This document summarizes various valuation methods and techniques discussed in academic literature and applied in practice. It compares the results of two research surveys on the gap between academic theory and real-world practice of firm valuation. Several discounted cash flow models are outlined, including net present value and weighted average cost of capital. Relative valuation approaches like comparable public companies multiples are also presented. Key valuation concepts from various corporate finance textbooks are referenced.

1. The Question You’ve Got to Ask Yourself Is: What’s
Valuation, What are the Methods & How it’s Done?
Bancel & Mitto. 2014. “The Gap between Theory and Practice of Firm Valuation: Survey of
European Valuation Experts”
Gompers, Kaplan, & Mukharlyamov .2014. “What Do Private Equity Firms (Say They) Do?”
>Brealey, Myers and Allen, (2014) “Principles of Corporate Finance” 11/E McGraw Hill
>Ross, S, Westerfield, R, & Jordan, B (2008), Corporate Finance Fundamentals, McGraw-HILL
Valuation Methods & Techniques: Comparing
Results of Two Researches Surveys With
Regard to Academia & Practice
Morshed Parkook
4707072

2. 𝑁𝑃𝑉 = −𝐶𝐹0 +
𝐶𝐹𝑡
(1 + 𝑟)𝑡
𝑡
𝑡=1
𝑃𝑉 = 𝐹𝑉 [1 (1 + 𝑟)𝑡
] or 𝑃𝑉 = 𝐹𝑉/(1 + 𝑟)𝑡
FCF= profit after tax + Dep -Investment in fixed Assets - Investment in Working Capital
𝐺 ↑ ⋯ value of the firm↑ 𝐺 ↑ ⋯ value of Assets ↑ 𝑃𝑉𝐺𝑂+
if investments earns > 𝑟𝐸
𝒐𝒑𝒑𝒐𝒓𝒕𝒖𝒏𝒊𝒕𝒚 𝒄𝒐𝒔𝒕 𝒐𝒇 𝒄𝒂𝒑𝒊𝒕𝒂𝒍, 𝑬𝒒𝒖𝒊𝒕𝒚 (ℎ𝑢𝑟𝑑𝑙𝑒 𝑟𝑎𝑡𝑒): 𝑟 = 𝑟𝐷 𝐷 𝑉 + 𝑟𝐸 𝐸 𝑉
𝑟𝐸 = 𝑟 + 𝑟 − 𝑟𝐷 𝐷/𝐸
𝒓 𝑬 = 𝒓 if the firm has no debt
𝐶𝐴𝑃𝑀 = 𝑅𝑓 + 𝛽𝑎 (𝑅 𝑚 − 𝑅𝑓)
𝑊𝐴𝐶𝐶 = 𝑟𝐷 1 − 𝑇𝑐 𝐷 𝑉 + 𝑟𝐸 𝐸/𝑉 𝑉 = 𝐷 + 𝐸
If 𝑟𝐷 ↓ ⋯ 𝑟𝐸 ↓ ⋯ 𝑊𝐴𝐶𝐶 ↑ If 𝑟𝐷 ↑ ⋯ 𝑟𝐸 ↑ ⋯ 𝑊𝐴𝐶𝐶 ↓
𝐴𝑃𝑉 = base case value + value of financing side effects (positive or negative)
Relative Valuation (RV),
Comparables Companies
Multiplies, Multiplies Of
Invested Capital (MOIC):
Firm Value/EBITDA
P/EPS
Price-to-Book
Firm Value/EBIT
Firm Value/Sales
Firm Value/ FCF
Firm value/ NOPAT
DPS/Price
(Brealey et al. Ch.4. pg.79,80, 95)
𝑃𝑉𝐻 =
𝐹𝐶𝐹𝐻+1
𝑊𝐴𝐶𝐶 − 𝐺
𝐸𝑉 =
𝐹𝐶𝐹𝐹𝑖
(1 + 𝑊𝐴𝐶𝐶)𝑖
𝑡
𝑡=1
+
𝑇𝑉
(1 + 𝑊𝐴𝐶𝐶) 𝑛
𝑇𝑉 =
𝐹𝐶𝐹𝐹𝑛+1
𝑊𝐴𝐶𝐶 − 𝐺
=
𝐹𝐶𝐹𝐹𝑛 × 1 + 𝐺
𝑊𝐴𝐶𝐶 − 𝐺
Sometimes called DCF
return (Ross et al) or IRR:
Is the discount rate where
NPV=zero
If NPV=Zero then ROE=
If IRR > required return,
the investment will be
acceptable. IRR could be
misleading too.
( Ross et al. Ch.9 pg.277, 2008)
(Brealey et al. Ch.17 pg.434)
What Academia Says

3. Bancel & Mittoo

4. Bancel & Mittoo

5. Gompers, Kaplan &
Mukharlyamov

6. Alibaba: Jefferies, BMO Start At Buy, But Valuations Vary
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