Question 17 If an earnings multiplier is not available for a given firm, the multiplier used in an earnings-based method of valuation is estimated from comparable: Taxable entities. Industries. Firms. For-profit firms. Publicly-held firms.
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The earnings-based method of valuation relies on using multiples from similar companies to estimate value. Show more…
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Suppose TurboLight Co., a renewable energy startup is expected to generate earnings of $3 per share next year. If the mean ratio of share price to expected earnings of competing firms in the same industry is 14, then using the price-earnings valuation method, the valuation of the firm’s shares is: $35.70 per share $37.80 per share $42.00 per share $43.26 per share Which of the following are limitations to the price-earnings model? Check all that apply. It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that uses a collection of firms that is too narrow. It can result in inaccurate valuations when investors rely on an industry price-earnings ratio that assigns incorrect weighting to various industry firms. It assumes that uncertainty cannot be accounted for because it doesn’t allow expectations about a firm’s cash flows to change. It can result in inaccurate valuations when the dividends to be paid in the next year are incorrectly estimated.
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Briefly respond to the following questions: a. Briefly describe the comparables approach to valuation. b. What is a valuation multiple? Identify and explain common valuation multiples. c. What are the limitations of multiples? d. Suppose Furniture Herman Miller Inc. has earnings per share of 1.38. If the average P/E of comparable furniture stocks is 21.3, estimate the value for a share of Herman Miller’s stock using the P/E multiple. What are the assumptions underlying this estimate? e. Fairview is an ocean transport company with EBITDA of $50 million, cash of $20 million, debt of $100 million, and 10 million shares outstanding. The ocean transport industry as a whole has average EV/EBITDA ratio of 8.5. What is one estimate of Fairview enterprise value? What is the corresponding estimate of its stock price?
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