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Calculate valuation metrics for the companies below
Calculate valuation metrics for the companies below. PG AMZN JNJ SNOW Assumptions: Price / Share Net Income, Current Year Forward 5 Year Growth in EPS Free Cash Flow Fully Diluted Shares, Current Year Net Cash, Current Year EBITDA, Current Year $138 14,465 6% 15,416 2,606 (16,350) 20,807 $3,234 24,709 40% 25,437 513 11,201 43,218 1659042 $138 20,939 5% 18,252 2,633 (748) 27,552 $265 (282) 50% (151) 349 (141) (278) 92485 359628 363354 Calculate: P/E PEG Ratio EV / EBITDA FCF Yield How do you explain a huge valuation and negative valuation ratios? a) investors have made a mistake b) the negative ratios are meaningless because you are dividing by negative numbers c) investors predict sizable growth over the next 5 years that will turn profits and cash flows largely positive d) b and c
Expert Solution
1) P/E Ratio: Price to Earnings Ratio
P/E Ratio = Price per share / Earnings per share
(EPS) Earnings per share = Net Income / Number of shares
- For PG
EPS = 14465 / 2606 = 5.55
P/E Ratio = 138 / 5.55 = 24.86
- For AMZN
EPS = 24709 / 513 = 48.166
P/E Ratio = 3234 / 48.166 = 67.143
- For JNJ
EPS = 20939 / 2633 = 7.953
P/E Ratio = 138 / 7.953 = 17.352
- For SNOW
EPS = -282 / 349 = -0.808
P/E Ratio = 265 / -0.808 = -327.96
2) PEG Ratio: Price to Earnings to growth ratio:
PEG Ratio = (P/E ratio) / Annual EPS Growth
- For PG
PEG Ratio = 24.86 / 6 = 4.143
- For AMZN
??????????????PEG Ratio = 67.143 / 40 = 1.678
- For JNJ
??????????????PEG Ratio = 17.352 / 5 = 3.47
- For SNOW
??????????????PEG Ratio = -327.96 / 50 = -6.54
3) EV/EBITDA: Enterprise Value / Earnings before interest tax depreciation and amortization
EV = (Price per share * Number of shares) + Debt - Cash and cash equivalents
EV to EBITDA = EV / EBITDA
- For PG
???????EV = (138 *2606) - (-16350) = 375978
EV / EBITDA = 375978 / 20807 = 18.07
- For AMZN???????
???????EV = (3234*513) - 11201 = 1647841
EV / EBITDA = 1647841 / 43218 = 38.13
- For JNJ???????
???????EV = (138*2633) - (-748) = 364102
EV / EBITDA = 364102 / 27552 = 13.215
- For SNOW???????
???????EV = (265*349) - (-148) = 92633
EV / EBITDA = 92633 / -278 = -333.212
4) FCF Yield: Free cashflow Yield:
FCF Yield = Free cashflow / EV
- For PG
???????FCF Yield = 15416 / 375978 = 0.041 = 4.1%
- For AMZN
???????FCF Yield = 25437 / 1647841 = 0.015 =1.5%
- For JNJ
???????FCF Yield = 18252 / 364102 = 0.05012 = 5.012%
- For SNOW
???????FCF Yield = -151 / 92633 = -0.00163 = -0.163%
How do you explain a huge valuation and negative valuation ratios?
ANSWER)
Huge and negative valuations are not an investor's mistake. Nor these valuations are meaningless. But these valuations help investors predict sizeable growth over the next 5 years that will turn profits and casflows largely positive. The ratios can be huge as well as negative. these help investors analyze the performance of companies alone and also compare different companies. This can help different growth predictions. Therefore option c is right.
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