Question 01:

Relative Valuation

Select Technology industry sector .Take a sample of 20-25 firms from this industry sector and determine the key drivers of the relative valuation multiple . Perform regression to get predicted multiple values. State whether each stock in the sample is under or valued. Growth rates may be estimated from IBES estimates

• The key drivers /companion variables for PE multiple are payout ratio , riskiness (measured by volatility of stock returns during one year period) and expected growth rates for a certain period of time
• The key drivers for PEG ratio are risk and return on equity
• The key drivers for EV/EBITDA are tax rate, depreciation and amortization , reinvestment requirement , cost of capital and expected growth ,
• The key drivers for price to book value ratio are return on equity, payout ratio , riskiness measured by cost of equity and growth rate in earnings
• The key drivers of Value to Book ratio are return on capital employed , cost of capital, growth rate and reinvestment .
• The key drivers for price to sales ratio are net profit margin , payout ratio , riskiness measure by cost of equity and expected growth rate in earnings .
• The key drivers for value to sales ratio are after tax operating margin, reinvestment rates, cost of capital and growth rate in operating income.

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