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valncaps2 - FIN Valuation methods An overview 2001 M. P....

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FIN ©2001 M. P. Narayanan University of Michigan Valuation methods Valuation methods An overview
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FIN ©2001 M. P. Narayanan University of Michigan 2 Methodologies Methodologies Comparable multiples P/E multiple Market to Book multiple Price to Revenue multiple Enterprise value to EBIT multiple Discounted Cash Flow (DCF) NPV, IRR, or EVA based Methods WACC method APV method CF to Equity method
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FIN ©2001 M. P. Narayanan University of Michigan 3 Valuation: P/E multiple Valuation: P/E multiple If valuation is being done for an IPO or a takeover, Value of firm = Average Transaction P/E multiple × EPS of firm Average Transaction multiple is the average multiple of recent transactions (IPO or takeover as the case may be) If valuation is being done to estimate firm value Value of firm = Average P/E multiple in industry × EPS of firm This method can be used when firms in the industry are profitable (have positive earnings) firms in the industry have similar growth (more likely for “mature” industries) firms in the industry have similar capital structure
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FIN ©2001 M. P. Narayanan University of Michigan 4 Valuation: Price to book multiple Valuation: Price to book multiple The application of this method is similar to that of the P/E multiple method. Since the book value of equity is essentially the amount of equity capital invested in the firm, this method measures the market value of each dollar of equity invested. This method can be used for companies in the manufacturing sector which have significant capital requirements. companies which are not in technical default (negative book value of equity)
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©2001 M. P. Narayanan University of Michigan 5 Valuation: Value to EBITDA multiple Valuation: Value to EBITDA multiple This multiple measures the enterprise value , that is the value of the business operations (as opposed to the value of the equity). In calculating enterprise value, only the operational value of the business is included. Value from investment activities, such as investment in treasury bills or bonds, or investment in stocks of other companies, is excluded. The following economic value balance sheet clarifies
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This note was uploaded on 03/08/2012 for the course FINA 6274 taught by Professor Williamhandorf during the Fall '11 term at GWU.

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valncaps2 - FIN Valuation methods An overview 2001 M. P....

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