428_lecture13_Multiples_S09

428_lecture13_Multiples_S09 - Pricing by Multiples...

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Pricing by Multiples Valuation Lecture 13
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Midterm Exam (3/12) Close book, 1 hour 15 minutes. Covers materials until March 5. Sample exam Sections (Review and go through sample exam)
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Today’s Lecture Discussions Valuation by multiples: General principles What’s behind PE ? What’s behind PB ? What’s behind EVS ?
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Discussion: Valuation Toll Way Suppose you have a toll road which you have paid $3 billion dollars for a 75 year lease, how would you value this toll road using the Discounted Cash Flow method? What are the revenues and revenue drivers? What are the expenses and capital expenditures? What discount rates to choose? Can you use RIM? What are other factors?
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Discussion: Valuation Toll Way Forecast FCF , r and g Forecast Earnings Earnings = FCF – i + I + accruals Earnings = 150 million * 1.2= 180 million r g FCF 10% 0% $277,300,615 12% 0% $328,629,151 15% 0% $404,169,768 10% 5% $148,095,919 12% 5% $199,868,701 15% 5% $278,214,031
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Discussion: Valuation Toll Way Forecast Revenue Sales revenue - Cost of goods sold Gross profit - Operating expenses Income from operations +/- Non-operating items Income before taxes - Income taxes Net income Forecast profit margin, Operating Expense Or use E/S ratio. If E/S =.75 Sales= 240 million
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Discussion: BV Is Rarely Required Reading now? Before Yardstick, easy to find bargains. Now Distorted, less meaningful, Few with depressed levels Why? New Acc. Rules, buybacks, writeoffs, pensions, BV is more than Equity + Retained earnings Who still use BV? Value Investors Where ? For valuation of banks and utilities companies Useful? Yes, need to dig deeper.
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Valuation by multiples General principles What’s behind PE? What’s behind PB? What’s behind EVS?
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Valuation by Multiples What is multiple ? A valuation multiple is the ratio of market value of equity or the entire firm to some consistent accounting base. What are some possible multiples ? Multiple Market Value Accounting Base =
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Valuation by Multiples Price multiples are ratios of a stock’s market price to some measure of value per share. P/E, P/B, P/S Usage: Apple to Apple comparison, i.e. firms in the same business, industry, time period, ….
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So simple, yet so difficult… The actual computations are simple. For instance, market value of equity of a firm you are trying to value is: Value = Your P/E * My Earnings The difficulty is in choosing appropriate comparables.
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Since the approach does not require the forecast of future cash flows or cost of capital, it is easy to use compared to the DCF approach. Its simplicity makes it a widespread choice in pricing initial public offerings ( IPO ), valuing mergers and acquisitions , private firms , etc. Advantages of Multiples Based
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This note was uploaded on 09/23/2009 for the course AEM 4280 taught by Professor Ng,d. during the Spring '08 term at Cornell.

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428_lecture13_Multiples_S09 - Pricing by Multiples...

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