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INTRODUCTION TO FINANCIAL INSTRUMENTS AND MARKETS Valuation multiples are often used to compare companies quickly. Identify...

INTRODUCTION TO FINANCIAL INSTRUMENTS AND MARKETS

Valuation multiples are often used to compare companies quickly. Identify an appropriate valuation multiple/ratio and evaluate if the company (Woolworths) is over or under valued using relative valuation. What are the reasons you picked the multiples that you did and how did you conclude that Woolworths is over or under valued? .

Current Price AU$36.01

Fair Value AU$36.01

Share price 31 march 2020 AU$35.10

Expert Solution

There are two different types of valuation multiples: Equity Multiples and Enterprise Valuation Multiples.

Equity Multiples has four method to compute valuation ratio:

- Price Earning Ratio

- Price book Ratio

- Dividend Yield

- Price Sales Ratio

Enterprise Valuation Multiples has four method to compute valuation ratio:

- Enterprise Value / Revenue

- Enterprise Value/ Earnings before Interest, Tax, Depreciation, Amortization and Rental Costs

- Enterprise Value/ Earnings before Interest, Tax, Depreciation, Amortization

- Enterprise Value/ Invested Capital

As per the given information,

Current Price (EPS) is AU$ 36.01 and share Price(MPS) is AU$ 35.10

Hence, Price Earning Ratio is the most appropriate one to compute valuation ratio.

PE Ratio= Market price/ Earning per share

=35.10/36.01 = AU $0.975

The price of the Woolworth is undervalued as the Market price is lower than the earning per share.

ekkarill92 answered 2 years ago

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