Hi,
I wanted to ask why do we multiply P/E ratio with EPS to get Terminal Value of the stock. I didn’t get the idea behind calculating terminal value combining DDM and P/E multiple.
Thanks.
Please expand P/E — Into its full form.
that is how that number is always used. Why the surprise?
You have the P/E Multiple, you have the Earnings number predicted for a particular stock - you multiple the two together to get an estimate of how much that stock would cost - as a result of its Earnings being what it is…
Can you please expand the P/E to help me understand. I’m not surprised I just don’t know. I still don’t understand the logic behind multiplying P/E to EPS
P/EPS* estimated EPS in 5 years (for example)= estimated selling price in 5 years. That number goes in the fifth dividend (or cash flow, more generally) , that is, CAsh flow in year five + price. Recall how you did a one year ddm: price = (d1 +selling price)/ 1+discount rate. It is the same principle.
P/E = Price to earnings Ratio…
that is what I meant by asking you to expand it out.
So you take the P/E and then multiply it by the EPS - gives you the “PRICE” at the end of the period.
which is the expected / estimated Selling Price …