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Unformatted text preview: of value that are selected for the valuation of the target
company include revenue, operating cash flow, and net income. The market value for each
comparable company is given in row (1). The dollar value of each measure of value is given in rows
(2)-(4). Market value multiples are given in rows (5) -(7). These multiples are calculated by dividing
market value by the dollar value of each measure of value.
Company 1 Comparable
Company 2 Comparable
($Millions) Measures of Value ($Millions)
(1) Market Value
(4) Net Income $120
$8.5 $7 $4 $5.5 Market Value Multiples
(7) Net Income 1.2
11.4 17.1 20 1.3
Average Estimated Value of Target $195
$247.7 8 Market-Based Methods: Same or Comparable Industry Method
• Multiply target’s earnings or revenues by market value to earnings or revenue ratios for the average firm in target’s industry or a comparable industry.
• Primary advantage is the ease of use and availability of data.
• Disadvantages include presumption industry multiples are actually comparable and analysts 9 Market-based Methods: Comparable Transactions Method
• Multiples used to estimate target’s value are based on purchase prices of recently acquired comparable companies.
• Most accurate method whenever the transaction is truly comparable and very recent.
• Major limitation is that truly comparable transactions are rare. 10 Illustration
• Siebel Incorporated, a non-publicly traded company, has 2008 earnings before interest and taxes (EBIT) of $33.3 million, which is expected to grow at 5% annually into the foreseeable future. The firm’s...
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