Method

1. Comparables

Strengths
Quick to use Simple to understand Commonly used in industry Market based

Weaknesses
Private company comparables may be difficult to find and evaluate If use public company comparables, need to adjust resulting valuation to take into account private companys illiquidity Cash flows may be difficult to estimate Private company comparables (ie. capital structure) can be difficult to find and evaluate Weighted Average Cost of Capital assumes a constant capital structure and constant effective tax rate Typical cash flow profile of outflows followed by distant, uncertain inflows is very sensitive to discount and terminal growth rate assumptions More complicated to calculate than NPV method Same disadvantages as NPV Method except overcomes the shortfalls of the WACC assumption (i.e., constant capital structure and tax rate)

2. Net Present Value

Theoretically sound

3. Adjusted Present Value

Theoretically sound Suitable (and simple to use) in situations where the capital structure is changing (e.g., highly leveraged transactions such as leveraged buyouts) Suitable in situations where the effective tax rate is changing (e.g., when there are Net Operating Losses) Simple to understand Quick to use Commonly used Theoretically sound Overcomes drawbacks of NPV and APV techniques in situations where managers have flexibility

4. Venture Capital

Relies on terminal values derived from other methods Oversimplified (large discount rate fudge factor) Methodology is not commonly used in industry and may not be understood Real world situations may be difficult to reduce to solvable option problems Limitations of Black-Scholes model

5. Asset Options