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Business valuations and market efficiency
Income/earnings based valuation
methods
These methods are particularly useful when valuing a majority
shareholding. They reflect that the investor has additional benefits of
control which mean they have access to the earnings of the business,
not just the dividends (as they can influence dividend policy).
3.1 PE ratio method
Value per share = EPS × P/E ratio
Total value of equity = Total earnings × P/E ratio
Which earnings figure?
Starting point: The current post-tax earnings, or EPS
After preference share dividends but before ordinary dividends
BUT this is historic, not expected, future earnings.
Adjust for factors such as:
one-off items which will not recur in the coming year (e.g. debt
write offs in the previous year)
directors' salaries which might be adjusted after a takeover
has been completed
synergies.
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