Join Jim Stice for an in-depth discussion in this video Earnings and equity multiples, part of Finance Foundations: Business Valuation.
- 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 require rates of return for firms in that industry.…This information is summarized in…the price earnings or P/E 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's shares…by using the information in the P/E ratio as follows:…The price is equal to the company's earning,…multiplied by the P/E ratio.…
P/E 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 considered…to be competitors of McDonald's.…Brinker International operates…restaurants all over the world…
Make sure to check out the Stice brothers' other accounting and finance courses to understand the other economic factors that impact your business.
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- Using market, cost, and income approaches to business valuation
- Valuing homes
- Valuing companies by multiples
- Using price-to-sales ratios to value companies
- Using discounted cash-flow analysis to estimate value
- Valuing McDonald's as a case study