1. Valuation Methods

2. Methods of Corporate Valuation
Asset-Based Methods
Using Comparables
Free Cash Flow Methods
Option-Based Valuation

3. 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

4. Relative Valuation What is relative valuation?
What is the logic underlying relative valuation?
Using comparables

5. What is relative valuation?
Relative to revenues or cash flows
Relative to Earnings
Relative to the Book Value of Equity

6. Relative to Revenue Price/Sales (PS) Value/Sales (VS)
Usually used in valuing retailing firms

7. 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.

8. Relative to the Book Value of Equity
Price/Book Value (PBV)
Market to book Value (MB)

9. 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

10. 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

11. 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

12. Comparing two PE ratios across firms assumes …
Identical payout ratio
Identical cost or equity
Identical expected stable-growth rate

13. What is logic underlying relative valuation? Price to book value
Divide both sides by book value of equity

14. Comparing two PE ratios across firms assumes …
Identical payout ratio
Identical cost or equity
Identical expected stable-growth rate
Identical

15. What is logic underlying relative valuation? Price to sales
Divide both sides by sales

16. Comparing two PE ratios across firms assumes …
Identical payout ratio
Identical cost or equity
Identical expected stable-growth rate
Identical Gross profit margin

17. 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)

18. Remember to control for differences between firms
Growth
Payout
Risk
ROE
Profit Margin

19. 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.

20. 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

21. Free cash flow method Free cash flows to equity
Free cash flows to firm
Basic case
Firms with insufficient valuation data
Acquisition valuation

22. Option base valuation
Real option approach in valuing firm