Pinnacle Manufacturing Company Case Study
1. What do you expect to drive a company’s price-to-book equity and price-to-earnings multiples?
PE ratio is expected to be affected by various factors include company earnings, payout ratio, growth rate and cost of equity. From the dividend discount model we know that P0=EPS0×Payout ratio×(1+gn)r-gn , thus P0EPS0=PE ratio=Payout ratio×(1+gn)r-gn. Thus we see that the PE ratio is an increasing function of the payout ratio and the growth rate and a decreasing function of the riskiness of the firm.
The determinants of PBV ratio can also be explored by using the dividend discount model. We know thatP0=DPS1ke-gn, substituting for DPS1 =EPS1(payout ratio), the value of the equity can be written as: P0=EPS1×Payout ratioke-gn, Defining the return on equity (ROE)= EPS1/Book value of equity0,the value of equity can be written as P0=BV0×ROE×Payout …show more content…
it can be seen that company B currently is in the “golden period” with high reinvestment need as new restaurants are opened during current years. Its average guest check is currently the highest among the others. Given the high revenue and its new store rollout plan, the growth rate is consequently high and the PE ratio should be high.
Company C: PE ratio of 28 is most suitable for company C. Given the fact that company C is planned to open 14 new restaurants in the following year, the growth rate would be extremely high. However it can be seen that the profit margin of the company is low comparatively, considered the high reinvestment need and low profit margin, its dividend ratio would be very low or even none.
Company D: it can be seen that Company D is a medium size firm who owns over hundred restaurants. Its underlying risk would be low compared to company B and C. moreover the company reinvestment would be low as the company is planned to merger with small to medium-sized firm around the country and thus A PR ratio of 20 is most
PE ratio is expected to be affected by various factors include company earnings, payout ratio, growth rate and cost of equity. From the dividend discount model we know that P0=EPS0×Payout ratio×(1+gn)r-gn , thus P0EPS0=PE ratio=Payout ratio×(1+gn)r-gn. Thus we see that the PE ratio is an increasing function of the payout ratio and the growth rate and a decreasing function of the riskiness of the firm.
The determinants of PBV ratio can also be explored by using the dividend discount model. We know thatP0=DPS1ke-gn, substituting for DPS1 =EPS1(payout ratio), the value of the equity can be written as: P0=EPS1×Payout ratioke-gn, Defining the return on equity (ROE)= EPS1/Book value of equity0,the value of equity can be written as P0=BV0×ROE×Payout …show more content…
it can be seen that company B currently is in the “golden period” with high reinvestment need as new restaurants are opened during current years. Its average guest check is currently the highest among the others. Given the high revenue and its new store rollout plan, the growth rate is consequently high and the PE ratio should be high.
Company C: PE ratio of 28 is most suitable for company C. Given the fact that company C is planned to open 14 new restaurants in the following year, the growth rate would be extremely high. However it can be seen that the profit margin of the company is low comparatively, considered the high reinvestment need and low profit margin, its dividend ratio would be very low or even none.
Company D: it can be seen that Company D is a medium size firm who owns over hundred restaurants. Its underlying risk would be low compared to company B and C. moreover the company reinvestment would be low as the company is planned to merger with small to medium-sized firm around the country and thus A PR ratio of 20 is most