| Basic Valuation Methods: A Rough Guide |
| General Definitions |
| Firm Value = Operating Assets + Non-Operating Assets = Equity + Debt |
| Enterprise Value = Debt + Equity - Non-Operating Assets = Operating Assets |
| Equity Value = Operating Assets + Non-Operating Assets - Debt = Firm Value - Debt =Enterprise Value + Non-Operating Assets - Debt |
| Always use market values in computing the values above |
| Free cash flow = Cash flow available to meet the needs of lenders and the wants of investors |
| Free cash flow for the firm = A variation on free cash flow, eliminating the non-operating items |
| Free cash flow for equity = Cash flow available to meet the wants of investors in common equity: FCFE |
| The cash flows can be tied to the claimants in the same way the balance sheet is organized: CF for Assets = CF for Debt + CF for Equity | |
| Relative valuation (using multiples) |
| P/E Ratio |
| Steps: |
| Find the "comparable" ratio of stock price to earnings per share for the subject company |
| Find earnings available to common shareholders for the subject company |
| Multiply P/E ratio times earnings available to common shareholders to find the implied equity value |
| Divide by shares outstanding to find the equity value per share (intrinsic value) |
| P/S Ratio |
| Steps: |
| Find the "comparable" ratio of stock price to revenue per share for the subject company |
| Find revenue for the subject company |
| Multiply P/S ratio times revenue to find the implied equity value |
| Divide by shares outstanding to find the equity value per share (intrinsic value) |
| EV/EBITDA Ratio |
| Steps: |
| Find the "comparable" ratio of enterprise value to EBITDA for the subject company |
| Find EBITDA for the subject company |
| Multiply EV/EBITDA ratio times EBITDA to find the value of operations (i.e. Enterprise Value) |
| Add the market value of any non-operating assets |
| Subtract the market value of debt |
| Divide by shares outstanding to find the equity value per share (intrinsic value) |
| Discounted cash flow valuation |
| Equity CF Method (FCFE//Ke) |
| Determine Free Cash Flows for Equity (FCFE) |
| Model the expected future cash flows for the explicit forecast period (e.g. 5 years) |
| Compute the terminal value of the cash flows |
| Discount the cash flows and terminal value using the cost of equity (Ke) to find the equity value of operations |
| Add the market value of any non-operating assets which were excluded from CF computations |
| Divide by shares outstanding to find the equity value per share (intrinsic value) |
| Corporate Valuation Method (FCFF//WACC) |
| Determine Free Cash Flows for the firm (FCFF) |
| Model the expected future cash flows for the explicit forecast period (e.g. 5 years) |
| Compute the terminal value of the cash flows |
| Discount the cash flows and terminal value using the weighted average cost of capital (WACC) to find the Value of Operations (i.e. Enterprise Value) |
| Add the market value of any non-operating assets which were excluded from CF computations |
| Subtract the market value of debt |
| Divide by shares outstanding to find the equity value per share (intrinsic value) |
| Adjusted Present Value (APV) Method (FCFF//Ku + TS//Ku) |
| Steps: |
| Determine Free Cash Flows for the firm (FCFF) |
| Model the expected future cash flows for the explicit forecast period (e.g. 5 years) |
| Compute the terminal value of the cash flows |
| Discount the cash flows and terminal value using the unlevered cost of capital (Ku) to determine the Unlevered Value of Operations |
| Determine the interest tax savings for the firm (Interest expense * tax rate) |
| Model the expected future interest tax savings for the explicit forecast period (e.g. 5 years) |
| Compute the terminal value of the interest tax savings |
| Discount the interest tax savings and terminal value using the unlevered cost of capital (Ku) to determine the value of the tax shield |
| Add the Unlevered Value of Operations to the Value of the Tax Shield to find Value of Operations (i.e. Enterprise Value) |
| Add the market value of any non-operating assets which were excluded from CF computations |
| Subtract the market value of debt |
| Divide by shares outstanding to find the equity value per share (intrinsic value) |
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XiaomingXu
ValuationFrameworksSTUDENT.xlsx
