lecture 3 Relative Valuation HO - FINA 5512 VALUATION...

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1 Lecture 3 Valuation: Relative/Asset-based Valuation Models Dr Isaac Otchere FINA 5512: VALUATION
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2 Valuation: A Primer on Relative Valuation Models Objective of Lecture: Discuss how to value firms using market- and asset-based models Relative/market based methods of valuation Comparable companies Comparable transactions Same industry or comparable industry PEG ratios. Asset oriented approaches tangible book value, liquidation value break-up value; Replacement cost method; Weighted average valuation methodology
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3 Relative Valuation The value of an asset is derived from the pricing of ‘comparable’ assets standardised using a common variable such as earnings, cash flow, book value or sales Examples of relative valuation ratios: Price/book value ratio; P/E ratios (used to estimate value of equity) Price/sales ratio (used to estimate Enterprise (Firm) Value) price/cash flows eg. Firms selling at a discount on book relative to comparable firms are undervalued Using comparables Compute multiples for firm and compare with industry average or use industry multiple to value target firm.
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Market-Based (Relative Valuation) Methods MV T = (MV C / I C ) x I T where MV C = Market value of the comparable company C I C = Measure of value for comparable company C I T = Measure of value for company T (MV C /I C ) = Market value multiple for the comparable company 4
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Illustration Pellagial Inc. is a nationwide retail chain specializing in women’s apparel. The company’s most popular lines are Aura and Home. Aura offers executive wear for women in the middle to high-end markets, and Home features casual but stylish clothes, also targeted at women in the middle to high-end markets. The company has 135 million shares outstanding, 30% of which are publicly traded with a current market price of $5.63 per share. The company is expected to net $38 million in the next 12 months. Forecast sales and EBITDA are $633 million and $57 million, respectively. Debt outstanding is $120 million. a) What is the current enterprise market value of Pellagia? b) Supposed you are asked to value Pellagia Inc. given the following information. What is your estimate of equity value? Of enterprise value? Price-to-Earnings Price-to-Sales Abercrombie & Fitch 13.04 1.58 Ann Taylor Stores Corp 26.10 0.78 Bebe Stores Inc 15.36 1.41 Gap Inc N/A 0.76 Limited Brands Inc 18.59 0.96 Talbots Inc 14.11 1.06 5
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Finding overvalued or undervalued firms using relative valuation method 6 Generally a firm is overvalued if its multiple is higher than the average and vice versa. (NB use relative valuation method with care!) Higher multiple may be explained by higher growth potential Co. PE PBV PS Exp Growth Margin ROE% 1 17.96 .52 .2 33% 1.12 2.88% 2 21.92 2.88 .79 21 3.60 13.15% 3 42.59 4.3 1.51 20 3.54 10.09% 4 14.81 1.84 1.10 11 7.45 12.41% ׃ AV 18.15 2.57 0.81 16 4.62 14.53% X 27.09 2.39 1.11 9 4 8.82% X is overvalued !
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PEG Ratio Used to adjust relative valuation methods for differences in growth rates among comparable firms.
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lecture 3 Relative Valuation HO - FINA 5512 VALUATION...

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