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

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ThereisastrongpositiverelationshipbetweenE/Pratiosand
T-bondrates,asevidencedbythecorrelationof0.69between
thetwovariables.Inaddition,thereisevidencethattheterm
structure also affects the E/P ratio. In the following
regression,weregressE/PratiosagainstthelevelofT-bond
ratesandtheyieldspread(T-bondminusT-billrate),using
data from 1960 to 2005.


Other things remaining equal, this regression suggests that:



  • Every1%increaseintheT-bondrateincreasesthe
    E/P ratio by 0.7437% (and thus reduces the P/E
    ratio). This is not surprising, but it quantifies the
    impact that higher interest rates have on the P/E ratio.

  • Every1%increaseinthedifferencebetweenT-bond
    and T-bill ratesreducestheE/P ratioby 0.3274%.
    Flatterordownward-slopingtermyieldcurvesseem

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