Determines company price-to-book multiple

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Reference no: EM132064617

1. A trainee analyst makes the following statement: “The terminal value element in the Residual Income Valuation Model typically accounts for a much larger proportion of the estimated intrinsic value of equity than the terminal value element in the Discounted Free Cash Flow and Dividend Discount Models. This makes the Residual Income Valuation Model inferior to the other two models”. Critically assess the statement.

2. Using the Residual Income Valuation Model please demonstrate what determines a company’s price-to-book (P/B) multiple. Explain why the P/B multiple of information technology companies is usually higher than the P/B of banks, and discuss which of these types of companies is likely to be more reliably valued by the P/B multiple.

Reference no: EM132064617

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