Relative Valuation Method for Estimating Earnings Multiplier in the Health Care Industry

Relative Valuation Method

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Question

A portfolio manager with Churn Brothers Brokerage is examining the health care industry from the perspective of relative valuation. In her analysis, the portfolio manager examines the relationship between the historical earnings multiple of the health care industry and the historical earnings multiple of the entire market using a time series forecast. Which of the following best characterizes this method of estimating an earnings multiplier? Choose the best answer.

Answers

Explanations

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Explanation

The method profiled in this example is "macroanalysis," which is one of two methods for estimating the earnings multiplier of an industry. Macroanalysis involves examining the historical relationship between the earnings multiplier of an industry with that of the overall market. Macroanalysis forecasts often use a time series.

The macroanalysis method is contrasted by microanalysis, which involves examining the variables underlying the earnings multiplier - the required rate of return, the growth forecast, and the dividend payout ratio. In microanalysis, these variables are examined for the industry and then compare them with the values of these variables for the entire market.

"Simulation analysis" is a method of examining stand-alone risk, and the "Forbes method" is a fictitious term. "Linear regression" does not represent the best choice.

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