The average enterprise value ebitda multiple for


The average enterprise value/ EBITDA multiple for healthy telecomm firms is 7.2
currently.

Applying this multiple to Global Crossing’s EBITDA in year 5, yields a value in year 5
of
• Enterprise Value in year 5 = 1371 * 7.2 = $9,871 million
• Enterprise Value today = $ 9,871 million/ 1.138 5 = $5,172 million
(The cost of capital for Global Crossing is 13.80%)
• The probability that Global Crossing will not make it as a going concern is 77%.
• Expected Enterprise value today = 0.23 (5172) = $1,190 million

Aswath Damodaran 190
Comparisons to the entire market: Why not?

In contrast to the 'comparable firm' approach, the information in the entire
cross-section of firms can be used to predict PE ratios.

The simplest way of summarizing this information is with a multiple
regression, with the PE ratio as the dependent variable, and proxies for risk,
growth and payout forming the independent variables.

Aswath Damodaran 191
PE versus Expected EPS Growth: January 2009

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PE Ratio: Standard Regression for US stocks - January 2009

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The value of growth
Time Period PE Value of extra 1% of growth Equity Risk Premium
January 2009 0.780 6.43%
January 2008 1.427 4.37%
January 2007 1.178 4.16%
January 2006 1.131 4.07%
January 2005 0.914 3.65%
January 2004 0.812 3.69%
July 2003 1.228 3.88%
January 2003 2.621 4.10%
July 2002 0.859 4.35%
January 2002 1.003 3.62%
July 2001 1.251 3.05%
January 2001 1.457 2.75%
July 2000 1.761 2.20%
January 2000 2.105 2.05%
The value of growth is in terms of additional PE…

Aswath Damodaran 194
Fundamentals hold in every market: PE regressions across
markets…
Region Regression – January 2009 R squared
Europe PE = 10.07 – 5.23 Beta + 7.78 Payout + 27.51
Expected growth rate
53.8%
Japan PE = 9.28 – 4.50 Beta + 42.29 Payout + 62 48.3%
Emerging
Markets
PE = 5.63 + 062 Beta + 9.65 Payout + 13.05
Expected growth rate
27.4%

Aswath Damodaran 195
Relative Valuation: Some closing propositions

Proposition 1: In a relative valuation, all that you are concluding is that a stock
is under or over valued, relative to your comparable group.
• Your relative valuation judgment can be right and your stock can be hopelessly
over valued at the same time.

Proposition 2: In asset valuation, there are no similar assets. Every asset is
unique.
• If you don’t control for fundamental differences in risk, cashflows and growth
across firms when comparing how they are priced, your valuation conclusions will
reflect your flawed judgments rather than market misvaluations.

Aswath Damodaran 196
Choosing Between the Multiples

As presented in this section, there are dozens of multiples that can be
potentially used to value an individual firm.

In addition, relative valuation can be relative to a sector (or comparable firms)
or to the entire market (using the regressions, for instance)

Since there can be only one final estimate of value, there are three choices at
this stage:
• Use a simple average of the valuations obtained using a number of different
multiples
• Use a weighted average of the valuations obtained using a nmber of different
multiples
• Choose one of the multiples and base your valuation on that multiple

Aswath Damodaran 197
Picking one Multiple

This is usually the best way to approach this issue. While a range of values can