ratios to expected growth rates, betas, payout ratios, and
numberofpagesin the10-Kfor eachofthesefirms(asa
measure of complexity) in 2001. The regression is
summarized here:
Thus,afirmwitha 15 percentreturnonequity,abetaof1.15,
expectedgrowthrateof 10 percent,and 350 pagesinthe10-K
would have a price-to-book ratio of:
Relative Valuation
Most analysts value companies using multiples and
comparable firms. How can this approach be modified to
considerfirmsthatarecomplex?Whileitismoredifficultto
assesstheeffectofcomplexityonrelativevalue,weshould
consider the following options:
- Ifa firmisin multiplebusinesses,we couldvalue
eachbusinessusingaseparaterelativevaluationand
different comparable firms, rather than trying to
attachonemultipletotheentirecompany.Ifthefirm
reports revenues or earnings from unspecified
businesses(whereinformationisnotprovidedoris
withheld), our estimate of relative value for these
businessesshouldbeconservative.Forinstance, we
could treat these earnings as both risky and
low-growth and apply a low multiple to estimate
value.