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Unformatted text preview: FBE 421: Financial Analysis & Valuation Relative Valuation Using Market Comparables I ntroduction Relative valuation using market comparables: technique used to value businesses and business units Assumes similar assets should sell at similar prices. The critical assumption underlying the approach is that the comparable assets are truly comparable to the assets being valued. I ntroduction Relative valuation should be used to complement DCF analysis These methods do not contradict each other. Computing the DCF directly might be challenging. I ntroduction I f we get both methods right, then we will get the same answer. But in a specific context we might be more confident about one versus the other. Analysts valuing companies typically consider ratios such as market values relative to the various earnings and cash flow numbers, sales (revenues), or book values. I ntroduction The method of compar ables involves using a price multiple to value a company A current measure of performance is converted into a value through application of a multiple for comparable firms. I nstead of computing the DCF directly, we compute the implied value for the company we are analyzing, given the multiples for comparable firms I ntroduction The economic rationale underlying the method of comparables is the law of one pricethe economic principle that two identical assets should sell at the same price. I f the company we are trying to value does not have a price, this method can only be used to estimate the implied value for the company. I n this case, we need to assume that the price of the comparable companies is right. I ntroduction I f the company does have a price, then this method can be used to evaluate if there is mispricing by the market. I f the implied price is different from the actual price, there is mispricing. For example, if the implied price is higher than the actual price, either the company being analyzed is undervalued or the comparable firms are overvalued. Valuation Using Comparables Steps in Relative Valuation Step 1 : I dentify similar or comparable assets and recent market prices for each. Step 2 : Calculate a valuation metric for use in valuing the asset. Step 3 : Calculate an initial estimate of value. Step 4 : Refine or tailor your initial valuation estimate to the specific characteristics of the asset. Real Estate Example Most common application of this method is the valuation of commercial and residential real estate. Collect the ratio of prices from recent sales in the neighborhood Multiply the price per square foot comp number by the number of square feet in your house to get an estimate of what the home should sell for....
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This note was uploaded on 04/20/2011 for the course FBE 421 taught by Professor Plotts during the Spring '07 term at USC.
 Spring '07
 Plotts

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