Four Valuation Methods
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on 1/19/11 at 9:11am
I've heard of the "four valuation methods" but I haven't been able to find out what those are. Anyone have a link?






DCF, trading comps,
DCF, trading comps, Acquisition comps, and LBO
"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
What's the difference between
What's the difference between trading comps and acquisition comps? I think that's where I'm stuck.
Trading comps: market data on
Trading comps: market data on where peers trade, the metrics change as market prices change
Precedent comps (aka, acquisition comps, transaction comps): shows at what valuation other peers were acquired in the past, the metrics do not change as the data is all historical
To conclude. The first shows
To conclude. The first shows the market's valuation of the peer group. The second shows the actual buyers' valuation.
C'mon man... thats one of the
C'mon man... thats one of the most basic interview questions... check out the guides. You have more points than I do and don't know the 4 valuation methods?
INTERVIEW GUIDES -- Technical, Fit and Networking... The Biz School Bible and More...
I don't know as much about
I don't know as much about equity research as I would like. That's why I asked.
What about DCF wacc, DCF APV,
What about DCF wacc, DCF APV, RIM and DDM?
Valor is of no service, chance rules all, and the bravest often fall by the hands of cowards. - Tacitus
Dr. Nick Riviera: Hey, don't worry. You don't have to make up stories here. Save that for court!
I'd say those all fall under
I'd say those all fall under the "DCF" umbrella.
What's ironic is there is a Google Banner next to this thread, at least for me, advertising a WallStreetPrep program that teaches you to "build lbo, dcf, m&a, and comps models"
El_Mono wrote: What about DCF
What about DCF wacc, DCF APV, RIM and DDM?
Somebody correct me if I am wrong, but I think DDM is just something they like to teach in school and not really used much in the real world (not IBD at least).
Isn't APV useful for an LBO?
"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
There are multiple Methods
There are multiple Methods but 3 main approaches to Business Valuations
1. Income Approach - DCF Method + All discounted Cash and Earnings models, including debt assumptions
2. Market Approach - Transactions Multiples Method + Guideline Comparables Method
3. Asset Approach - Replacement Methods + All related liquidation Models
The M&M theory says regardless of Debt added to the business the EV is still the same. In Leverage model, use the Ke for Equity CF, while in a Debt Free model use WACC, the PV should always be the same. LBO’s, leverage leases, etc don’t increase the EV, (Maybe the ROE).
This is only a theory and I have never gotten the same answer using Ke & WACC, regardless of the type of debt, Project Finance, LBO, Leverage Lease, Bank loan, etc. This is due to a static WACC in my Debt free model.
nonpog wrote: El_Mono
What about DCF wacc, DCF APV, RIM and DDM?
Somebody correct me if I am wrong, but I think DDM is just something they like to teach in school and not really used much in the real world (not IBD at least).
Isn't APV useful for an LBO?
Wrong. DDM is one of the primary valuation methods used in FIG groups.
The "LBO method" isn't
The "LBO method" isn't intended to give you the "intrinsic" value of the firm. All the LBO method does is tell you what valuation an LBO buyer could pay for the company to achieve a target equity return (usually around 20%+) assuming a leveraged capital structure. This valuation should be lower than a DCF because your discount rate (includes 20%+ "cost of equity") is higher. To calculate the LBO method value, all you do is build an LBO model with an equity IRR output and then goal seek the purchase price to target a 20% IRR.
Also, capital structure will affect TEV to some degree (that's why there's an "optimal capital structure" that minimizes the firm's WACC...minimizing WACC increases TEV). Modigliani Miller (M&M) makes some assumptions (e.g., companies don't pay tax) that aren't realistic.
There are multiple Methods but 3 main approaches to Business Valuations
1. Income Approach - DCF Method + All discounted Cash and Earnings models, including debt assumptions
2. Market Approach - Transactions Multiples Method + Guideline Comparables Method
3. Asset Approach - Replacement Methods + All related liquidation Models
The M&M theory says regardless of Debt added to the business the EV is still the same. In Leverage model, use the Ke for Equity CF, while in a Debt Free model use WACC, the PV should always be the same. LBO’s, leverage leases, etc don’t increase the EV, (Maybe the ROE).
This is only a theory and I have never gotten the same answer using Ke & WACC, regardless of the type of debt, Project Finance, LBO, Leverage Lease, Bank loan, etc. This is due to a static WACC in my Debt free model.
bankbank wrote: The "LBO
The "LBO method" isn't intended to give you the "intrinsic" value of the firm. All the LBO method does is tell you what valuation an LBO buyer could pay for the company to achieve a target equity return (usually around 20%+) assuming a leveraged capital structure. This valuation should be lower than a DCF because your discount rate (includes 20%+ "cost of equity") is higher. To calculate the LBO method value, all you do is build an LBO model with an equity IRR output and then goal seek the purchase price to target a 20% IRR.
Also, capital structure will affect TEV to some degree (that's why there's an "optimal capital structure" that minimizes the firm's WACC...minimizing WACC increases TEV). Modigliani Miller (M&M) makes some assumptions (e.g., companies don't pay tax) that aren't realistic.
There are multiple Methods but 3 main approaches to Business Valuations
1. Income Approach - DCF Method + All discounted Cash and Earnings models, including debt assumptions
2. Market Approach - Transactions Multiples Method + Guideline Comparables Method
3. Asset Approach - Replacement Methods + All related liquidation Models
The M&M theory says regardless of Debt added to the business the EV is still the same. In Leverage model, use the Ke for Equity CF, while in a Debt Free model use WACC, the PV should always be the same. LBO’s, leverage leases, etc don’t increase the EV, (Maybe the ROE).
This is only a theory and I have never gotten the same answer using Ke & WACC, regardless of the type of debt, Project Finance, LBO, Leverage Lease, Bank loan, etc. This is due to a static WACC in my Debt free model.
Wouldn't an LBO valuation give you a higher valuation than a DCF? Here is my reasoning, you assume a purchase premium in the purchase price of an lbo, you assume that you can increase the CF's of the company when a PE firm acquires it by making management changes / rolling over other companies / imrpoving ops etc, so the CF's alone will grow at a higher rate than when oing a DCF. I am only a recent grad about to start as an analyst next month, but this is my understanding and was an answer I gave an interviewer and he moved on.
Just would like some clarification.
DCF goes off management
DCF goes off management assumptions which are always overly optimistic is the explanation I heard.
rafiki wrote: DCF goes off
DCF goes off management assumptions which are always overly optimistic is the explanation I heard.
Ya, but you still need to project a fully integrated three statement model for an LBO, it's not like your going to be using pessimistic assumptions, you are going to be targeting a specific IRR.
For interview purposes just
It's amazing how many
Ya people are retarded and
HFFBALLfan123 wrote: Ya
DCF, Comps, Comp.
I'm editing this to be less
There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
Kenny - respectfully I
HFFBALLfan123 wrote: DCF,
Race's answer is what an
[quote= Wouldn't an LBO
SHORTmyCDO......are you a
"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
Yes I am. I am starting at a
If you can get an offer this
Cool, thanks for the advice
"One should recognize reality even when one doesn't like it, indeed, especially when one doesn't like it." - Charlie Munger
SHORTmyCDO
^^The other posters here
bankbank, I shouldn't have
bank...thank you so much for