market approach
valuation by market comparison approach
identical items must be the same price - law of one price
firms with the same attributes should have the same value
objective and observable transactions
valuation by cash flow ( NPV) approach
P/E=1/(k-g)
E/P= earnings yield .......................................................
why P/E ratio are higher for more growth firms
pv go ( present value of growth oppurtunities)
PO=el/k+PVGO
Valuation - market approach
P/E-Ratio- the 1/x domain problem
selection of comparable companies ( Hard to find suitable comps)
the p/e is an accounting number whereas the "p" is a market number
" non agregation" of comparable ratios
honest work when earnings are negative
other techniques to handlwe the 1/x domain problem
use median p/e instead of mean p/e ( the outliers issue)
ignore non positive earnings of firms
average the e/p
yeilds and the invert
work with sums instead of just ratios
other than p/e ratios for valuation
price/EBITDA - excludes capital expenditure
price/cash-cash flows can be lumpy
PEG-P/E divided by growth- warning! especialy very low "g"
price/bookequity-tends to high number for older firms ( may be poor comp)
price/sales-can use for newer firms where earnings are negative
price/employee ratios- could be difficult to use for various reasons
employee ratio - people who have a high value to the company
P/E ratio - adjustments to consider
trailing 12 months
valuation market approach
caveat
during economic boom p/e tends to be overly high
non-valuation ratios
leverage
liabilities/equity,financial debt/equity, times interest earned, fixed charge
projecting the future
pro formats
formal way/form to propose new projects
apply business expertise, financial expertise, and soft intuition ( art and science)
use of key and other assumptions
key assumptions are generally more sensitive to change since results when they change
elements include financial statements, comporable, capital budgeting, taxes, cost of capital, capital structure, etc/
goal and logic
estimates of value ( cash flows, projected financial statements
detailed and intergrated
different from business to business
recognize limitations ( varies with complexity and nature of activities
project the future
outsider user view
value of busness- market view
privately hel firms for sale without known market values
privately-held firms for sale without known market values
private equity buyers looking at a public companies to identify potnetial targets
inside view
tempelate
choice of horizon
detailed financial from time O
detailed financials at time T
Toataling the present values
other considerations
Investments: first look
asset classes
stocks, bonds and cash
other assets
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