From the course: Financial Accounting Part 2

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McDonald's: Earnings multiple

McDonald's: Earnings multiple

From the course: Financial Accounting Part 2

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McDonald's: Earnings multiple

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- Let's use a price multiple, price to earnings, to estimate the value of McDonald's. Now, market prices incorporate all kinds of information. For example, the market prices for firms in a given industry include average investor expectations about future earnings growth in that industry and required rates of return for firms in that industry. This information is summarized in the price-earnings ratio, or PE ratio, computed as price per share divided by earnings per share. So, rather than directly estimating growth rates and required rates of return an investor can value a company shares by using the information in the PE ratio as follows. The estimated price equals earnings multiplied by the PE ratio for companies in that industry. PE ratios for a selection of restaurant chains as of the end of 2011 are as follows, Brinker International, PE ratio of 16.4; Darden Restaurants PE, ratio of 14.7; Starbucks, PE ratio of 27.6;…

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