- CFA Exams
- Dec. 2020 Level 2
- Study Session 11. Equity Valuation III
- Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples
Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples
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Learning Outcome Statements
Reading 29. Market-Based Valuation: Price and Enterprise Value Multiples | |
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1. Price multiple valuation methods a. distinguish between the method of comparables and the method based on forecasted fundamentals as approaches to using price multiples in valuation, and explain economic rationales for each approach; b. calculate and interpret a justified price multiple; c. describe rationales for and possible drawbacks to using alternative price multiples and dividend yield in valuation; | |
2. Price to earnings: determining earnings d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
3. Price to earnings: valuation based on forecasted fundamentals d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
4. Price to earnings: valuation using comparables d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
5. Price to book value d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
6. Price to sales d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
7. Price to cash flow d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
8. Dividend yield d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
9. Enterprise value / EBITDA ratio d. calculate and interpret alternative price multiples and dividend yield; e. calculate and interpret underlying earnings, explain methods of normalizing earnings per share (EPS), and calculate normalized EPS; f. explain and justify the use of earnings yield (E/P); g. describe fundamental factors that influence alternative price multiples and dividend yield; h. calculate and interpret the justified price-to-earnings ratio (P/E), price-to-book ratio (P/B), and price-to-sales ratio (P/S) for a stock, based on forecasted fundamentals; i. calculate and interpret a predicted P/E, given a cross-sectional regression on fundamentals, and explain limitations to the cross-sectional regression methodology; j. evaluate a stock by the method of comparables and explain the importance of fundamentals in using the method of comparables; k. calculate and interpret the P/E-to-growth ratio (PEG) and explain its use in relative valuation; l. calculate and explain the use of price multiples in determining terminal value in a multistage discounted cash flow (DCF) model; m. explain alternative definitions of cash flow used in price and enterprise value (EV) multiples and describe limitations of each definition; n. calculate and interpret EV multiples and evaluate the use of EV/EBITDA; | |
10. Cross-border valuation o. explain sources of differences in cross-border valuation comparisons; | |
11. Momentum indicators p. describe momentum indicators and their use in valuation; | |
12. Valuation indicators: issues in practice q. explain the use of the arithmetic mean, the harmonic mean, the weighted harmonic mean, and the median to describe the central tendency of a group of multiples; r. evaluate whether a stock is overvalued, fairly valued, or undervalued based on comparisons of multiples. |