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Relative valuation

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Relative valuation

  1. 1. Submitted By – Ankita Nagarkoti ankita.nagarkoti@gmail.com
  2. 2. Relative Valuation Valuation is a generic term that refers to the notion of comparing the price of an asset to the market value of similar assets. Valuing peer companies in the same industry Valuation by historical data Disadvantages Peers may not be valued correctly Assumption that historically, average of past is a good indicator
  3. 3. Relative Valuation Method•Price multiples & enterprise value multiples•Trailing multiples & Forward multiplesMethods–Based on comparables–Based on forecasted fundamentals (justifiedmultiple)
  4. 4. Price Multiples Price to earnings Price to book value Price to sales Price to cash flow Dividend yield
  5. 5. EPS Adjustments RequiredAdjust for potential EPS dilution and non-recurringEarnings.Dealing with very low or negative EPS – EPS notmeaningful, use normalized EPS, or use earnings yield forranking.Cyclicality in earnings – use normalized EPSBV – Book ValueROE – Return on Equity EPS(normalised) = ROE * BV
  6. 6. Justified P/E•P0/E0 = (1-b)(1+g)/(r-g)•P/E increases with growthb – Earning Retention Ratiog – Substantial rate of growthb = (1 – Dividend Payout Ratio) P0/E1 = (1-b)/(r-g) = (1-b)/(r-RoExb)
  7. 7. Present Value of Growth Opportunities The first term indicates the component in case of no growth and second term indicates the component related to growth opportunities. V0 = E1/r + PVGO
  8. 8. Enterprise Value MultiplesUnlike EPS, EBITDA controls for effects of depreciation &amortization. However, unlike free cash flows it does not take intoaccount cash flows due to working capital changes or capex. EV = MV of equity + MV of preferred equity + MV of debt – Value of cash and marketable securities

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