Valuation Ratios
What are they? Just Price/Something What is this "Something"? Dividends Earnings Book-value Sales (All per share)
Idea: suppose the ratio is constant for all firms in an industry So we can estimate it for all those other firms If we know what the denominator is for our firm, we can find the numerator for our firm So the denominator needs to be Observable - Plausibly related to price
Price dividend ratio
(Price)/(Last dividend) If we know what the firm's P/D should be, and we know the firm's dividend was, we can get the price Example: Utility firms have a P/D ratio of 25. Duke Energy just paid a dividend of $3.16. What should its price be? A P/D ratio of 25 means you're paying $25 for ...
Denominator and numerator have to be comparable
Two companies are identical. Each has just paid $100M in dividends. Company 1 has 100M shares outstanding. The total value of those shares is 1B Company 2 has 50M shares outstanding. The total value of those shares is 1B. P/D for each?
Price dividend
Suppose the firm is correctly priced (i.e., price equals fair value) Suppose we use the GGM to determine fair value. So
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PE
Can use: Past earnings: PO/EO "Trailing P/E" Estimate of next year's earnings: P0/E1 "Forward P/E" What are ear