This is one of the two common "rule-of-thumb" techniques supported by Strategic Finance (the similar Market / Book Ratio method follows). The P/E Ratio method multiplies an estimate for a future P/E ratio by the Net Income in the last period to determine an equity value.
To calculate the Residual Value using the Price/Earnings Ratio Method, Strategic Finance uses Income Available for Common as earnings, which is net of Preferred Dividends. In addition, because there is the possibility that the final forecast period's earnings are atypical and not representative of what the firm would earn going forward, Strategic Finance includes a "Normalized Earnings Adjustment" variable to enable you to adjust the earnings accordingly.
Finally, because this method estimates an equity value, Strategic Finance adds back the future market value of the debt to get the corporate value. Strategic Finance enables you to determine the book value of the debt and enables you to input a Debt Discount factor to adjust the book value of the debt to market value.
The formula for the Price/Earnings Ratio Residual Value Method (v5200) is:
P/E * (Earnings + Earnings Adj.) + Book Value of Debt - Debt Discount