# Equity - FF....where did this come from?

Which one of the following alternatives accurately represents the franchise factor (FF)? A) FF = Observed price-to-earnings (P/E) ratio − Base P/E). B) FF = Observed price-to-earnings (P/E) ratio × Growth Factor − Base P/E. C) FF = [(Observed price-to-earnings (P/E) ratio) / Growth Factor] − Base P/E. D) FF = (Observed price-to-earnings (P/E) ratio − Base P/E) / Growth Factor. Your answer: C was incorrect. The correct answer was D) FF = (Observed price-to-earnings (P/E) ratio − Base P/E) / Growth Factor. The Franchise P/E is given by: Franchise P/E = Observed P/E − Base P/E. The Franchise P/E can also be written in terms of the franchise factor (FF) as: Franchise P/E = FF × Growth Factor. Putting these two equations together we get: FF × Growth Factor = Observed P/E − Base P/E. Which finally leads to: FF = (Observed P/E − Base P/E) / Growth Factor. ************************************************************ Where the heck did the observed P/E and base P/E come from? What do they even mean? I am only up to SS 11, is this from a later study session and just coded wrong in the q-bank (this was from a SS 11 test) or did I miss a whole section?

I hopeeeeee I remember this right but it was touched on early in Equity and then it goes into more detail in SS #13.

observed P/E = intrinsic P/E = tangible P/E + franchise P/E base P/E is the same as tangible P/E Too many confusing notiation to represent the same dmm thing.

I am assuming that observed P/E is the market price divided by earnings? But if observed=intrinsic then we would have to assume that all securities are properly price right?

i guess it’s FF implied in market prices.

Ok. I am used to intrisic meaning the theoretical value from some model that we use to compare to actual market prices and get an over/under valued decision.

Basically FF * Growth = PE no matter how they call it… (so reverse algebra to find FF)