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  FIN ©2001 M. P. Narayanan University of Michigan Valuation methods An overview    FIN ©2001 M. P. Narayanan University of Michigan 2 Methodologies Comparable multiples P/E multiple Market to Book multiple Price to Revenue multiple Enterprise value to EBIT multiple Discounted Cash Flow (DCF) NPV, IRR, or EVA based Methods WACC method  APV method CF to Equity method  FIN ©2001 M. P. Narayanan University of Michigan 3 Valuation: P/E multiple If valuation is being done for an IPO or a takeover, Value of firm = Average Transaction P/E multiple   EPS of firm  Average Transaction multiple is the average multiple of recent transactions (IPO or takeover as the case may be) If valuation is being done to estimate firm value Value of firm = Average P/E multiple in industry   EPS of firm This method can be used when firms in the industry are profitable (have positive earnings) firms in the industry have similar growth (more likely for “ mature ”  industries) firms in the industry have similar capital structure  FIN ©2001 M. P. Narayanan University of Michigan 4 Valuation: Price to book multiple The application of this method is similar to that of the P/E multiple method. Since the book value of equity is essentially the amount of equity capital invested in the firm, this method measures the market value of each dollar of equity invested. This method can be used for companies in the manufacturing sector which have significant capital requirements. companies which are not in technical default (negative book value of equity)

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Jul 23, 2017
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