My valuation method discrepancies are too large: EV v QV

Based on the most helpful WSO content, here are some potential reasons and justifications for the large discrepancies in your valuation methods:

1. Differences in Cash Flow Projections:

   • DCF/FCFF: This method often uses projected free cash flows to the firm, which includes both debt and equity holders. If your projections are overly optimistic or conservative, it can significantly impact the valuation.
   • DDM/FCFE: These methods focus on cash flows available to equity holders. If the company's debt levels or interest expenses are high, it can reduce the cash flows available to equity holders, leading to a lower valuation.

2. Capital Structure:

   • The difference in leverage (debt vs. equity) can cause discrepancies. High levels of debt can lead to higher interest expenses, reducing the cash flows available to equity holders in DDM/FCFE models.

3. Discount Rates:

   • WACC (Weighted Average Cost of Capital): Used in DCF/FCFF, it reflects the overall cost of capital, including both debt and equity.
   • Cost of Equity: Used in DDM/FCFE, it might be higher due to the risk premium associated with equity investments, leading to a lower valuation.

4. Terminal Value Assumptions:

   • Differences in growth rates and terminal value calculations can cause significant variations. Ensure that the growth rates and exit multiples used in both methods are consistent and realistic.

5. Industry-Specific Factors:

   • In the aviation industry, factors such as fuel prices, regulatory changes, and competition can impact future cash flows and valuations. Ensure that these industry-specific risks are adequately reflected in your models.

6. Accounting for Non-Operating Assets and Liabilities:

   • Ensure that non-operating assets (e.g., excess cash, investments) and liabilities (e.g., pension obligations) are correctly accounted for in both methods.

7. Market Conditions and Sentiment:

   • Market sentiment and conditions can impact equity valuations more directly. If the market is bearish on the aviation industry, it might reflect more in the equity valuation methods.

To bridge the gap, consider the following steps: - Revisit Assumptions: Ensure that the assumptions used in both methods are consistent and realistic. - Sensitivity Analysis: Perform sensitivity analysis to understand how changes in key assumptions impact the valuations. - Cross-Check with Industry Benchmarks: Compare your valuations with industry benchmarks and peers to ensure they are within a reasonable range.

By addressing these factors, you can better understand and justify the discrepancies in your valuation methods.

Sources: POPULAR ACCOUNTING/FINANCE QUESTIONS, Uber last 3.5B$ Raise - Debt disguised as Equity? (Technical Disc.), Please Help Me Understand Corp. Finance / M&A at the Big 4, Those who left RE, where did you end up?, Navigating The Floor: A S&T Analyst's Guide