Sep 20, 2023

Hello,

I have the following task to solve.
I came up with two solutions.
Which one is correct?
Or maybe is there another one?

Calculate the value of company’s equity using P/E and P/BV ratios.

Use trailing version of P/E indicator.
Assume that peer group was thoroughly chosen and adjusted.

Formula needed for calculations as below:
Market value of equity = (P/Epeers) x adj. Net Earnings + Market value of non-operating assets

Market value of equity = (P/BVpeers) x equity book value (operating activity) + Market value of non-operating assets

Peer group multipliers:
P/BV 1.5x
Trailing P/E 11.0x

Company information:
Last year net earnings – \$5.5 million
Expected annual profit growth rate – 5%
Current equity book value – \$44 million
Non-operating real estate book value – \$4 million
Non-operating real estate market value – \$7 million

the value of company’s equity using P/E ratio:

Solution 1
Market value of equity = (P/Epeers)) x equity book value (operating activity) + Market value of non-operating assets

so Trailing P/E 11.0x X Last year net earnings \$5 500 000 + Non-operating real estate market value \$7 000 000 = \$67 500 000
The value of company’s equity using P/E ratio is: \$67 500 000

OR

Solution 2
Market value of equity = (P/Epeers) x adj. Net Earnings* + Market value of non-operating assets

*adj. Net Earnings = Last year net earnings + Expected annual profit growth rate so Trailing P/E 11.0x X (Last year net earnings \$5 500 000 X (1+0,05) ) + Non-operating real estate market value \$7 000 000 = \$70 525 000The value of company’s equity using P/E ratio is: \$70 525 000

the value of company’s equity using P/B ratio:
Market value of equity = (P/BVpeers) x equity book value (operating activity) + Market value of non-operating assets
so P/BV 1,5 x (Current equity book value - \$44 000 000 - Non-operating real estate book value \$4 000 000) + Non-operating real estate market value \$7 000 000 = \$67 00 000
The value of company’s equity using P/BV ratio is: \$67 00 000