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

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

𝒓𝑬 = 𝒓 if the firm has no debt

𝐶𝐴𝑃𝑀 = 𝑅𝑓 + 𝛽𝑎 (𝑅𝑚 − 𝑅𝑓)

𝑊𝐴𝐶𝐶 = 𝑟𝐷 1 − 𝑇𝑐 𝐷 𝑉 + 𝑟𝐸𝐸/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

Bancel & Mittoo

Bancel & Mittoo

Gompers, Kaplan & Mukharlyamov

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