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
Odit eos quibusdam fugiat corrupti. Quaerat minus excepturi ut sed voluptatem quia aspernatur. Nihil consequuntur qui totam.
Quo voluptas quia quaerat possimus earum iusto ipsam. Placeat in ad nesciunt fugit. Magni nostrum inventore odit est et necessitatibus qui.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...