What do you expect to drive a company’s price-to-book equity and price-to- earnings multiples? Company’s net sales and profit margin: This is company’s ability to use its equity to generate abnormal earnings. This is driven by industry maturity and performance under the given economic condition. Mature and highly saturated industry will have a lower profit margin as the competition is getting intense and it is harder to earn profit. Company’s financial strategy: the effectiveness of the financial strategy is evaluated through different financial strategy.
If the company’s return on equity is greater than the cost of the capital, the equity value-to-book multiple will be positive. The company’s strategy also affects its perceived risk which drives the price to earning multiple. Operational efficiency: this is the utilization of company’s asset which is a profitability ratio. A higher ROAR usually indicate high ROE and therefore result in higher value of both multipliers. Future growth: this is the expected future growth of the company and this will be reflected on the future ROE.
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Growth in book value of the equity: the growth of equity base in positive value project will increase he equity value to book multiple. 2. Match the price-to-book equity valuation multiple below with each of the four restaurant business discussed above. What is your reasoning for the matches you selected? Washes making the matching, my reasoning based on the following factors: Financial leverage gain: all company except company A have negative financial leverage gain, but the company C and D having an improving trend. On the other hand, company Bi’s leverage gain were falling from a positive number in 1999 to a negative value in 2002.
This means the return on equity is deteriorate the cost of UAPITA. ROAR: Company A, B and D reported a steady growth in ROAR over the time period whereas company C had declining ROAR over the time period and it coupled with negative leverage gain. Investors probably would not place a higher than book- value worth on the company. Grow rate: the growth rates for B and D can attribute to business expanding by opening new stores. The negative figure for company C in the first two years may suggest that its area of industry is young and still in the phase of fast developing. 3.
Match the price-to-earnings valuation multiples below with each of the four assistant businesses discussed above. What is your reasoning for the matches you When making these Judgments, I look at the following two factors: Growth perspective: Company Ad’s sales growth peaked in 2000 and has been declining since; it appears that it is operating in a saturated industry. Although Company C is also experiencing a declining rate in sales growth, the rate is still relatively high and the industry is not yet mature. Both Company A and Company B have increasing rates; however company Ass rates appear to be stronger.
Company B reported negative Roth rates in 1999 and 2000 and turned a corner in 2001 when it first reported a positive growth rate which grew modestly in 2001. The positive change may be partially attributable to the acquisition of 11 new restaurants in 2001. The slow growth rate may indicate that the company is operating in a mature industry with few growth opportunities. Perceived company risks: when you look at the financial leverage gain, entities with negative financial leverage are generally perceived to have greater risk since it is expected that they have high levels of interest rates and depressed ROAR due to rising costs.