when to use which valuation method?
Hey guys, quick question about the three valuation methods (DCF, public comps, precedent comps): When is the best situation to use each? For example if you were valuing a large, established company with low growth rates vs a newer company with really high growth which would you use?
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Valuation Methods (Originally Posted: 06/24/2008)
What are the most commonly used valuation methods in M&A? I always thought that comparable analysis would be the one as DCF is too flawed, but then when I was going through some of MBA students resumes who had IB experience, a lot of them listed DCF in their experience.
So I'm curious to find out which method M&A analysts use the most to value companies?
Thanks.
I believe Dillution/Accretion, LBO and Comp-transactions are three prominent models. Depends on the structure of the deal. For instance, if a firm is buying another all-cash, then things aren't necessarily as complex (at least on the debt service side).
I'm not in M&A. Any thoughts from anyone else?
DCF is flawed but due to the subjectivity that is involved in that type of analysis you need to be certain that your assumptions are based on conservative market trends. Public company comparables and transaction comp analysis are the other two primary valuation methods. Transaction comp analysis usually yields the highest valuation (as it includes a takeover/control premium, with DCF being the next highest (due to optimisitc subjectivity), and comps usually yielding the lowest value.
Generally, you will use at least two of these to ensure consistency. We almost always build an initial comp set and then run a DCF.
My apologies, I meant to say that DCF is not flawed but...
The people I respect the most are the ones that understand building a model isn't necessarily to come to one single value (because even conservative/"accurate at the time" projections rarely work out), but instead to understand a range of values where you are comfortable, and to understand that if you want a certain valuation, this is the growth/CF/etc. you need. The sensitivity to a DCF is the most interesting part.
For instance, I believe 2 years ago when Google's price was over 700, the valuations called for growth of 60-70%. While they're still red hot, obviously that valuation was a litle bit innacurate.
Alphaholic's comment above hits the nail on the head. It's all about building a "football field." This gives you a range of value. It's important to note here there is no definitive answer when it comes to valuation. One can certainly be completely off base, however if you have logical and rational assumptions behind your DCF and have completely scrubbed all of your multiples in your comparable company and transaction analyses you can always make an argument for your valuation.
FYI, I typically use 3-4 valuation methods in my pitches: DCF, LBO, Comp. Transactions and Companies.
Repeat after me: accretion/(dilution) analysis is not a valuation methodology.
Thank you GK! It was the first thing mentioned too... Ughh.
Thank you everybody for the replies! If someone could elaborate more on building a "football field", I would very much appreciate it.
A football field is just a rectangular grid (chart) that shows your valuation ranges. For example, it will have a bar for something like: IEV for '08 Revenue from public comps with the lower limit of the horizontal bar being at the low of your range (generally ~(15%) below median) and the upper limit at the high end of your range (~+15%). It will have bars for your diff. years of rev, ebitda, and your M&A comps or whatever you are showing in your valuation.
Valuation Method Tech (Originally Posted: 06/02/2017)
Hello,
My professor asked us to come up with a company and show in 4 slides: Financials and a price we would be aiming to sell the company for.
I have my Income Statement, Balance Sheet and Cash flow but I am stuck in this last part.
I don't know how to come up with a price to sell my company for. Can you please help ?
what do you mean by come up with a company, do you create your own imaginary firm? in that case, just run a DCF, because your growth assumptions are entirely up to you.
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I showed my DCF analysis to my professor and she thinks that my acquisition price is low.
I am estimating that companies will have to pay $40M to acquire my company because I am adding my present value of free cash flow + Present value of terminal value
My Revenue for 2019 is 100M and EBITDA is 40M She thinks that it should be more and approximately 120M
Please help me tweak my model
The three main RE valuation methods (Originally Posted: 10/31/2012)
Hi, I've been lurking in this website for a while but decided to sign-up today to ask a question.
I have a final-round interview coming up with E&Y RE transaction advisory. I think the technical questions will be based on the valuation methods and was wondering if someone could explain this in detail (DCF, Direct Cap, Sales Comps + Cost approach though that's not used too often).
The basics I do have it down, but just wanted to make sure I get other peoples' perspectives on it. Textbook definitions would still be great as a review.
I looked at several threads in the website and they were all helpful, but if someone could perhaps touch on pros/cons of each and compare them through cases, it would be more than just helpful.
Thank you so much in advance.
Highest and best use?
Direct Cap - Most common method to get an opinion on value. Obviously this takes your NOI and applies a cap rate. This cap rate would be based on prevailing market conditions. Pro: requires no "crystal ball" or "sticking your thumb in the wind" kind of guessing. You need a stabilized NOI to get an accurate figure -- drawback is sometimes it can be subject as to what stabilized means -- i.e. did those tenants get crazy TI's to sign that lease? Pro is it's easy to defend, "well that's what everything else was selling for at the time."
DCF - Should be used in a valuation. Requires some "sticking your thumb in the wind" regarding market leasing assumptions and some other things, especially exit cap rate. Obviously this requires a computer model to be done. Obvious thing going on here is that no matter how detailed your model, it's shit if your assumptions are shit. A detailed model can also tell a story about a property.
Cost Approach - This is just stupid and only used by government as far as I know. It's just my opinion, and I can be wrong, but it's like saying I opened a sandwich shop and I sell a sandwich for: Price = (variable cost of sandwich) + y(fixed costs of sandwich). That says nothing about how good I am at making sandwiches. It's the mixture of the steel, land, concrete, entrepreneurial and architectural talent that all go together to make it valuable. In other words, what's missing from the equation is the value added by me, or technically, my opportunity cost.
I think the cost approach is more applicable to specialized properties, such as certain medical office buildings or biotech offices. There is value in the build-out of the lab space and some equipment and fixtures that run with the building.
With that said, I echo what econ said above. Even if you have a highly specialized building with a lot of technology, doesn't matter how much it cost you if no one wants to lease the space.
We use the cost approach on almost everything we buy to ensure that we are not buying above replacement cost. That is it. Most teams, if large enough, will have a good costing guy or engineer that does this well and you will just need to find market prices for land. Sometimes you can back into a land value by solving for a market development yield if there are no land comparables. Otherwise there are some high level costing software and manuals available for purchase. Appraisers need to use the cost approach quite often to appraise special purpose buildings with no lease in place or an unstable lease that cannot be quantified. As an investor, all you care about is yield
They will probably ask you what NOI is. Don't confuse NOI with net cash flow or even net profit. It is purely a real estate metric that is the operating income of the property before all capital, TIs, leasing commissions, other one time expenses and debt service. Essentially only the items that happen every year. It is kind of BS metric if you ask me, but it seems to be pretty much industry standard.
Many investors will also look at the cash on cash in a particular property, especially if they are looking to use it for cashflow.
Others doing value-add investing will not look at cash on cash and will simply look at IRR over a 3-5 year holding period (shorter term) as the capital that you are injecting into the property will hammer the cash flow.
In both of these cases NOI is irrelevant.
Sorry, but what do you mean? The NOI drives your cash flow from tenants, which is what ends up driving your returns. Do you mean it's "irrelevant," or that "you shouldn't tunnel vision on it?"
NOI is important because it's the equivalent of EBITDA and a good proxy for a property's unlevered free cash flow. It makes sense that the LONG-RUN ability of a property to generate NOI will be the principal barometer of its STABILIZED value.
Mogul's point is well-taken, though, since many/most value-add investors are buying properties that generate little-to-no NOI, and will make little-to-none of their profit from the cash flow from NOI yield (or its levered derivative, the cash-on-cash yield). Rather, they will try to stabilize the occupancy, so that the property is ready to spit off NOI, and then sell it to a core investor who will buy it for its ability to produce NOI.
As to the cash-on-cash return, the NOI is still fairly relevant since the cash-on-cash return will basically be a function of the cap rate (NOI yield) you can acquire the property at, affected by the amount of leverage you can add and the cost of leverage.
Three methods of valuation: quick question. (Originally Posted: 10/16/2010)
How detailed should we go? Briefly explain what DCF, Comparable company analysis, and precedent transaction analysis are?
I got this one a couple times and just gave the bassssssic inputs, proccess and output for each. Like literally about 4 minutes at most. The more you give them, the more they grill you and such. Be accurate, concise, and give them the big picture while showing you understand some of the underlying calcs... comps and precedent should take you 30 seconds a piece I guess DCF depending on how you attack it will take a minute. I had an interviewer at a superday ask me to break down the DCF further and I did. Then she asked me more in detail about issues that can arise at arriving at WACC, etc. They will press you if they need to, don't go further than you need.
I hate saying do a search, but there was a post a few days ago about the step-by-step way to approach a DCF analysis. That should give you a good basis for the other two as well.
I think that was my thread lol. But I understand dcf, but not so much detail about the other two.
Search on google for "Investment Banking: Mergers and Acquisitions, Valuation and Leveraged Buyouts" and look at some info. If you have enough time I would actually buy that book. It will teach you everything about these topics in-depth and you will ace any type of technical questions with superior knowledge.
Just follow the advice of the first guy that posted.
If you feel your answer may not have been detailed enough, after you finish your explanation ask the interviewer "is there anything you would like me to discuss in more detail?" This way you don't look like a rambling fool, but you still show you're confident and know enough to answer tougher questions on the methods of valuation.
MissingNo is on the right track, but 4 min is still long as shit. Absolute maximum of 2 minutes is more like it, and just ask them if they'd like more detail. If they do, they'll ask. No one wants to hear you ramble.
Valuation Method suggestions (Originally Posted: 12/15/2016)
Hello! I'm new here and have a problem that I need help with. I am taking a class in Investment Banking this semester and want some help from more valuation-savvy people.
I have a project for class and decided on this theme: Take Amazon, try 4 different valuation methods on it, compare the results and write an essay about the comparisson.
What I would like help with is finding what methods I should use. I've been trying to find some but it's still unclear to me and my deadline is near, so any suggestions are very appreciated!
Thanks in advance
I'm surprised they ask for 4. Most people here will probably only ever use 2 or 3 IMO. Those are: DCF, comps (using EV/EBITDA), and comparable transactions (though I doubt that you'd find a comparable transaction for Amazon). The only other one I can think of is residual value.
EV/EBITDA is a multiple that you can pull from comps, not a valuation methodology.
4 methods: DCF, comps, precedent transactions, LBO
So you haven't gone over any valuation methods in class?
(1) DCF
(2) Comps
(3) precedent transactions
(4) LBO
Dude you literally posted this exact same thread two days ago - actually word for word. Do your own work.
you asked this two days ago .. answers don't change:
http://www.wallstreetoasis.com/forums/valuation-suggestions-for-project…
A new valuation method I stumbled upon. What do you think about it? (Originally Posted: 02/24/2014)
In my pursue of looking for new valuation models rather than DCF and DDM, which are very sensitive when it comes to the TV, I found this model, and the guy that presented it said that would be close of what Warren Buffet would use (i am not sure this is true). 1. Calculate the BV/share 2. Use the growth of BV/share for the last 10 years to kinda forecast the BV/share in 10 years from now. 3. If the company gives out dividend then you forecast dividends for the next 10 years. 4. Use as discount rate the rate of the 10y treasury bond. Discount the BV/share at the year 10, discount all the dividends and add these values, and you would get the value of company. In a way it makes sense, because it adds up the dividends and then at the end of 10 years it assumes the worst case scenario in which u sell the stock at BV. The model transforms the stock into a bond, where dividends are your coupons and BV in year 10 assumes to be the face value. What bothers me is the discount rate of 10y treasury. It assumes that whatever will happen in the next 10 years it will be certain. But at the same time the model incorporates the worst case scenario (selling the stock at just BV). What are your thoughts on this mode?
i'll try it out where did you hear about this exactly?
initially i found it on youtube, The guy from the video then provided a a link to his website (i think). It didn't give the specifics of the method, but it gave free spaces to input the numbers. I punched in some figures and then I cracked the formula. From my experience this method gives me a greater value then my initial analysis, so i am little skeptical, due t my conservative approach. But let me know what do you get.
This is basically just finding the plow back rate of the company and forecasting BV. Also forecast shares outstanding and then you can find out a $ price per share. You then discount that dollar pice by the annual return you want to obtain and then you can find a buy price that satisfies your returns. Kind of what you said but this is what Buffett has been doing all along.
Appreciate your insight. So basically, I use my own return, say i want it to be 8% right? Have you ever used this method, and what do you think about it in comparison with other largely used methods?
Yea I have used this method and in terms of personal valuations I think it is a good one at least for large stable companies. Remember though you always want a margin of safety. Buffet typically uses 15% to get his buy price, but at today's valuations I would bet it would be hard to find stocks in that range. Also use a 10 year period for projecting and discounting back. Hope that helps
Yes that helps a lot. Thank you. Just one little detail if you wouldn't mind. What would you use as a discount rate? My idea would be about 8% for US (depends on the business too) and then add the spread between the 10year US bond and the country bond where the stock trades.
desperately need help on valuation methods (Originally Posted: 08/12/2007)
Hi
I'm having an interview next week at a BB for a full-time position. I'm pretty sure they will ask me about different valuation methods: DCF, EBITDA multiple, PE multiple.
I understand the DCF very well. But not quite get the EBITDA multiple and PE multiple.
I know this forum is not a lecture room. But if anyone (who is actually working with these) could explain to me how they work in valution, it would be tremendously helpful. Thank you very much, I really appreciate it.
Example: 1)EBITDA multiple = EBITDA / enterprise value . Is this correct ?
2)i know ebitda mult is used to determine the operation value of a company, and PE mult is used to determine the equity value of a company. But how do we decide which one to use in the first place ?
3)say, I want to valuate a company X. THis company is not public. So, I pick similar traded companies A,B,C within the same industry. A,B,C have PE ratio 8,9,10 respectively. Next step is to take the average of all the 3 PE ratio, this would give us a PE ratio of (8+9+10)/3 = 9 But what is next ? how do we determine the value ?
Again, thank you.
have you looked at the vault guide to finance interviews?
You're close on the EBITDA multiple, but you have it mixed up. Here is how it works:
It is typically called "Comps" or Comparable Company Analysis. The idea is that if the company you were trying to value was public, what would it be worth? It is very easy to tell how much a public company is worth, all its financials are publically available. So what you do is you find a whole bunch of public companies that are similar to the one you are trying to value (this can get creative sometimes), and you look at the EBITDA multiples (you can use Rev or EBIT as well, sometimes people value Tech deals off of revenue, especially if they have a negative EBITDA). EBITDA / Enterprise Value is going to get you a number between 0 and 1, that isn't very helpful. What you want is EV / EBITDA. So if the median EV/EBITDA of your public company set (you don't use just 1!) is say, 8.0x, and your company has an EBITDA of $100m, you could say the value of your company is $800m.
Got it?
As far as picking whether to value based on P/E or EBITDA - well, typically that's an insight based on some time in the industry and experience with how these things are traded. Heck, some things like internet start-ups may even be valued off of revenue multiples. You haven't even gotten to asking whether it's valued off 1-year or 2-year forward multiples.
If you want to get into some technicalities, here's a useful wrinkle to throw into the mix: don't forget who the metric is applicable to when thinking about whether the multiple is off of aggregate (or enterprise) value or equity value. If the cash will flow to all holders in the company (ie EBITDA is before interest and taxes, and so it will eventually pay off holders of both debt and equity stakes) it should be a multiple of agg value. Thus EBIT, revenue, basically any statistic created above the Interest line is an agg multiple. EBT (earnings before taxes but after interest), net income, etc. will be, then, multiples of Equity value. Conceptually, you've already paid off debt holders as these metrics fall below the interest line item.
What other valuation models/methods are there? (Originally Posted: 02/17/2013)
I have been trying to search for other valuation models for finding an intrinsic price for a company other than: Discounted Cash Flow (FCFF and FCFE) Dividend Discount Model Price Multiples (Justified and Industry Multples) Residual Income Model Net asset Value Model
Are there other valuation models?
multiples aren't intrinsic - they are relative.
LBO sum of the parts (can be intrinsic or have relative aspects depending on how you value lines of business/assets) liquidation value (not purely intrinsic; similar to sum of the parts in that way)
Liquidation value, Comps
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