business valuation

christie_2903 · #1 18th May 2007, 02:21 AM

Hi all!

I have an assignment that asked me to value a company and determine whether the company is over or under-valued.
The company is Harvey Norman. I am clueless how to value the company.
what valuation model is most appropriate for retail industry and why ?
(P/E ratio? , DDM? or others?)

If PE ratio was to be used, the formula is market price / earnings per share
the EPS is normally 1 yr forward estimate. HOW do u estimate the forward EPS?

and i also have to predict the holding period over which i expect the market to correct itself if the company is over or under-valued.

PLEASE I NEED HELP!!

thanks in advance

oxusmorouz · #2 18th May 2007, 08:16 AM

Quote:

Originally Posted by christie_2903

Hi all!

I have an assignment that asked me to value a company and determine whether the company is over or under-valued.
The company is Harvey Norman. I am clueless how to value the company.
what valuation model is most appropriate for retail industry and why ?
(P/E ratio? , DDM? or others?)

The dividend discount model involves estimation of dividend flows and their growth rate for several years into the future. Given the dynamic nature of the markets, these figures rarely hold good in practise and require constant rectification of forecasted estimates.

Quote:

Originally Posted by christie_2903

If PE ratio was to be used, the formula is market price / earnings per share
the EPS is normally 1 yr forward estimate. HOW do u estimate the forward EPS?

Forecasting forward EPS requires quantifying qualitative events and is not in anyway based on regression or estimation by looking at historical data. Earnings being a zero sum affair for most companies, past figures do not hold good in estimation of earnings growth.

Quote:

Originally Posted by christie_2903

and i also have to predict the holding period over which i expect the market to correct itself if the company is over or under-valued.

It is quite impossible to do that. The market consists of people who are driven by emotions, not historical financial data, and these emotions need not change within a specific time period.

In short, assigning "one value" for a stock may apply good in theory but simply doesn't seem to be practically applicable.

swagat86 · #3 18th May 2007, 10:34 AM

Quote:

Originally Posted by oxusmorouz

The dividend discount model involves estimation of dividend flows and their growth rate for several years into the future. Given the dynamic nature of the markets, these figures rarely hold good in practise and require constant rectification of forecasted estimates.

Forecasting forward EPS requires quantifying qualitative events and is not in anyway based on regression or estimation by looking at historical data. Earnings being a zero sum affair for most companies, past figures do not hold good in estimation of earnings growth.

It is quite impossible to do that. The market consists of people who are driven by emotions, not historical financial data, and these emotions need not change within a specific time period.

In short, assigning "one value" for a stock may apply good in theory but simply doesn't seem to be practically applicable.

god work soldier

christie_2903 · #4 18th May 2007, 12:00 PM

THANKS so mucH!
I think i will use PER valuation model.
PER is a comparative measure right?
Does anyone know what company in the same industry as harvey norman that i can use for industry comparison?

and also can i find the EPS forward forecast in the internet somewhere?

thankss

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