In which of these companies do you think valuing brand name will be easiest
to do and which of them will it be hardest?
Kelloggs
Sony
Goldman Sachs
Apple
Explain.

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EV/Sales Ratio Regression: US in January 2011

Aswath Damodaran
148
EV/Sales Regressions across markets…
Region
Regression – January 2011
R Squared
Europe
EV/Sales =0.38 + 3.20 Expected Growth + 12.74
Operating Margin –2.50 t + 0.13 Reinvestment Rate
73.4%
Japan
EV/Sales =0.01 + 6.72 Operating Margin –1.99 Tax
rate + 5.58 Debt/Capital
26.4%
Emerging
Markets
EV/Sales = 2.15
- 3.50 t+ 10.09 Operating Margin -
2.01 Debt/Capital + 0.16 Reinvestment Rate
40.7%

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149
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
150
Averaging Across Multiples
This procedure involves valuing a firm using five or six or more multiples and
then taking an average of the valuations across these multiples.
This is completely inappropriate since it averages good estimates with poor
ones equally.
If some of the multiples are
“
sector based
”
and some are
“
market based
”
, this
will also average across two different ways of thinking about relative
valuation.

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151
Weighted Averaging Across Multiples
In this approach, the estimates obtained from using different multiples are
averaged, with weights on each based upon the precision of each estimate. The
more precise estimates are weighted more and the less precise ones weighted
less.
The precision of each estimate can be estimated fairly simply for those
estimated based upon regressions as follows:
Precision of Estimate = 1 / Standard Error of Estimate
where the standard error of the predicted value is used in the denominator.
This approach is more difficult to use when some of the estimates are
subjective and some are based upon more quantitative techniques.

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152
Picking one Multiple
This is usually the best way to approach this issue. While a range of values can
be obtained from a number of multiples, the
“
best estimate
”
value is obtained
using one multiple.
The multiple that is used can be chosen in one of two ways:
•
Use the multiple that best fits your objective
. Thus, if you want the company to be
undervalued, you pick the multiple that yields the highest value.

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- Spring '11
- tnaga
- P/E ratio, PEG ratio, Aswath Damodaran, Damodaran