relintro - Relative Valuation Basics Aswath Damodaran...

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Aswath Damodaran 1 Relative Valuation: Basics Aswath Damodaran
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Aswath Damodaran 2 What is relative valuation? n In relative valuation, the value of an asset is compared to the values assessed by the market for similar or comparable assets. n 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 firms that might affect the multiple, to judge whether the asset is under or over valued
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Aswath Damodaran 3 Standardizing Value n Prices can be standardized using a common variable such as earnings, cashflows, book value or revenues. Earnings Multiples Price/Earnings Ratio (PE) and variants (PEG and Relative PE) – Value/EBIT – Value/EBITDA Value/Cash Flow Book Value Multiples Price/Book Value(of Equity) (PBV) Value/ Book Value of Assets Value/Replacement Cost (Tobin’s Q) Revenues Price/Sales per Share (PS) – Value/Sales Industry Specific Variable (Price/kwh, Price per ton of steel .... )
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