Learning Module 7 of Equities 11–14% of the exam

Relative Valuation with Multiples

5 lessons. About 37 minutes in cram mode, 168 minutes in full.

Start with lesson 1 Learn with Sensei Read the module summary Practice this module

Lessons

1
Valuing with multiples: comparables and forecasted fundamentals
explain 7 min cram, 32 min full
2
Price multiples: P/E, earnings yield, P/S, P/B and dividend yield
calculate 10 min cram, 46 min full
3
Enterprise value multiples
calculate 8 min cram, 36 min full
4
Choosing a peer group for multiples
determine 6 min cram, 26 min full
5
Trailing, current and forward multiples
describe 6 min cram, 28 min full

What the exam expects you to do

Explain the process for using multiples to value equity based on the method of comparables and the method of forecasted fundamentals.Valuing with multiples: comparables and forecasted fundamentals
Calculate and interpret price and enterprise value multiples, and describe their appropriate uses.Price multiples: P/E, earnings yield, P/S, P/B and dividend yield
Determine a potential peer group for multiples-based equity valuation based on a company’s industry classification or specific drivers of expected return.Choosing a peer group for multiples
Describe the use of multiples based on past, current, and projected future values in estimating equity value.Trailing, current and forward multiples

Module summary

The whole module on one sheet, organised by lesson: what to memorize, how the ideas fit together, the formulas and the key terms. No paragraphs, just what you need to revise.

Hide what I know

How deeply to learn each part

Know the idea: Understand it in general. It frames other topics, but you will not calculate with it.
Use it: Understand it well enough to solve a question with it. Recognize when it applies.
Memorize: Learn it by heart. The exam will not give it to you.

Valuing with multiples: comparables and forecasted fundamentals

Known

MemorizeThe method of comparables

Step	What to do
1	choose peers with similar cash flow, risk and growth
2	select a multiple; numerator and denominator for the same claimants
3	calculate and compare; median when skewed; drop not-meaningful values
4	judge over-, under- or fairly valued
5	apply: value = multiple × fundamental, or a terminal value

Memory hook Peers, multiple, compare, verdict, apply.

Know it cold Positive skew: mean > median, so use the median.

MemorizeJustified multiples from fundamentals

Tool	Formula	Reading
Justified P/B	$(\text{ROE} - g)/(r_e - g)$	above 1 when ROE > $r_e$
Sustainable growth	$g = (1 - \text{payout}) \times \text{ROE}$	payout $= 1 - g/\text{ROE}$
PEG	P/E ÷ growth (as a number)	higher: more likely overvalued
Regression	predicted vs actual multiple	predicted > actual: possibly undervalued

Memory hook P/B lives on the spread between ROE and the cost of equity.

Know it cold Justified multiple: peer median (comparables) or value drivers (forecasted fundamentals).

Key terms

relative valuation Know the idea
principle of no arbitrage Know the idea
method of comparables Memorize
five-step relative valuation process Memorize
peer group Use it
multiple Know the idea
value to claimants Know the idea
consistency of numerator and denominator Know the idea
central tendency of peer multiples Use it
mean versus median Use it
skewed distribution of multiples Use it
outliers Use it
not meaningful multiples Use it
justified multiple Memorize
method of forecasted fundamentals Memorize
trailing multiple Use it
forward multiple Use it
justified price-to-book ratio Use it
sustainable growth rate Use it
adjustment approach Use it
price/earnings-to-growth (PEG) ratio Use it
regression approach Know the idea
value from a peer multiple Use it
multiples in a terminal value Know the idea

The method of comparables in five steps

Relative valuation by comparablessimilar assets should trade at similar prices

1. Choose peers Memorize similar cash flow, risk and growth
2. Select a multiple Memorize numerator and denominator for the same claimants
3. Calculate and compare Memorize median or mean; outliers; not meaningful values
4. Judge the value Memorize over-, under- or fairly valued, on past, current or future figures
5. Apply Memorize support a discounted cash flow value or set a value range

Where a justified multiple comes from

Justified multiplean estimate of the fair value of a multiple

Method of comparables Memorize peer mean or median
Method of forecasted fundamentals Memorize built from profitability, growth and reinvestment
Both combined correct the peers for differences in fundamentals
- Adjustment approach Use it for example the price/earnings-to-growth ratio
- Regression approach Know the idea predicted multiple from the peers' fundamentals

Formulas

Value from a peer multiple Use it

V = \text{peer multiple} \times \text{company fundamental}

Quick example

A peer median price-to-earnings (P/E) ratio of 12.0 and company earnings per share (EPS) of 2.40 give 12.0 × 2.40 = 28.80 per share. Applied to total net income it gives a market capitalization instead.

On your calculator

12×2.4= 28.80

12ENTER2.4× 28.80

ENTER enter (on the HP, puts the number on the stack)

Justified P/B from fundamentals Memorize

\dfrac{P_t}{BVE_t} = \dfrac{ROE \times \text{Payout ratio}}{r_e - g} = \dfrac{ROE - g}{r_e - g}

Quick example

Return on equity 17%, cost of equity 11%, growth 3%: (0.17 − 0.03) ÷ (0.11 − 0.03) = 0.14 ÷ 0.08 = 1.75.

On your calculator

0.17−0.03=÷(0.11−0.03)= 1.75

0.17ENTER0.03−0.11ENTER0.03−÷ 1.75

ENTER enter (on the HP, puts the number on the stack)

Sustainable growth rate Memorize

g = (1 - \text{Payout ratio}) \times ROE

Quick example

Payout ratio 40% and return on equity 15%: 0.60 × 15% = 9.0%.

On your calculator

1−0.4=×0.15= 0.09

1ENTER0.4−0.15× 0.09

ENTER enter (on the HP, puts the number on the stack)

PEG ratio Use it

\text{PEG} = \dfrac{\text{P/E}}{\text{Expected EPS growth rate}}

Quick example

A P/E of 24 with expected EPS growth of 12% (entered as 12) gives 24 ÷ 12 = 2.00.

On your calculator

24÷12= 2.00

24ENTER12÷ 2.00

ENTER enter (on the HP, puts the number on the stack)

Regression-predicted multiple Know the idea

\text{P/B}_i = a + b_1 \times ROE_i + b_2 \times g_i + e_i

Quick example

Estimated a = −0.80, b₁ = 20, b₂ = 25; a peer with ROE 12% and growth 3% is predicted at −0.80 + 2.40 + 0.75 = 2.35.

On your calculator

0.8+|-+(20×0.12)+(25×0.03)= 2.35

+|- change sign

0.8CHSENTER20ENTER0.12×+25ENTER0.03×+ 2.35

CHS change sign · ENTER enter (on the HP, puts the number on the stack)

Price multiples: P/E, earnings yield, P/S, P/B and dividend yield

Known

MemorizeJustified price multiples

Multiple	Justified form	Moves up with
Trailing P/E	$\text{payout}(1 + g)/(r_e - g)$	g up, $r_e$ down
P/S	net profit margin × justified P/E	margin up
P/B	$(\text{ROE} - g)/(r_e - g)$	ROE above $r_e$
Trailing dividend yield	$(r_e - g)/(1 + g)$ ; leading $r_e - g$	$r_e$ up, g down
Price to FCFE	$1/(r_e - g)$	g up, $r_e$ down

Memory hook Every justified multiple is the constant growth model divided by a fundamental.

Know it cold Trailing P/E = forward × (1 + g). Paying out more cuts growth, so payout alone does not lift P/E.

MemorizeEarnings for the P/E and earnings yield

Item	Rule
Earnings yield	$\text{EPS}_{t+1}/P_t$
PVGO share	$1 - (\text{EPS}_{t+1}/P_t)/r_e$ ; negative: reinvestment destroys value
Core earnings	strip gains, write-downs, impairments, provisions, estimate changes, discontinued operations
Normalized EPS	average EPS over the cycle, or average ROE × current BVPS (better if size changed)
Actual P/E	payout ratio ÷ dividend yield

Memory hook No growth: price = EPS ÷ $r_e$ . Everything above that is growth.

Know it cold Yield below justified → price too high (overvalued); P/S only for low-debt firms.

Key terms

price-to-earnings ratio (P/E) Memorize
weighted average shares outstanding Know the idea
trailing P/E Memorize
forward P/E Memorize
earnings yield Use it
present value of growth opportunities (PVGO) Use it
negative PVGO Use it
justified trailing P/E Memorize
drivers of P/E Memorize
payout and growth trade-off Use it
core earnings Know the idea
non-recurring items Know the idea
normalized EPS Use it
historical average EPS method Use it
average return on equity method Use it
dilution Know the idea
price-to-sales ratio (P/S) Use it
net sales Know the idea
justified P/S Use it
price-to-book ratio (P/B) Use it
price to tangible book value Use it
price-to-dividend multiple Know the idea
dividend yield Memorize
dividend rate Know the idea
trailing dividend yield Memorize
leading dividend yield Memorize
justified dividend yield Memorize
cash flow multiples Know the idea
price to free cash flow to equity Know the idea

Price multiples and what drives them

Price multiplesprice over a shareholder figure; same basis for every firm

P/E Memorize payout, growth, cost of equity; trailing or forward
P/S Memorize profit margin; only for low-debt firms
P/B and price to tangible book Memorize ROE against cost of equity; banks
Dividend yield Memorize trailing or leading; mature payers
Price to FCFE Know the idea 1 ÷ (r_e − g); stable FCFE

Getting the E in P/E right

Earnings for the P/Ea P/E is only as good as its EPS

Core earnings Use it strip non-recurring items
Normalized EPS Use it cyclical firms
- Average EPS over the cycle the simple method
- Average ROE × current BVPS better when size changed
Dilution Know the idea options, warrants, convertibles lower EPS
Not meaningful Use it zero, negative or tiny EPS

Formulas

Price-to-earnings ratio Memorize

\text{P/E} = \dfrac{P_t}{\text{EPS}}, \quad \text{Trailing: EPS}_t, \quad \text{Forward: EPS}_{t+1}

Quick example

Price 54.00, trailing EPS 3.60 and forward EPS 4.00: trailing P/E 15.0 and forward P/E 13.5.

On your calculator

54÷3.6= 15.0
54÷4= 13.5

54ENTER3.6÷ 15.0
54ENTER4÷ 13.5

ENTER enter (on the HP, puts the number on the stack)

Price and PVGO Use it

P_t = \dfrac{\text{EPS}_{t+1}}{r_e} + \text{PVGO}, \quad \dfrac{\text{PVGO}_t}{P_t} = 1 - \dfrac{\text{EPS}_{t+1}/P_t}{r_e}

Quick example

Price 60.00, forward EPS 3.30, cost of equity 11%: earnings yield 5.5%, so PVGO ÷ P = 1 − 0.50 = 50%.

On your calculator

1−(3.3÷60÷0.11)= 0.50

1ENTER3.3ENTER60÷0.11÷− 0.50

ENTER enter (on the HP, puts the number on the stack)

Justified trailing P/E Memorize

\dfrac{P_t}{\text{EPS}_t} = \dfrac{\text{Payout ratio} \times (1 + g)}{r_e - g}

Quick example

Payout 65%, cost of equity 11%, growth 3%: 0.65 × 1.03 ÷ 0.08 = 8.37.

On your calculator

0.65×1.03÷(0.11−0.03)= 8.37

0.65ENTER1.03×0.11ENTER0.03−÷ 8.37

ENTER enter (on the HP, puts the number on the stack)

Normalized EPS Use it

\text{EPS}_{norm} = \overline{\text{EPS}}_{cycle} \;\text{or}\; \overline{\text{ROE}}_{cycle} \times \text{BVPS}_t

Quick example

Average return on equity 11% and book value per share 20.00: normalized EPS = 0.11 × 20.00 = 2.20.

Justified P/S Use it

\dfrac{P_t}{\text{Sales}_t} = \dfrac{\text{Net profit margin} \times \text{Payout ratio} \times (1 + g)}{r_e - g}

Quick example

Margin 12%, payout 65%, cost of equity 11%, growth 3%: 0.12 × 8.37 = 1.00.

On your calculator

0.12×0.65×1.03÷0.08= 1.00

0.12ENTER0.65×1.03×0.08÷ 1.00

ENTER enter (on the HP, puts the number on the stack)

Price-to-book and price to tangible book Use it

\text{P/B} = \dfrac{P_t}{\text{BVPS}_t}, \quad \text{Price to tangible book} = \dfrac{P_t}{\text{BVPS}_t - \text{intangibles per share}}

Quick example

Price 35.00, book value per share 28.00 of which intangibles 8.00: P/B 1.25, price to tangible book 1.75.

Justified dividend yield Memorize

\text{Trailing: } \dfrac{Div_t}{P_t} = \dfrac{r_e - g}{1 + g}, \quad \text{Leading: } \dfrac{Div_{t+1}}{P_t} = r_e - g

Quick example

Cost of equity 12%, growth 5%: trailing 0.07 ÷ 1.05 = 6.67%, leading 7.00%.

On your calculator

0.12−0.05=÷1.05= 0.0667

0.12ENTER0.05−1.05÷ 0.0667

ENTER enter (on the HP, puts the number on the stack)

Dividend yield, payout and P/E Use it

\dfrac{Div_t}{P_t} = \dfrac{Div_t}{\text{EPS}_t} \times \dfrac{\text{EPS}_t}{P_t}

Quick example

Payout 50% and P/E 12.5: dividend yield = 0.50 ÷ 12.5 = 4.00%, so the actual P/E equals the payout ratio ÷ the dividend yield.

Price to FCFE Know the idea

\dfrac{P_t}{\text{FCFE}_{t+1}} = \dfrac{1}{r_e - g}

Quick example

Cost of equity 12.5%, growth 4.5%: 1 ÷ 0.08 = 12.5.

Enterprise value multiples

Known

MemorizeEnterprise value and its multiples

Item	Rule
EV	MV debt + MV equity + MV preferred − cash and short-term investments
Firm value	MV debt + MV equity
Pairing	EV with EBITDA, EBIT, sales, FCFF, book value of capital
Justified EV/EBITDA	$[(1 - t) + \text{Dep}\,t/\text{EBITDA} - \text{Capex}/\text{EBITDA} - \Delta\text{WC}/\text{EBITDA}]/(\text{WACC} - g)$
Justified EV to book capital	$\text{ROC}(1 - \text{reinvestment rate})/(\text{WACC} - g)$

Memory hook Add the claims, subtract the cash; divide by what all claimants share.

Know it cold Debt-funded buyback at the market price: EV unchanged until prices move.

MemorizeWhich EV multiple

Situation	Use
capital-intensive, large depreciation	EV/EBITDA
amortization large, depreciation small	EV/EBITA
neither charge large	EV/EBIT
different leverage or negative book equity	EV (or value) to book value of capital
significant debt, sales-based	EV/sales, not P/S
commodity producer	EV per unit of production or reserves

Memory hook More capex, less value per unit of EBITDA.

Know it cold Higher WACC, higher capex, lower growth → lower justified EV/EBITDA.

Key terms

market capitalization Know the idea
enterprise value (EV) Memorize
firm value Know the idea
book value of debt as a proxy Know the idea
cash as a non-operating asset Use it
price versus EV multiples Memorize
EV after a change in capital structure Use it
EV/EBITDA Memorize
justified EV/EBITDA Use it
EV/EBITA Know the idea
EV/EBIT Know the idea
EV/sales Use it
value to book Use it
enterprise value to book Use it
return on capital (ROC) Use it
reinvestment rate Use it
justified EV to book value of capital Use it
EV/FCFF Know the idea
industry-specific multiples Know the idea
EV/developed reserves Know the idea
EV/production Know the idea

From market capitalization to enterprise value

Enterprise value (EV)value of the business to all claimants

Market value of equity Memorize price × shares outstanding
plus Market value of debt Memorize book value often used as a proxy
plus Market value of preferred shares Memorize a senior claim
minus Cash and short-term investments Memorize non-operating assets; never add them

Enterprise value multiples by statement

EV multiplespair EV with figures for all capital providers

Income statement Memorize EV/EBITDA, EV/EBITA, EV/EBIT, EV/sales
Balance sheet Use it value to book, EV to book value of capital
Cash flow Know the idea EV/FCFF = 1 ÷ (WACC − g) when justified
Industry-specific Know the idea EV per unit of output or reserves

Formulas

Enterprise value Memorize

EV = \text{MV of debt} + \text{MV of equity} + \text{MV of preferred shares} - \text{Cash and short-term investments}

Quick example

Market capitalization 900, debt 350, preferred shares 50, cash 140: 900 + 350 + 50 − 140 = 1,160.

On your calculator

900+350+50−140= 1,160

900ENTER350+50+140− 1,160

ENTER enter (on the HP, puts the number on the stack)

Firm value Know the idea

\text{Firm value} = \text{MV of debt} + \text{MV of equity}

Quick example

Debt 350 and equity 900 at market value: 1,250.

Justified EV/EBITDA Use it

\dfrac{EV}{\text{EBITDA}} = \dfrac{(1 - t) + \dfrac{\text{Dep} \times t}{\text{EBITDA}} - \dfrac{\text{Capex}}{\text{EBITDA}} - \dfrac{\Delta \text{WC}}{\text{EBITDA}}}{\text{WACC} - g}

Quick example

Ratios to EBITDA: depreciation 0.20, capital expenditures 0.28, change in working capital 0.05; tax 25%; WACC 10.5%, g 3.5%: (0.75 + 0.05 − 0.28 − 0.05) ÷ 0.07 = 6.71.

On your calculator

0.75+(0.2×0.25)−0.28−0.05=÷0.07= 6.71

0.75ENTER0.2ENTER0.25×+0.28−0.05−0.07÷ 6.71

ENTER enter (on the HP, puts the number on the stack)

Value to book and EV to book Use it

\text{Value to book} = \dfrac{\text{MV equity} + \text{MV debt}}{\text{BV equity} + \text{BV debt}}, \quad \text{EV to book} = \dfrac{\text{MV equity} + \text{MV debt} - \text{Cash}}{\text{BV equity} + \text{BV debt} - \text{Cash}}

Quick example

Equity 700 and debt 450 at market; book equity 350, book debt 450; cash 90: value to book 1,150 ÷ 800 = 1.44, EV to book 1,060 ÷ 710 = 1.49.

Justified EV to book value of capital Use it

\dfrac{EV}{\text{Book value of capital}} = \dfrac{\text{ROC} \times (1 - \text{Reinvestment rate})}{\text{WACC} - g}

Quick example

Return on capital 11%, reinvestment rate 20%, WACC 8%, g 2.2%: 0.088 ÷ 0.058 = 1.52.

On your calculator

0.11×0.8÷(0.08−0.022)= 1.52

0.11ENTER0.8×0.08ENTER0.022−÷ 1.52

ENTER enter (on the HP, puts the number on the stack)

Value to FCFF Know the idea

\dfrac{V_t}{\text{FCFF}_{t+1}} = \dfrac{1}{\text{WACC} - g}

Quick example

WACC 8.5%, g 3.5%: 1 ÷ 0.05 = 20.0.

Choosing a peer group for multiples

Known

MemorizeBuilding a peer group

Approach	Peers are	Watch out
Industry-based	same principal business; then refined by size or geography, outliers, mix, costs, demand, life cycle	few peers in concentrated industries; mixed life cycles; multi-industry firms
Factor-based	firms with similar betas, any industry	misspecified models; factors underperform for years

Memory hook Risk, growth, cash flow: the three things a peer must share.

Know it cold The best criterion is similar risk, growth and cash flow, not the industry label or the size.

MemorizeFixes for awkward peer groups

Problem	Fix
concentrated industry, unique firm	little weight on multiples; use DCF
mixed life-cycle stages	drop peers in other stages; keep enough
multi-industry company	weighted average of segment multiples
outlier from a one-time item	exclude, adjust earnings, or use the median

Memory hook Blend by weight, never by a plain average.

Know it cold Segment multiple $= \sum w_j M_j$ , weights from revenue, operating income or assets.

Key terms

peer group Memorize
similar risk, growth and cash flow Memorize
industry-based peer group Memorize
industry classification systems Know the idea
refining an industry screen Use it
size cut-off Use it
outlier from a one-time item Use it
business mix Know the idea
cost structure Know the idea
life-cycle stage Know the idea
concentrated industries Memorize
different jurisdictions Know the idea
multi-industry companies Memorize
segment-weighted peer multiple Use it
factor investing Know the idea
systematic risk Know the idea
non-systematic risk Know the idea
factor-based peer group Memorize
capital asset pricing model (CAPM) Know the idea
beta Know the idea
model misspecification Know the idea

Two ways to build a peer group

Peer groupsimilar risk, growth and cash flow

Industry-based Memorize same principal business activity
- Start: a classification system sector and industry codes
- Refine size or geography, outliers, business mix, cost structure, demand, life-cycle stage
Factor-based Memorize similar statistical risk factors, such as beta
- Shares a cost of equity similar expected returns
- May differ in growth and cash flow adjust before judging

Peer group problems and fixes

Industry peers fall shortthe clean peer group does not exist

Concentrated industry or unique firm Memorize lean on DCF
Mixed life-cycle stages Memorize drop peers in other stages, keep enough
Different jurisdictions Know the idea rules and taxes limit comparability
Multi-industry company Memorize weight segment multiples by revenue, operating income or assets

Formulas

Segment-weighted peer multiple Use it

M = \sum_j w_j \times M_j

Quick example

Revenue 70% in a business whose peers trade at 9.0 times and 30% in one at 15.0 times: 6.3 + 4.5 = 10.8.

On your calculator

0.7×9+(0.3×15)= 10.8

0.7ENTER9×0.3ENTER15×+ 10.8

ENTER enter (on the HP, puts the number on the stack)

CAPM (for factor-based peers) Know the idea

E(R_i) = R_f + \beta_i\,[E(R_m) - R_f]

Quick example

Risk-free rate 4%, beta 1.2, expected market return 9%: 4% + 1.2 × 5% = 10.0%.

On your calculator

1.2×5+4= 10.0

1.2ENTER5×4+ 10.0

ENTER enter (on the HP, puts the number on the stack)

Trailing, current and forward multiples

Known

MemorizeTime bases of multiples

Basis	Denominator	Use and limit
Trailing	prior 12 months (EPS $_t$ , last four quarters)	what happened; backward-looking
Current	latest reported figures	one-time items, accounting, cycle (base-year effect)
Forward, FY1, FY2	next 12 months or next fiscal years (EPS $_{t+1}$ )	meaningful for firms with losses today; depends on forecasts
Past (history)	own past multiples; peer historical averages	trends; cannot alone show misvaluation

Memory hook Trailing looks back, forward looks ahead, history shows the trend, peers show the level.

Know it cold Same basis and same price date for the company and every peer.

MemorizeTerminal values from multiples

Step	Rule
Terminal value	year-n fundamental × multiple
Which multiple	mature, larger, slower-growing peers
Discount	$(1 + r)^n$ , the full forecast length
Peer group check	a whole group can be mispriced; pair with present value methods

Memory hook Value the company you will own in year n, not the one you own today.

Know it cold $IV_0 = \sum E(CF_t)/(1 + r)^t + E(P_{t+n})/(1 + r)^n$ .

Key terms

trailing multiple Memorize
current multiple Know the idea
forward multiple Memorize
FY1 and FY2 multiples Know the idea
same-date prices Know the idea
base-year effect Know the idea
historical multiples Use it
own-history comparison Use it
peer historical averages Use it
loss years in a multiple average Use it
projected future multiples Use it
forward P/E of a loss-making firm Use it
terminal value from a multiple Memorize
terminal value peer group Memorize
misvalued peer group Memorize
combining relative and present value methods Use it

Which period the multiple uses

Time basis of a multiplesame basis and same price date for every firm

Current Know the idea latest reported figures; exposed to one-time items and the cycle
Past Memorize historical multiples
- Own history trend of the company's performance
- Peer historical averages relative performance under similar conditions
Trailing Memorize prior 12 months, EPS_t
Forward Memorize next 12 months, EPS_{t+1}; FY1, FY2
Projected for a terminal value Memorize year-n figure × multiple from mature peers

Formulas

Trailing and forward P/E Memorize

\text{Trailing P/E} = \dfrac{P_t}{\text{EPS}_t}, \quad \text{Forward P/E} = \dfrac{P_t}{\text{EPS}_{t+1}}

Quick example

Price 54.00, trailing EPS 4.50 and consensus forward EPS 5.40: trailing P/E 12.0, forward P/E 10.0.

On your calculator

54÷4.5= 12.0
54÷5.4= 10.0

54ENTER4.5÷ 12.0
54ENTER5.4÷ 10.0

ENTER enter (on the HP, puts the number on the stack)

Present value with a terminal multiple Use it

IV_0 = \sum_{t=1}^{n} \dfrac{E(CF_t)}{(1 + r)^t} + \dfrac{E(P_{t+n})}{(1 + r)^n}, \quad E(P_{t+n}) = \text{year-}n\text{ fundamental} \times \text{multiple}

Quick example

Cash flows of 10 in year 1 and 12 in year 2, a terminal multiple of 10 on the year-2 figure, required return 12%: 10 ÷ 1.12 + (12 + 120) ÷ 1.2544 = 114.16.

On your calculator

10÷1.12+(132÷1.2544)= 114.16

10ENTER1.12÷132ENTER1.2544÷+ 114.16

ENTER enter (on the HP, puts the number on the stack)