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Techniques of valuation

Comparable Company Analysis (Public Comps): Evaluating other, similar companies’ current valuation
metrics, determined by market prices, and applying them to the company being valued.

Discounted Cash Flow Analysis (DCF): Valuing a company by projecting its future cash flows and then using
the Net Present Value (NPV) method to value the firm.

Precedent Transaction Analysis (M&A Comps): Looking at historical prices for completed M&A
transactions involving similar companies to get a range of valuation multiples. This analysis attempts to arrive at a
“control premium” paid by an acquirer to have control of the business.

Leverage Buyout/“Ability to Pay” Analysis (LBO): Valuing a company by assuming the acquisition of the
company via a leveraged  buyout, which uses a significant amount of borrowed funds to fund the purchase, and
assuming a required rate of return for the purchasing entity

 Enterprise Value: Represents the total value of a company’s net operating assets. In other words, “Enterprise
Value” is the value of the entire company.
 Market Value: Also known as “Market Capitalization” or “Equity Value,” market value represents the dollar value
of a company’s issued shares of common equity. It is calculated by multiplying shares outstanding by the current stock price.
 Book Value: The accounting valuation of the equity. Book Value simply equals Total Assets – Total Liabilities.
Book Value is often called “liquidation value,” because it represents the expected value of a company’s assets after they are
used to pay off all existing liabilities. This generally assumes, of course, that the company will be ceasing operations.

WHAT IS THE DIFFERENCE BEEN BOOK VALUE AND

MARKET VALUE?

Market Value is almost always larger then Book Value for three primary reasons:

 Market Value includes future growth expectations while Book Value does not.
 Market Value includes brand value and company intangible assets.
 Market Value includes value accrued by the company historically through wise managerial decision making, while
Book Value generally does not.

In other words, Book Value is a value arrived at for a company by simply following the rules of standard accounting based on
a company’s past transactions and operations, while Market Value takes into account all information about a company’s
operations, including future expectations.

HOW DO YOU CALCULATE MARKET VALUE AND

ENTERPRISE VALUE?

Market Value is calculated based on the number of shares outstanding multiplied by the company’s current stock price.

Enterprise Value represents the total value of the firm and is found by adding the Net Debt of a company to Market Value,
where Net Debt is simply the company’s Debt outstanding minus excess Cash on the company’s balance sheet.

WHY IS CASH SUBTRACTED OUT?

Cash is subtracted out of Enterprise Value because excess Cash is considered a non-operating asset. For example, that Cash
often could be used to pay down part of the company’s debt immediately, which reduces the Enterprise Value of the
Company. (Note that the definition of “excess cash” is somewhat loose, as it refers to cash that is not needed to conduct the
operations of the business; a simplifying assumption in most cases is to count all Cash as excess Cash.)

WHEN SHOULD ENTERPRISE VALUE BE USED?

Enterprise Value should be used for ratios and other calculations that measure the total return to all capital holders (such as
Revenue, Earnings Before Taxes (EBT); Earnings Before Interest and Tax (EBIT); Earnings Before Interest, Taxes,
Depreciation and Amortization (EBITDA); Net Operating Profit After Tax; Operating Cash Flow; etc.), whereas Equity Value
should be used for ratios that measure the total return to shareholders (such as Earnings/Net Income).

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