constant,increasingtheriskofequitywilldecreaseallequity
multiples.InTable8.8,weexaminetheeffectofchangingthe
beta(andthroughitthecostofequity)onalloftheequity
multiples.Asriskincreases,equitymultiplesdecreaseacross
theboard.Afirmwithacostofequityof 15 percentwilltrade
at 9.14 times earnings, even though its expected earnings
growthrateisstill 18 percent.Thesamecanbe saidabout
PEG, price-to-book and price-to-sales ratios.
TABLE 8.8Risk and Equity Multiples
Fromapracticalstandpoint,thisshouldaddanoteofcaution
tothoseanalyseswheretheP/EratiosorPEGratiosoffirms
in a sector are compared to each otherwith theintent of
finding undervalued and overvalued stocks. Without
controllingfordifferencesinrisk,thistypeofanalysiswillbe
biasedtowardfindingriskiercompaniestobecheap(because
theywilltradeatlowermultiples)andsafercompaniestobe
expensive.Fromthefirm’s viewpoint,this relationshipalso
suggeststhatatveryhighrisklevels,afirm’sequitymultiples
are likely to increase more as the risk decreases than as
growthincreases.Formanyyoungfirmsthatareviewedas
bothveryriskyandhavinggoodgrowthpotential,reducing