Estimate Earning Per Share and Industry’s Earning Multiplier

Estimate Earning Per Share (EPS)

EPS = [(Sales x EBITDA margin%) - Depreciation - Interest expense] x (1 - Tax rate)

Estimate Industry's Earning Multiplier
Macroanalysis
· Assume there is a relathionship between market required rate of return (k) and growth rate (g) with the industry, adjust the industry multplier upwards / downwards based on projected market mulitplier.

Microanalysis
Specific mulitplier approach (more preferable method)
1. Estimate payout ratio (D1/E1), required rate of return (k), growth rate (g)
2. Calcuate expected P/E = (D1/E1)/ (k-g)

Where:
E1 - Next year's EPS
k - Required rate of return derived from the CAPM model (Rseries = Rf + Bseries(Rmarket - Rf). If the required rate of return increases, the multiplier decreases.
g - Expected growth rate derived from both the retention rate (1-payout rate) and corporate ROE. (g = (retention rate)(ROE)). If the expected growth rate increases, the multiplier increases.
D1 - Next year's dividend. Calculate last year's dividend first and then next year's dividend, given last year's corporate earnings as well as the corporate payout ratio.

Direction of change approach
· Study industry variables and then adjust upwards or downwards