the value of company’s equity using P/E and P/BV ratios – help needed
Hello,
I have the following task to solve.
I came up with two solutions.
Which one is correct?
Or maybe is there another one?
I am waitng for your comments, thank you in advance for your support.
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
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