Intelligent Semiconductor Franchise Price/Earnings Ratio Calculation

Franchise Price/Earnings Ratio for Intelligent Semiconductor

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Question

Lynn Burns, CFA, is examining the performance of Intelligent Semiconductor, and has gathered the following information:

Market discount rate: 14.5% per year

Observed Price/Earnings ratio: 26.50

Given this information, what is the Franchise Price/Earnings ratio for Intelligent Semiconductor?

Answers

Explanations

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A. B. C. D. E. F.

C

The Franchise Factor method of value measurement is in many respects similar to EVA and MVA calculations. When examining a company using the franchise value approach, the observed price-to-earnings ratio is broken down into its two components - (1) the "base P/E," which is based on the Company's ongoing performance, and (2) a "franchise P/E" that is based on the expected value of new and profitable business opportunities. This relationship is illustrated as follows:

Franchise P/E = Observed P/E - Base P/E

Where the Base P/E equals the reciprocal of the market discount rate. For example, if the market discount rate is 14.5%, the base P/E would be equal to 6.89655.

In this example, all the necessary information has been provided, and the calculation of the Franchise P/E is as follows:

Franchise P/E = (26.5 - 6.89655) = 19.60345

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