Value
Estimate
Intrinsic Value
Asset Value Given a
Complete Understanding of an Asset’s
Characteristics
VE – P = (V – P) + (VE – V)
Fairness
• Is the value paid for the firm fair?
Opinions
Uses of Equity Valuation
Evaluating Business • What is the effect on firm value of a
Strategies new strategy?
Communicating with
Analysts and • How is firm value being affected?
Shareholders
Appraising Private
Businesses
• What is the value of a private firm?
Investment
Valuation opinions Strategic decisions
recommendations
Valuation Models
Absolute Valuation Relative Valuation
Models Models
What is the
purpose of the
valuation?
Other Valuation Model Issues
Sum-of-the-Parts Valuation
Sensitivity Analysis
Situational Adjustments
Analyst Roles
Sell-Side Buy-Side
Analysts Analysts
Corporate Independent
Analysts Analysts
Choice of Discounted Cash Flow Models
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Advantages and Disadvantages
• Theoretically appealing and provide a
Present direct computation of intrinsic value
• Input uncertainty can lead to poor
value models estimates of value
• Ratios are easy to compute and
Multiplier analysis is easily understood
• Problems with selecting a peer group
models or “comps”
• Consistent with the notion that a
Asset-based business is worth the sum of its parts
• Difficulties determining market value
valuation and the value of intangible assets
Choice of Discounted Cash Flow Models
• Rapidly increasing
Transition • ROE = r
earnings • Earnings and dividends
• Heavy reinvestment • Earnings growth slows growth matures
• Small or no dividends • Capital reinvestment • Gordon growth model
slows useful
• FCFE and dividends
increasing
Growth Maturity