Info

Source: Value Line

Source: Value Line

This simple view of multiples leads us to conclude that Disney should trade at 47.08 times earnings, since that is the average for similar publicly traded firms. The resulting value for the equity would be:

Value of Equity = Disney net income in 2003* Average PE ratio for sector

= $1,267 million * 47.08 = $59,650 million In this valuation, we assume that Disney has a growth rate similar to the average for the sector. One way of bringing growth into the comparison is to compute the PEG ratio, which is reported in the last column. Based on the average PEG ratio of 2.79 for the sector and the analyst estimate of growth in earnings of 12% for the next 5 years, we obtain the following value for the equity in Disney:

Value of Equity = $ 1,267 million * 2.79 * 12 = $ 41,692 million While this may seem like an easy adjustment to resolve the problem of differences across firms, the conclusion holds only if these firms are of equivalent risk. Implicitly, this approach assumes a linear relationship39 between growth rates and PE.

Money Mogul

Money Mogul

Get All The Support And Guidance You Need To Be A Success At Being A Money Mogul. This Book Is One Of The Most Valuable Resources In The World When It Comes To How to Maintain the Pledge to Fix Your Finances from Your New Year’s Resolution.

Get My Free Ebook


Post a comment