Answer 2 questions of questions about the ratios in restaurants industry: 1) what do you expect to drive a company's price-to-equity and price to earnings multiples. 2) Match the price-to-equity valuation in the (uploaded doc) with each the four rest - Essay Example

PROSPECTIVE ANALYSIS Prospective Analysis Question One Multiple of Price to Book Multiples of price to book are functions that reflect on the abnormal future return on equity (ROE), cost of organization’s equity and growth of the book value. Abnormal future ROE= ROE-re (where re represents the equity capital cost). Most organizations with abnormal positive ROEs do create shareholders value by investing their disposable assets with the ratios of price to book not less than one. There are various factors that affect ROES in the long term.

They include management quality, delivery technologies or production changes and obstacles to their entrance in industries hence lead to decay of abnormal ROEs with time. The growth of book value at the beginning of a financial period dictates the extent of price to book multiple of an organization. Reinvestment of profits and new equity issuance will lead to growth of an organization equity base. Improving an organization price to book multiple will involve investing of new equity in shareholders’ value projects that are greater than the capital cost.

In organizations where capital cost is greater than ROEs, the multiple is lowered further by equity growth. Multiples of Prices to Earnings What drive both future and current ratio are total abnormal earnings changes, measured by net income of the present period. As change is always negative or positive, magnitude and direction of the anticipated change matters. Question Two A 4.4 C 3.9 D 1.0 B 1.O Analysis for these matches is done by the use of the leverage trend in finance. Of the above companies, only A have leverage gain that is negative, which implies deterioration in the shareholders return.

This is caused by borrowed funds usage. Nevertheless, companies D and C shows a trend of improving every year. For company B, there has been a nominal decline from positive to negative in the year 1999 to 2002 respectively. The analysis can also be done using the return on assets (ROA) consideration. This is shown by a steady ROA growth in companies B, A and D for the period. This indicates that the expected ROA in the future will be of the same trend. Unhealthy financial gain coupled with declining ROA of company C would bar shareholders from placing a higher worth than that of book value.

The positive rates of growth for both companies D and B will show an increase in their net income earned from acquiring new restaurants. The operations of company C reflect that it is a small industry from the average growth in its net income in the year 1999. Question Three Valuation of price to earnings multiples RESTAURANT PRICE EARNINGS C 34.5 A 28.0 B 20.0 D 9.6 Matches on the above table were made by considering the opportunity on growth of the four companies. The decline in growth of sales of company D has shown a fall from the year 2000, which implies that, its operation is of a saturated kind of industry.

Company C experiences a decline in its growth rate in sales despite of the high rates and the fact that the company is still growing. Company A shows an increasing and stronger growth rate. Company B shows an increasing rate except for 2000 and 1999 when it reported growths that are negative. This changed in 2001 the time when it first reported positive growth. This growth was as result of their new eleven restaurants acquired in the same year. Its sluggish rate of growth shows that it operates in an industry, which is mature, but with few opportunities on growth.

References Palepu, K. G., Healy, P. M., Bernard, V. L., & Peek, E. (2007). Business analysis and valuation (IFRS ed.). London: Thomson.