Session 17: Pricing - Distribution and Determinants
from Aswath Damodaran Hosted by Aswath Damodaran
In today's class, we extended our analysis of multiples by first looking at PE and PEG ratios, then moving on to PBV ratios and finally examining enterprise value multiples: EV/Invested Capital, EV/EBITDA and EV/Sales. In particular, we noted that the drivers for EV multiples are analogs of the equity multiples: growth in operating income replacing growth in net income, reinvestment rates replacing payout ratios, ROC replacing ROE and cost of capital replacing cost of equity. There is a simple way to find the companion variable (the key driver) for a multiple. With an equity multiple, you can get this variable by dividing the net income by the denominator of the multiple. With an enterprise value, you divide after-tax operating income by the denominator of the multiple. With the EV/Sales ratio, this yields the after-tax operating margin as the determining variable. We used that measure to evaluate the value of a brand name, by comparing the pricing of Coca Cola with its current operating margin with its value with a generic margin. Start of the class test: www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/relval1test.pdfSlides: http://www.stern.nyu.edu/~adamodar/podcasts/valfall15/valsession17.pdfPost class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session17Atest.pdfPost class test solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session17Asoln.pdf
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