Valuation Methods Used In Investment Banking

Investment Banking often requires the use of specific valuation methods to achieve the desired outcome for the client. Established valuation techniques used include:

1. Discounted Cash Flow: Also known as DCF, this method utilizes inputs derived from forecasting income and cash flow for the company and discounting them to their present value. This method is useful for companies that generate steady and predictable cash flows.

2. Asset-Based Valuation: Generally used for businesses with high asset values, such as real estate or hard assets like machinery and infrastructure. This method is useful for highly capital-intensive businesses.

3. Comparable Companies Analysis: Also known as a peer group analysis, this method compares a company to similar publicly traded companies. The comparison may include market-based multiples such as price/earnings, price/sales, and price/cash flow.

4. Sum-of-the-Parts Analysis: This method adds the individual values of a company's assets to arrive at a total value. This approach can be useful in situations where the worth of the component parts of a company exceeds the value of the whole.

5. Private Market Value: This most commonly refers to the actual market value of the company's stock when the company is not publicly traded. The value may be based on the opinions of the company’s board of directors, the company’s valuation advisors, or due to the lack of comparable publicly-traded companies.

6. Option Pricing Models: This measures the value of a company’s options by calculating theoretical values based on inputs such as the company’s volatility, expected return, current stock price, exercise price, and its time to expiration.