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In this chapter, we will examine the P/E and other ratios that scale a firm’s market valuation to a measure of firm value. These ratios will be used to determine the relative valuation of a common share. They are widely used in practice because in a single number, they provide the firm’s market valuation relative to some firm fundamental. | Market-Based Valuation: Price and Enterprise Value Multiples Presenter Venue Date 1 In Chapter 3, we used the Gordon growth model to derive a justified price-to-earnings ratio (P/E) for a stock, given its fundamentals. In this chapter, we will examine the P/E and other ratios that scale a firm’s market valuation to a measure of firm value. These ratios will be used to determine the relative valuation of a common share. They are widely used in practice because in a single number, they provide the firm’s market valuation relative to some firm fundamental. In this chapter, we also examine the issues that affect the evaluation of valuation ratios, how the ratios relate to firm fundamentals, the rationales and drawbacks to the various ratios, the challenges of using valuation ratios internationally, and the use of momentum indicators. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be . | Market-Based Valuation: Price and Enterprise Value Multiples Presenter Venue Date 1 In Chapter 3, we used the Gordon growth model to derive a justified price-to-earnings ratio (P/E) for a stock, given its fundamentals. In this chapter, we will examine the P/E and other ratios that scale a firm’s market valuation to a measure of firm value. These ratios will be used to determine the relative valuation of a common share. They are widely used in practice because in a single number, they provide the firm’s market valuation relative to some firm fundamental. In this chapter, we also examine the issues that affect the evaluation of valuation ratios, how the ratios relate to firm fundamentals, the rationales and drawbacks to the various ratios, the challenges of using valuation ratios internationally, and the use of momentum indicators. DISCLAIMER: This presentation is NOT a substitute for the CFA Program curriculum. Candidates should not view this material as reflecting what will be required of them on the CFA exam. Valuation Indicators LOS: Distinguish among types of valuation indicators. Pages 258 – 259 Price multiples are ratios of the stock price to some measure of fundamental value. The intuition behind price multiples is that they tell the investor what one share buys, whether that is earnings, cash flow, net assets, or some other measure of value. Enterprise value multiples are ratios of total firm value divided by a measure of fundamental value, such as earnings before earnings and taxes (EBIT), sales, or operating cash flow. Momentum indicators can also be used in valuation, where the stock price or some firm fundamental (e.g., earnings) is related to the time series of its own past values. The logic behind their use is that they may forecast future returns. Methods for Price & Enterprise Value Multiples LOS: Distinguish between the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation. LOS: .
