Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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ThekeydeterminantsoftheP/Eratioaretheexpectedgrowth
rateinearningspershare,thecostofequity,andthepayout
ratio.Otherthingsremainingequal,wewouldexpecthigher
growth,lowerriskand higherpayoutratiofirmstotradeat
higher multiples of earnings than firms without these
characteristics.


Dividing both sides by the book value of equity, we can
estimatetheprice/bookvalue(P/BV)ratioforastablegrowth
firm.


whereROEisthereturnonequityandistheonlyvariablein
additiontothethreethatdetermineP/Eratios(growthrate,
cost of equity, and payout) that affects price-to-book equity.


Dividingbythesalespershare,theprice/sales(PS)ratiofora
stable-growthfirmcanbeestimatedasafunctionofitsprofit
margin, payout ratio, risk, and expected growth.


The net margin is the new variable that is added to the
process. While all of these computations are based on a
stable-growthdividenddiscountmodel,wewillshowthatthe
conclusionsholdevenwhenwelookatcompanieswithhigh
growth potential and with other equity valuation models.

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