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

(Hop HipldF0AV) #1

Sincethesefirmsdifferonbothriskandexpectedgrowth,a
regression of P/E ratios on both variables is presented.


Thenumbersinbracketsaret-statisticsandsuggestthatthe
relationships between P/E ratiosand both variables in the
regression are statistically significant. The R-squared
indicatesthepercentageofthedifferencesinP/Eratiosthatis
explained by the independent variables. Finally, the
regression
6 itself can be used to get predicted P/E ratios for the
companies in the list. Thus, the predicted P/E ratio for
Coca-Cola,basedonitsstandarddeviationof35.51%andthe
expected growth rate of 19%, would be:


SincetheactualP/EratioforCoca-Colais44.33,thiswould
suggestthatthestockisovervalued,givenhowtherestofthe
sector is priced.

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