In addition to the discounted dividend model approach, Mulroney decided to look at the price€“ earnings ratio and price€“book ratio, relative to the S&P 500, for both Eastover and Southampton.
Mulroney elected to perform this analysis using 2007€“2011 and current data.
a. Using the data in Tables E and F , compute both the current and the 5-year (2007€“2011) average relative price€“earnings ratios and relative price€“book ratios for Eastover and Southampton (i.e., ratios relative to those for the S&P 500). Discuss each company€™s current relative price€“earnings ratio compared to its 5-year average relative price€“earnings ratio and each company€™s current relative price€“book ratio as compared to its 5-year average relative price€“book ratio.
b. Briefly discuss one disadvantage for each of the relative price€“earnings and relative price€“ book approaches to valuation.

Eastover Company (EO) is a large, diversified forest products company. Approximately 75% of its sales are from paper and forest products, with the remainder from financial services and real estate. The company owns 5.6 million acres of timberland, which is carried at very low historical cost on the balance sheet.
Peggy Mulroney, CFA, is an analyst at the investment counseling firm of Centurion Investments.
She is assigned the task of assessing the outlook for Eastover, which is being considered for purchase, and comparing it to another forest products company in Centurion€™s portfolios, Southampton Corporation (SHC). SHC is a major producer of lumber products in the United States. Building products, primarily lumber and plywood, account for 89% of SHC€™s sales, with pulp accounting for the remainder. SHC owns 1.4 million acres of timberland, which is also carried at historical cost on the balance sheet. In SHC€™s case, however, that cost is not as far below current market as Eastover€™s.
Mulroney began her examination of Eastover and Southampton by looking at the five components of return on equity (ROE) for each company. For her analysis, Mulroney elected to define equity as total shareholders€™ equity, including preferred stock. She also elected to use year-end data rather than averages for the balance sheetitems.

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5-Year Average (2007-2011) 2008 Eastover Company $1.27 2.12 2.58 1.56 187 0.90 1.20 4 Book value per share 19.21 5 Southampton Corporation 1.66 3.13 3.55 5.08 2.46 1.75 0 Book value per share 2 0 2 8 2 15.2 2 Current Share Price Current Dividends Per Share 2012 EPS Current Book Value Per Share Eastover 1.60 3.00 82.16 $ 17.32 2 32.21 1660 639.32