Page 14 - FINAL CFA II SLIDES JUNE 2019 DAY 8

Justified P/CF Multiple READING 31: MARKET-BASED VALUATION: PRICE AND
ENTERPRISE VALUE MULTIPLES
MODULE 31.4: EV AND OTHER ASPECTS

Observations:
All else equal, P/CF will increase, if:
• Required return decreases.
• Growth rate increases.

Justified EV/EBITDA Multiple

Based on a forecast of fundamentals divided by EBITDA forecast based on fundamentals.

The ratio is:
• Positively related to the growth rate in FCFF and EBITDA.
• Negatively related to the firm’s overall risk level and weighted average cost of capital (WACC).

Justified Dividend Yield

Observations:
•Positively related to the required rate of return.
•Negatively related to the forecasted growth rate in dividends.

This implies that choosing high dividend yield stocks reflects a value rather than a
growth investment strategy.