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
Aswath Damodaran 192 PE Ratio: Standard Regression for US stocks - January 2009
Aswath Damodaran 193 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
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