6 Equity Valuation Methods 2

6 Equity Valuation Methods 2 - Equity Valuation 13-1 Equity...

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13-1 Equity Valuation
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13-2 Equity Valuation Essentially three ways to value a firm: Value of assets Value of future earnings (drives dividends and eventual resale price) “Comparables” where a given ratio for a firm is compared to similar firms, the overall market or the past Many analysts will use some combination of each Relative utility of each varies with company and industry Value of assets useful for financial entities or “distressed firms”
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13-3 Equity Valuation Relative utility of each varies with company and industry Comparable methods do not provide any absolute information on over or under valuation; it could be that all the firms in the comparison are overvalued There are two perspectives to consider: Shareholder (dividends) Company itself (earnings)
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13-4 Equity Valuation: Value of Assets Three methods: Book value Replacement value Liquidation value Book value is historical cost minus depreciation Easily accessible information though data: may be difficult to interpret and is not very “granular” Generally will underestimate value of firm: many fully depreciated assets with book value of zero have great value land is not usually subject to depreciation but if acquired many years prior may have much higher value than historical cost
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13-5 Equity Valuation: Value of Assets Replacement value is estimated cost to replicate company’s fixed assets (subject to great error, but avoids issue of depreciation) Requires access to company’s physical plant in most cases Need to have experts involved in evaluation Liquidation value is value of firm if assets are sold Will usually give similar valuation to that of replacement value similar problems to replacement value Each method: underestimates “brand value” Ignores firm’s ability to exploit these assets
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13-6 Equity Valuation: Value of Assets Valuing a company by value of assets methodology is most useful in valuation of: Distressed companies where analysts are focusing on operating losses To evaluate distressed firm’s ability to honor repayment of bond iesues Private equity firms buying companies and LBOs Smallish companies with easily marketable assets In each case, asset value must be reduced by any debt obligations (eg payroll, bonds, bank loans, suppliers, taxes) outstanding, though any prior period losses may be considered a tax asset by acquirer “Tobins q” is ratio of market cap to
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13-7 Equity Valuation: Value of Assets Method is not particularly useful for firms: providing services or goods based on intellectual property: Microsoft, Google, Facebook, Accenture With very strong brand value: Coca cola, Burberrys with relatively few physical assets: Airlines which lease airplanes rather than own them Hotels which may not own properties, but operate management contracts Companies which outsource production of goods (Apple) Industrial firms where assets difficult to sell
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