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# vebitda - Value Multiples Aswath Damodaran Aswath Damodaran...

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Aswath Damodaran 1 Value Multiples Aswath Damodaran

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Aswath Damodaran 2 Value/Earnings and Value/Cashflow Ratios n While Price earnings ratios look at the market value of equity relative to earnings to equity investors, Value earnings ratios look at the market value of the firm relative to operating earnings. Value to cash flow ratios modify the earnings number to make it a cash flow number. n The form of value to cash flow ratios that has the closest parallels in DCF valuation is the value to Free Cash Flow to the Firm, which is defined as: Value/FCFF = (Market Value of Equity + Market Value of Debt-Cash) EBIT (1-t) - (Cap Ex - Deprecn) - Chg in WC n Consistency Tests: If the numerator is net of cash (or if net debt is used, then the interest income from the cash should not be in denominator The interest expenses added back to get to EBIT should correspond to the debt in the numerator. If only long term debt is considered, only long term interest should be added back.
Aswath Damodaran 3 Value/FCFF Distribution Enterprise Value/FCFF 800 600 400 200 0 Std. Dev = 21.77 Mean = 20.6 N = 3063.00

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Aswath Damodaran 4 Value of Firm/FCFF: Determinants n Reverting back to a two-stage FCFF DCF model, we get: V 0 = Value of the firm (today) FCFF 0 = Free Cashflow to the firm in current year g = Expected growth rate in FCFF in extraordinary growth period (first n years) WACC = Weighted average cost of capital g n = Expected growth rate in FCFF in stable growth period (after n years) V 0 = FCFF 0 (1 + g) 1 - (1 + g) n ( 1 +WACC) n WACC - g + FCFF 0 (1+g) n (1+g n ) (WACC - g n )(1 + WACC) n
Aswath Damodaran 5 Value Multiples n Dividing both sides by the FCFF yields, n The value/FCFF multiples is a function of the cost of capital the expected growth V 0 FCFF 0 = (1 + g) 1 - (1 + g) n (1 + WACC) n WACC - g + (1+g) n ( 1 +g n ) (WACC - g n )(1 + WACC) n

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Aswath Damodaran 6 Alternatives to FCFF - EBIT and EBITDA n Most analysts find FCFF to complex or messy to use in multiples (partly because capital expenditures and working capital have to be estimated). They use modified versions of the multiple with the following alternative denominator: after-tax operating income or EBIT(1-t) pre-tax operating income or EBIT net operating income (NOI), a slightly modified version of operating income, where any non-operating expenses and income is removed from the EBIT EBITDA, which is earnings before interest, taxes, depreciation and amortization.
Aswath Damodaran 7 Value/FCFF Multiples and the Alternatives n

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