Techniques of Valuation
Techniques of Valuation
Techniques of Valuation
Techniques of valuation
Comparable Company Analysis (Public Comps): Evaluating other, similar companies’ current valuation
metrics, determined by market prices, and applying them to the company being valued.
Discounted Cash Flow Analysis (DCF): Valuing a company by projecting its future cash flows and then using
the Net Present Value (NPV) method to value the firm.
Precedent Transaction Analysis (M&A Comps): Looking at historical prices for completed M&A
transactions involving similar companies to get a range of valuation multiples. This analysis attempts to arrive at a
“control premium” paid by an acquirer to have control of the business.
Leverage Buyout/“Ability to Pay” Analysis (LBO): Valuing a company by assuming the acquisition of the
company via a leveraged buyout, which uses a significant amount of borrowed funds to fund the purchase, and
assuming a required rate of return for the purchasing entity
Enterprise Value: Represents the total value of a company’s net operating assets. In other words, “Enterprise
Value” is the value of the entire company.
Market Value: Also known as “Market Capitalization” or “Equity Value,” market value represents the dollar value
of a company’s issued shares of common equity. It is calculated by multiplying shares outstanding by the current stock price.
Book Value: The accounting valuation of the equity. Book Value simply equals Total Assets – Total Liabilities.
Book Value is often called “liquidation value,” because it represents the expected value of a company’s assets after they are
used to pay off all existing liabilities. This generally assumes, of course, that the company will be ceasing operations.
Market Value is almost always larger then Book Value for three primary reasons:
Market Value includes future growth expectations while Book Value does not.
Market Value includes brand value and company intangible assets.
Market Value includes value accrued by the company historically through wise managerial decision making, while
Book Value generally does not.
In other words, Book Value is a value arrived at for a company by simply following the rules of standard accounting based on
a company’s past transactions and operations, while Market Value takes into account all information about a company’s
operations, including future expectations.
Market Value is calculated based on the number of shares outstanding multiplied by the company’s current stock price.
Enterprise Value represents the total value of the firm and is found by adding the Net Debt of a company to Market Value,
where Net Debt is simply the company’s Debt outstanding minus excess Cash on the company’s balance sheet.
Enterprise Value should be used for ratios and other calculations that measure the total return to all capital holders (such as
Revenue, Earnings Before Taxes (EBT); Earnings Before Interest and Tax (EBIT); Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA); Net Operating Profit After Tax; Operating Cash Flow; etc.), whereas Equity Value
should be used for ratios that measure the total return to shareholders (such as Earnings/Net Income).
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