Valuation methodologies overview
Advantages and disadvantages
Comparable company trading analysis
Description
• Compare the current trading level of a Company to its peers
• Specifically determine how the market has valued the earnings, cash flow, net asset value, assets or other characteristics of similar companies. Compare these ratios to the Company’s performance and/or use them to impute an aggregate market value of the Company
Advantages
• Market efficiency means that trading values in theory should reflect industry trends, business risk, market growth, etc.
• Values obtained can be a reliable indicator of the value of the Company for a minority investment (i.e., a non-control investment)
• Useful technique for assessing vulnerability: when fundamental vs. market value gap is large, vulnerability may be high
Disadvantages
• Always comparing apples to oranges. Truly comparable companies are rare and differences are hard to account for
• Thinly traded, small capitalization or poorly followed stocks may not reflect fundamental value
• Many people feel that the stock market is “emotional” and that it sometimes fluctuates irrationally (i.e., the market can be wrong)
• Current high level of M&A activity in certain sectors has introduced distortions in relative pricing benchmarks
Comments
• The unaffected trading level does not include a control premium or synergy value associated with strategic acquisitions
• Explaining value gaps between the Company and its comparables can involve extensive use of judgment
Comparable transactions and premium analysis
Description
• Determine the value offered in past acquisitions of similar companies
• Specifically, determine the pricing of past deals as compared to the...
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...ndustry group, but may be categorized generally as follows:
Equity value multiples: cash flows to equity holders only (e.g., net income, book value, operating cash flow)
Common ratios: P/E, P/BV, P/OCF (after tax)
Firm value multiples: cash flows to all investors (e.g., revenues, EBIT, EBITDA)
Common ratios: FV/revenues, FV/EBIT, FV/EBITDA
• J.P. Morgan typically uses median values; mean values often skewed from outlying data and therefore more likely to be misleading
• Keep back-up file to trading comparable presentation page in Lotus/Excel spreadsheet for easy updates/corrections
Show file location or Lotus/Excel output: = cell (“filename”)
Linking prices in Excel: = IDD (“ticker,” “close,” 0)
• Provide summary recent financial data and key operating ratios as backup
• Check all data with source material (10K, 10Q) to explain trading anomalies
The company I have chosen to research for my final paper is Home Depot. Home Depot’s principal assets, debt and stock information as of January 30, 2001 are as follows: (amounts in millions, except stock)
We compared the two companies in a variety of ways. To start, we will give a brief background
This case is about Star River and how the firm is in the middle of financial crisis that was induced by rapid growth. The CEO basically wants to improve the financial health of the company and ask for help to make some decisions. The CEO asks one of the analyst for help in reviewing the historical performance of the firm, forecast financing requirements for the next two years, exercise the forecasting model to identify the key drivers of the assumptions, estimate Star River’s weighted-average cost of capital and lastly to analyze the proposed investment in a packaging machine.
The second method we used to analyze the firm’s value was the Comparable Companies Method. We used the historical figures as of 1990 and Goldmans Sach’s Projections. With an average of 22.
a) Beta in financial terms is the amount of systematic risk brought by vulnerability of movements in the market.
However, when comparing the multiples to total enterprise value (TEV), we see a different story. To expand on Appomattox’s advice and research I further calculated the TEV, from Exhibit 5, of each competitor and then chose to compare the multiples that have similar TEVs. The companies with similar values are as follows: D&B Shoe Company ($545,540), Surfside Footwear ($766,224), Templeton Athletic ($567,288). When comparing the multiples of these companies to the proposed multiples offered by AGI, we see that they are higher than the average between these companies. The average EBIT multiple is 6.3 compared to 7.5 and the average EBITDA is 5.4 compared to
...ccurately reflects the intrinsic value of the company from the shareholders point of view and their expectations of future earnings.
It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms.
Week 5 Lecture. (2006). FIN 325 Mergers, Acquisitions, and International Finance. Retrieved from rEsource on July 7th, 2006 from https://ecampus.phoenix.edu/secure/resource/resource.asp
In this assignment, four widely used of the investment appraisal techniques will be presented. They are all unique in it’s own way in the financial world today.
Both of these companies are really great and they have a lot of support from their consumers but they continue to compete to see who can come out on top as the market share leader.
Chapter 11 closes our discussion with several insights into the efficient market theory. There have been many attempts to discredit the random walk theory, but none of the theories hold against empirical evidence. Any pattern that is noticed by investors will disappear as investors try to exploit it and the valuation methods of growth rate are far too difficult to predict. As we said before the random walk concludes that no patterns exist in the market, pricing is accurate and all information available is already incorporated into the stock price. Therefore the market is efficient. Even if errors do occur in short-run pricing, they will correct themselves in the long run. The random walk suggest that short-term prices cannot be predicted and to buy stocks for the long run. Malkiel concludes the best way to consistently be profitable is to buy and hold a broad based market index fund. As the market rises so will the investors returns since historically the market continues to rise as a whole.
The efficient market hypothesis has been one of the main topics of academic finance research. The efficient market hypotheses also know as the joint hypothesis problem, asserts that financial markets lack solid hard information in making decisions. Efficient market hypothesis claims it is impossible to beat the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information . According to efficient market hypothesis stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments . In reality once cannot always achieve returns in excess of average market return on a risk-adjusted basis. They have been numerous arguments against the efficient market hypothesis. Some researches point out the fact financial theories are subjective, in other words they are ideas that try to explain how markets work and behave.
Today financial corporate managers are continually asking, “What will today’s investment look like for the future health of the company? Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of investments with multiple cash flows” over a particular period of time which is incurred at the end of each period (Ross, Westerfield, & Jordan, 2011). Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or rec...
This is a trend table of industrial average financial ratio for the previous five years in comparison: