Chapter 9 Comprehension Check This is directly based on the readines for the week, You may take this as mary times as you want, and the sytem keeos your hichest score. tpoint A summarizes in a single number the relationhip between the market value of a compunys stock and some fundamental euantity, such as earnings, sales, or book value. A evalustes the price of a shure of stock by condiderine what a thare burs in terms of earnings, net assets, cash flow of some other meawire of value (stated on a per thare basis). An multigle evaluates the market value of total company value (minus the value of cash and short-term irvestments) relative to the. amount of EBIDA, sales. or ocerating cash flow it gentrates. Fwo methods underpin analyits' use of price and enterpelse value multiples: the method of the method based on forecasted , Multiptes are apseiline becsuse of and , but muy atfect conparabitity 1 point The method of comparables applies abo to enterperise value multiples, such as the EV/E8ITDA multiple - that is, a benchmark of EV (enterprise value) to EBITDA learnings before interest, taxes, depreciation, and amortization) in this apolication, multiglyine an EV/EBITDA benchmark multiple times an estimate of a company's EBITDA provides a quickestimate of the value of the entire contpang. and we would be evaluating the market value of an entire company in relation to some measure of value relevant to all providers of capltal not only providers of equity cagital. To arrive at an estimate of equilty value or per-share value, we would first need to adjust for the claim of debt against that whole-compary value. If Compary Dhas estimated EBIT of $100 million, depreciation anortitation of $20 millon, 20 million shares outstanding debe with a market value of 550 million and the petr-group comouriten wabgests the agpropriate EV/EBrTDA multiple is 5.0, the total equity value it estienated at and the per-thare price would be estinated as ser thare. The ideabehind is that a stock's price cannot be evaluated in inclation. The method of comparables refers to the valuation of an asset based on the multiples of (such as a peer-group comparison). For example, multiplying a benchmark value of the price-to-earnings (PyE) multiple ty an estimate of a company's earnings per share (EPS) provides a culck eftimate of the value of the company's stock that can be compared with the stock's market price. If Comoany A's EpS is $1.50 and an examination of benchmark frms in a peer-group comparison sugaests a fc of 22 is approcriate. we will estimate that an appropriate price for Compary As stock is - that is. . Similarty, multighirg a benshmark value of the price-to-sabes (P/5) multiple by an estimate of a company's sales fieure can provide an estimate of the compery's stock value. If company B has one bilicn shares outatanding and revenue of 35 billion and the peer eroup comparisonsugeests a P/5 of 32 is appropriate. we will estimate that an appropriate price for Cormany B's stock is - that is. . The price-to-book (P/i) multicle can be used in a similar liabilities, no preferred stock and elght hundred mililon thares of common stock cutstandirg. we will estimate that an aocrooriate price for Comoam Cis stock is - that is. The method of comparables applies also to enterprise value multiples, such as the EVEBITDA multiple - that is a benchmark of EV fenterprise value) to EBITDA (earnings before interest, taxes, depreciation, and amortization). In this application, multiplying an EV/EBITDA benchmark multiple times an estimate of a company's EBITDA provides a quick estimate of the value of the entire company, and we would be evaluating the market value of an entire company in relation to some measure of value relevant to all providers of eapital, not only providers of equity capital. To arrive at an estimate of equity value or per-share valuc, we would first need to ad; ist for the claim of debt against that whole-compamy value. If Compary D has estimated EBIT of $100 miltion, depreciation & amortization of $20 million, 20 million shares outstanding, debt with a market. value of 550 million and the peer-group comparison sugsests the appropeiate EV/EBITDA multiple is 5.0, the total equity value is estimated as price would be estimated as: per share. Chapter 9 Comprehension Check This is dicectly based on thereadings for the week. You may take this as many times as you want, and the system keeps your highest score. 1 point A summarizes in a single number the relationship between the market value of a company's stock and some fundamental quantity, such as earnings, sales, or bookvalue. A evaluates the price of a share of stock by considering what a share buys in terms of earnings, net assets, cash flow or some other measure of value (stated on a per share basis). An multiple evaluates the market value of total company value (minus the value of cash and short-term investments) relative to the amount of EBITOA, sales, or operating cash flowit generates. Two methods underpin analysts' use of price and enterprise value multiples: the method of the method based on forecasted 1 prient The ideabehind is that s stock's price cannot be evaluated in isolation. The method of comparables refers to the valuation of an asset based on the multiples of (such as a peecegroup comparison). For example, multiplying a benchmark value of the peice-to-earnings (P) multiple by an estimate of a company's earnings per share (EPS) provides a quick estimate of the value of the company's stock that can be compared with the stock's market price. If Company A's EPS is 51.50 and an ectamiration of benchmark fiems in a peer-group comparison sugeests a P/E of 22 is appropriate, we will estimate that an appropriate price for Company Ass stock is - that h. Similarly, multiplying a benchmark value of the price-to-sales (P/5) muitiple by an estimate of a compam/s sales figure can provide an estimate of the company's stock value. If company B has one billion shares outstanding and revenue of $5 tillition, and the peer-group comparison suggests a P/5 of 3.2 is appropriate, we will estimute that on appropriate price for Company B's stock is - The price-te-book (P/B) multiple can be used in a similiar way, It the benchmark for Company C, based on the peer-group, is P/B=850, and Company C, balance sheet shows $900 million in total assets, $500 million in total liabilities no nelerred stock and eisht hundred million shares of common stock outstanding. we will estimate that an appropeiate price for Coenpany C's stock is - this is