0.40 × 1.05) / (0.12 – 0.05) = 6.00

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A common price to earnings (P/E) based method for estimating terminal value in multi-stage models is the:

A) fundamentals approach.

B) P/E to growth (PEG) approach.

C) dividend yield approach.

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It is common to restate the Gordon growth model price as a multiple of expected future book value per share or earnings per share (EPS).

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Industrial Light is expected to have earnings per share (EPS) of $5.00 per share in five years, a dividend per share of $2.50, a cost of equity of 12%, and a long-term expected growth rate of 5%. What is the terminal trailing price-to-earnings (P/E) ratio in five years?

A) 3.75.

B) 7.50.

C) 7.14.

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P₅ / E₅ = (0.50 × 1.05) / (0.12 – 0.05) = 7.50