"What are the four approaches to valuation?"
(Senior Chimp, 17
Points)
on 7/11/12 at 4:16am
What the hell is this question all about? I just talked about how I like to group valuation methods into three categories: 1. Intrinsic, 2. relative valuation, and 3. contingent claim valuation.
Some silence on the other end of the line.
"Well there's also the looking at recent deals in the industry method"
I say ah yes, I'd put that under "relative valuation". Some more silence. Sounds like I gave the wrong answer. Oh well.
1. DCF 2. Comparable trading
1. DCF 2. Comparable trading 3. Precedent Transactions 4. sum of parts ?
Sounds like they are asking ways that you can value companies not categories of valuations...
Right, but even WITHIN each
Right, but even WITHIN each of the categories I listed there are multiple methods, leaving us with more than four. I just didn't understand why he'd ask for a definitive 4.
humble_dude: 1. DCF 2.
1. DCF 2. Comparable trading 3. Precedent Transactions 4. sum of parts ?
Sounds like they are asking ways that you can value companies not categories of valuations...
4. LBO
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wanderlvst: "Well there's
"Well there's also the looking at recent deals in the industry method"
= precedent transactions
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Three approaches of
Three approaches of value
Asset Approach (AA)
Market Approach (MA)
Income Approach (IA)
Some examples of METHODS of Value under the Approaches:
AA - net asset value (assets-liabilties);
MA - Guideline Public Companies (basically market multiples (ebitda, sales, etc..); Precedent Transactions
IA - Capitalization of earnings (you pick the benefit stream); DCF
crusader: Three approaches of
Three approaches of value
Asset Approach (AA)
Market Approach (MA)
Income Approach (IA)
Some examples of METHODS of Value under the Approaches:
AA - net asset value (assets-liabilties);
MA - Guideline Public Companies (basically market multiples (ebitda, sales, etc..); Precedent Transactions
IA - Capitalization of earnings (you pick the benefit stream); DCF
The way I learned was 1. Asset approach, 2. Market approach, 3. Earnings approach, 4. Cash Flow approach. DCF would probably be in cash flow approach. From what I understand (oh god, need to brush up on the basics...) Earnings approach uses the cap rate (backward-looking) while CF approach uses discount rate.
To OP -- get studying, buddy. They were tossing you a bone to see if you did any sort of interview prep at all. At the very least you should have been able to say the 4 or 5 most-used METHODS: book value (net assets), public comps, precedent txn, DCF, LBO.
"Accept no one's definition of your life; define yourself."
Currently: quantitative marketing/business development
Previously: management consulting, investment banking
Did you study at all? That
Did you study at all? That was literally a throwaway question. Unless you're a sophomore you really have no excuse to not know these things. The easiest way to get that question correct is as stated above: DCF, comps, precedents, LBO. All they want to know is that you know what you'll be using Excel for.
wanderlvst: Right, but even
Right, but even WITHIN each of the categories I listed there are multiple methods, leaving us with more than four. I just didn't understand why he'd ask for a definitive 4.
He asked for 4 because there were 4 he wanted...wtf man. Listen to the question, it's not rocket science. Give him the main 4 (trading comp, transaction comp, dcf, lbo) and move on. Don't try to get fancy with theory, they'll push you if they want it.