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Valuation Methods (PowerPoint)

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					Valuation Methods
Methods of Corporate
Valuation
   Asset-Based Methods
   Using Comparables
   Free Cash Flow Methods
   Option-Based Valuation
Asset-Based Methods
   Balance sheet approach:
       Cash and working capital (book value close to its
        realizable value)
       Property, Equipment, and Land (appraisal value)
       Intangibles.
   Book value of equity vs market value of
    equity
Relative Valuation
   What is relative valuation?
   What is the logic underlying relative
    valuation?
   Using comparables
What is relative valuation?
   Relative to revenues or cash flows
   Relative to Earnings
   Relative to the Book Value of Equity
Relative to Revenue
   Price/Sales (PS)
   Value/Sales (VS)
   Usually used in valuing retailing firms
Relative to Earnings
   Price/Earnings Ratio (PE)
   Trailing Price/Earnings Ratio (trailing PE)
       A trailing PE is a price-earnings ratio based on the
        most recent 12 months' results. U.S. companies report
        quarterly, so a trailing PE is computed based on the
        most recent four quarters.
   Forward Price/Earnings Ratio (forward PE)
       Also called estimated PE. Forward PE divides a stock's
        current price by its estimated future earnings per share.
        Forward PE is often used to compare a company's
        current earnings to its estimated future earnings.
Relative to the Book Value of
Equity
   Price/Book Value (PBV)
   Market to book Value (MB)
Advantages to using multiples
in valuation analysis
   Require fewer explicit assumptions than
    DCF
   Easy to compute and don’t require
    forecasting
   Commonly quoted and used by
    management and press
Disadvantages to using
multiples in valuation analysis
   Require more implicit assumptions than
    DCF
   Logic behind valuation analysis is often
    misunderstood
   Identification of comparable firms is
    subjective
What is logic underlying
relative valuation? P/E ratio
   Think about a basic DCF model (Gordon’s
    Growth Model)



   Divide both sides by earnings per share
Comparing two PE ratios
across firms assumes …
   Identical payout ratio
   Identical cost or equity
   Identical expected stable-growth rate
What is logic underlying relative
valuation? Price to book value



   Divide both sides by book value of equity
Comparing two PE ratios
across firms assumes …
   Identical payout ratio
   Identical cost or equity
   Identical expected stable-growth rate
   Identical
What is logic underlying relative
valuation? Price to sales


   Divide both sides by sales
Comparing two PE ratios
across firms assumes …
   Identical payout ratio
   Identical cost or equity
   Identical expected stable-growth rate
   Identical Gross profit margin
Using comparables
   Construct the multiple for the set of comparable
    firms
   Average the multiple across the set of
    comparable firms
   Compare individual firm to this average
   Differences may be attributed to differences in
    underlying logic of multiple
   Differences may be attributed to inefficient
    markets (price)
Remember to control for
differences between firms
   Growth
   Payout
   Risk
   ROE
   Profit Margin
Ways to control for differences between firms
   Sample firms and sort according to attributes (Growth,
    Payout, Risk, ROE, Profit)
       Requires a large number of potential comparables
       Compare your firm to subset of comparables with similar
        attributes
   Modify the multiples to make them more comparable
       Divide the PE ratio by the expected growth rate in EPS (PEG
        Ratio)
       Divide PBV ratio by the ROE (Value Ratio)
       This assumes firms are comparable on all other attributes
   Run regression of multiples on attributes


       Use coefficient values from regression and attributes for the firm
        to predict the correct multiple for the firm.
    Regression-based multiple
    analysis
   Damodaran ran regressions on 2,475 firms using data from
    1998

   PE=291.27*Growth+37.74*Payout+21.62*Beta
   PBV=3.99*Payout-0.79*Beta+60.65*growth+31.56*ROE
   PS=11.56*Growth+1.41*Payout-1.42*Beta+11.93*Margin
Free cash flow method
   Free cash flows to equity
   Free cash flows to firm
       Basic case
       Firms with insufficient valuation data
       Acquisition valuation
Option base valuation
   Real option approach in valuing firm

				
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posted:9/2/2011
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