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The Importance of Price Earnings Ratio in Equity Valuation on Stock Exchange Market

Author

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  • Neculai Tabara

    (“Alexandru Ioan Cuza” University of Iasi, Romania)

  • Andreea Vasiliu

    (“Alexandru Ioan Cuza” University of Iasi, Romania)

Abstract

There are many methods used to value equity and companies. Most of them fail to give a realistic value to the firm being valuated. The most used technique is discounted cash flow method. Because of its weaknesses, the investors are using more and more another approach to rate companies. This is relative valuation. The essence of this methodology depends critically on two components: the multiple that is used and the comparables that are chosen. Depending on what multiple we use we may be able to determine the Value of Equity or the Global Value of Enterprise. This paper focuses on equity valuation using multiples. We present the methodology of valuing equity of a non- listed company with the purpose of establishing a share price for the first time on the stock exchange market. The multiple selected is price earnings ratio, calculated as a median for the peer group. The comparable companies are defined as being those who are listed on the stock exchange market in the same class as the company for which we want to find a share value. Further studies on the subject refer to other multiples used in relative valuation.

Suggested Citation

  • Neculai Tabara & Andreea Vasiliu, 2011. "The Importance of Price Earnings Ratio in Equity Valuation on Stock Exchange Market," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 3(3), pages 104-120, June.
    • Handle: RePEc:dug:actaec:y:2011:i:3:p:104-120
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    File URL: http://journals.univ-danubius.ro/index.php/oeconomica/article/view/818/835
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    References listed on IDEAS

    as
    1. Kaplan, Steven N & Ruback, Richard S, 1995. "The Valuation of Cash Flow Forecasts: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 50(4), pages 1059-1093, September.
    2. Stephen H. Penman, 1998. "Combining Earnings and Book Value in Equity Valuation," Contemporary Accounting Research, John Wiley & Sons, vol. 15(3), pages 291-324, September.
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    Cited by:

    1. Andreea Vasiliu & Neculai Tabara, 2013. "Methods for Determining the Degree of Underestimation or Overrating of Shares Using PER Analysis," Acta Universitatis Danubius. OEconomica, Danubius University of Galati, issue 9(3), pages 84-99, June.

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