# relchoic - Averaging Across Multiples n n n This procedure...

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Aswath Damodaran 170 Averaging Across Multiples n This procedure involves valuing a firm using five or six or more multiples and then taking an average of the valuations across these multiples. n This is completely inappropriate since it averages good estimates with poor ones equally. n If some of the multiples are “sector based” and some are “market based”, this will also average across two different ways of thinking about relative valuation.

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Aswath Damodaran 171 Weighted Averaging Across Multiples n In this approach, the estimates obtained from using different multiples are averaged, with weights on each based upon the precision of each estimate. The more precise estimates are weighted more and the less precise ones weighted less. n The precision of each estimate can be estimated fairly simply for those estimated based upon regressions as follows: Precision of Estimate = 1 / Standard Error of Estimate where the standard error of the predicted value is used in the denominator. n This approach is more difficult to use when some of the estimates are subjective and some are based upon more quantitative techniques.
Aswath Damodaran 172 Picking one Multiple n This is usually the best way to approach this issue. While a range of values can be obtained from a number of multiples, the “best estimate” value is obtained using one multiple. n The multiple that is used can be chosen in one of two ways: Use the multiple that best fits your objective. Thus, if you want the company to be undervalued, you pick the multiple that yields the highest

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## This note was uploaded on 01/29/2012 for the course FIN 6000 taught by Professor Banko during the Fall '11 term at University of Florida.

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relchoic - Averaging Across Multiples n n n This procedure...

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