From the course: Finance Foundations: Business Valuation
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Earnings and equity multiples
From the course: Finance Foundations: Business Valuation
Earnings and equity multiples
- Let's use a price multiple, price to earnings, to estimate the value of McDonald's. So the price to earnings multiple. Market prices incorporate all kinds of information. For example, the market prices for firms in a given industry include average investor expectations about future earnings growth in that industry and required rates of return for firms in that industry. This information is summarized in the price earnings or PE ratio computed as a price per share, divided by earnings per share. Rather than directly estimating growth rates and required rates of return an investor can value a company shares by using the information in the PE ratio as follows. The price is equal to the company's earnings multiplied by the PE ratio. PE ratios for a selection of restaurant chains as of the end of 2011 are as follows. Brinker International 16.4, Darden restaurants 14.7, Starbucks 27.6, and Yum! Brands 21.5. These companies are…
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