Valuation Methods (2010)

7/21/2019 Valuation Methods (2010)

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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, Equipent, and !and (appraisal value)

"ntangibles#

Book value o$ equity vs arket value o$

equity



Relative Valuation

What is relative valuation

What is the logi! underl"ing relative

valuationUsing !omparables



What is relative valuation

Relative to revenues or !ash flows

Relative to #arnings

Relative to the Boo$ Value of #%uit"



Relative to Revenue

&ri!e'(ales )&(*

Value'(ales )V(*

Usuall" used in valuing retailing firms



Relative to #arnings

&ri!e'#arnings Ratio )&#*

+railing &ri!e'#arnings Ratio )trailing &#* % trailing &# is a price&earnings ratio based on the

ost recent ' onths results# *#+# copanies reportquarterly, so a trailing PE is coputed based on the

ost recent $our quarters#

Forward &ri!e'#arnings Ratio )forward &#* %lso called estiated PE# orward PE divides a stocks

current price by its estiated $uture earnings per share#

orward PE is o$ten used to copare a copanys

current earnings to its estiated $uture earnings#

http://www.investorglossary.com/trailing-pe.htm

http://www.investorglossary.com/earnings.htm

http://www.investorglossary.com/earnings.htm

http://www.investorglossary.com/trailing-pe.htm



Relative to the Boo$ Value of

#%uit"

&ri!e'Boo$ Value )&BV*

Mar$et to boo$ Value )MB*



Advantages to using multiples

in valuation anal"sis

Re%uire fewer e,pli!it assumptions than

CF

#as" to !ompute and don.t re%uirefore!asting

Commonl" %uoted and used b"

management and press





What is logi! underl"ing

relative valuation &'# ratio +hin$ about a basi! CF model )2ordon.s

2rowth Model*

ivide both sides b" earnings per share

1

0

Value of Equitye n

DPS P

r g =

−

0 1

0 0

1

e n

P DPS

PE EPS EPS r g = =−

( )0n

0

1(Payout Ratio) 1+g

e n

P PE

EPS r g = =

−



Comparing two &# ratios

a!ross firms assumes 3

0denti!al pa"out ratio

0denti!al !ost or e%uit"

0denti!al e,pe!ted stable-growth rate



What is logi! underl"ing relative

valuation &ri!e to boo$ value

-ivide both sides by book value o$ equity

10Value of Equity

e n

DPS P

r g =

−

0 1

0 0

1

e n

P DPS PBV

BV BV r g = =

−

0 1 1

0 0 1

1e n

P EPS DPS PBV BV BV EPS r g

= =

−

( )00 n

0

1(Payout Ratio) 1+g

e n

P ROE PBV

BV r g = =

−





"dentical payout ratio

"dentical cost or equity

"dentical e.pected stable&growth rate "dentical ROE



What is logi! underl"ing relative

valuation &ri!e to sales

-ivide both sides by sales

10Value of Equity

e n

DPS P r g

=

−

0 1

0 0

1

e n

P DPS PS Sales Sales r g

= =

−

0 1 1

0 0 1

1

e n

P EPS DPS PS

Sales Sales EPS r g

= =

−

( )00 n

0

1Gross Profit Margin (Payout Ratio) 1+g

e n

P PS

Sales r g = =

−





"dentical payout ratio

"dentical cost or equity

"dentical e.pected stable&growth rate "dentical /ross pro$it argin



Using !omparables

Construct the ultiple $or the set o$ coparable$irs

%verage the ultiple across the set o$

coparable $irsCopare individual $ir to this average-i$$erences ay be attributed to di$$erences in

underlying logic o$ ultiple-i$$erences ay be attributed to ine$$icient

arkets (price)



Remember to !ontrol for

differen!es between firms

/rowth

Payout

0isk01E

Pro$it 2argin



Wa"s to !ontrol for differen!es between firms +aple $irs and sort according to attributes (/rowth,

Payout, 0isk, 01E, Pro$it) 0equires a large nuber o$ potential coparables Copare your $ir to subset o$ coparables with siilar

attributes

2odi$y the ultiples to ake the ore coparable -ivide the PE ratio by the e.pected growth rate in EP+ (PE/

0atio) -ivide PB3 ratio by the 01E (3alue 0atio) 4his assues $irs are coparable on all other attributes

0un regression o$ ultiples on attributes

*se coe$$icient values $ro regression and attributes $or the $ir

to predict the correct ultiple $or the $ir#

0 1 2 3 PE growth payout risk β β β β ε = + + + +



Regression-based multiple

anal"sis

-aodaran ran regressions on ,567 $irs using data $ro

'889

PE8'#6;/rowth<=6#65;Payout<'#>;Beta PB3=#88;Payout&?#68;Beta<>?#>7;growth<='#7>;01E

P+''#7>;/rowth<'#5';Payout&'#5;Beta<''#8=;2argin



Free !ash flow method

ree cash $lows to equity

ree cash $lows to $ir

Basic case irs with insu$$icient valuation data

%cquisition valuation



Option base valuation

0eal option approach in valuing $ir

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Valuation Methods (2010)