Relative Valuation and Private Company

Relative Valuation and Private Company - Valuation: Lecture...

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Aswath Damodaran 1 Valuation: Lecture Note Packet 2 Relative Valuation and Private Company Valuation Aswath Damodaran B40.3331
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Aswath Damodaran 2 The Essence of relative valuation? In relative valuation, the value of an asset is compared to the values assessed by the market for similar or comparable assets. To do relative valuation then, we need to identify comparable assets and obtain market values for these assets convert these market values into standardized values , since the absolute prices cannot be compared This process of standardizing creates price multiples. compare the standardized value or multiple for the asset being analyzed to the standardized values for comparable asset, controlling for any differences between the Frms that might affect the multiple, to judge whether the asset is under or over valued
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Aswath Damodaran 3 Relative valuation is pervasive… Most valuations on Wall Street are relative valuations. Almost 85% of equity research reports are based upon a multiple and comparables. More than 50% of all acquisition valuations are based upon multiples Rules of thumb based on multiples are not only common but are often the basis for Fnal valuation judgments. While there are more discounted cash±ow valuations in consulting and corporate Fnance, they are often relative valuations masquerading as discounted cash ±ow valuations. The objective in many discounted cash±ow valuations is to back into a number that has been obtained by using a multiple. The terminal value in a signiFcant number of discounted cash±ow valuations is estimated using a multiple.
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Aswath Damodaran 4 Why relative valuation? If you think I m crazy, you should see the guy who lives across the hall Jerry Seinfeld talking about Kramer in a Seinfeld episode A little inaccuracy sometimes saves tons of explanation H.H. Munro If you are going to screw up, make sure that you have lots of company Ex-portfolio manager
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Aswath Damodaran 5 So, you believe only in intrinsic value? Here s why you should still care about relative value Even if you are a true believer in discounted cashFow valuation, presenting your ±ndings on a relative valuation basis will make it more likely that your ±ndings/recommendations will reach a receptive audience. In some cases, relative valuation can help ±nd weak spots in discounted cash Fow valuations and ±x them. The problem with multiples is not in their use but in their abuse. If we can ±nd ways to frame multiples right, we should be able to use them better.
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Aswath Damodaran 6 Multiples are just standardized estimates of price… Numerator = What you are paying for the asset Denominator = What you are getting in return Market value of equity Market value for the firm Firm value = Market value of equity + Market value of debt Market value of operating assets of firm Enterprise value (EV) = Market value of equity + Market value of debt - Cash Revenues a. Accounting revenues b. Drivers - # Customers
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This note was uploaded on 12/04/2011 for the course ECON 001 taught by Professor Tnaga during the Spring '11 term at Abant İzzet Baysal University.

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Relative Valuation and Private Company - Valuation: Lecture...

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