Professional Documents
Culture Documents
Learning Objectives
Primary learning objective: To provide students with knowledge of
alternatives to discounted cash flow valuation methods, including
Market Approach Similar to real estate valuations
Comparable companies
Comparable transactions
Same industry or comparable industry
Asset oriented approach
Tangible book value
Liquidation value
Break-up value
Cost approach
Weighted average method
See Website, Chapter 8, Alternate Valuation Ratios, Table 7, which discusses several
alternate Equity Valuation and Enterprise Valuation Ratios.
Comparable companies may include those with profitability, risk, and growth characteristics similar to the target firm.
Relative Valuation
Value of asset is compared to values assessed
by the market for similar or comparable asset.
Requirements:
Identify comparable assets and market values
Convert market values to standardized values
creating price multiples.
Compare relative values controlling for any
differences.
Damodoran, Corporate Finance, New York University, Chapter 7
5
Trailing P/E1
Forward
P/E2
Price/Sales
Price/Book
Col. 1
Col. 2
Col. 3
Col. 4
11.25
8.73
1.17
3.71
9.18
7.68
0.69
2.17
10.79
8.05
0.91
2.54
7.36
8.35
0.61
1.86
11.92
6.89
0.77
1.59
Total SA (TOT)
8.75
8.73
0.80
2.53
3.17
7.91
0.36
0.81
11.96
10.75
1.75
2.10
9.30
8.39
0.88
2.16
$4.38
$3.27
$92.66
$26.49
$40.72
$27.42
$81.77
$57.32
Average
Col. 1-4
$51.81
10
EPS
P/E Ratio
BASF
$ 70.47
$ 5.243
13.44
Bayer
35.64
1.511
23.59
Dow Chemical
47.40
4.401
10.77
DuPont
41.00
2.572
15.94
Eastman Chemical
51.69
5.75
8.99
FMC
59.52
5.729
10.39
45.02
2.678
16.81
Average
14.28
11
BASF
13.44
$ 38.25
Bayer
23.59
25.63
Dow Chemical
10.77
45.25
DuPont
15.94
40.61
Eastman Chemical *
8.99
4.10
FMC *
10.39
2.20
16.81
10.01
15.94
$37.44
12.06
5.44
Average (Big 4)
Average (Small 3)*
12
Variation of PE Ratio
Share Price
Current
EPS
Current/
Trailing P/E
Ratio
Forecast
EPS
Forward
P/E Ratio
BASF
$ 70.47
$ 5.243
13.44
$ 7.27
9.69
Bayer
35.64
1.511
23.59
2.69
13.27
Dow
47.40
4.401
10.77
5.71
8.30
DuPont
41.00
2.572
15.94
3.04
13.48
Eastman
51.69
5.75
8.99
5.93
8.71
FMC
59.52
5.729
10.39
5.66
10.51
Rohm &
Hass
45.02
2.678
16.81
3.12
14.44
Average
14.28
11.20
13
Valuation of ExxonMobil
Baseline valuation
Earnings $3.428B X P/E Ratio 14.28 = $48.94 B
Further modification
Substantial dispersion (10.77 23.59) in P/E
Ratios even among top 4 firms indicate risk and
growth potential must be considered.
14
Market-Based Methods:
Recent Transactions Method1
Calculation similar to comparable companies
method, except multiples used to estimate targets
value based on purchase prices of recently
acquired comparable companies.
Most accurate method whenever the transaction is
truly comparable and recent. Boston Beer IPO
Major limitation is that truly comparable recent
transactions are rare.
Also called precedent method.
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17
21
22
Market-Based Methods:
Same or Comparable Industry Method
Multiply targets earnings or revenues by
market value to earnings or revenue ratios
for the average firm in targets industry or a
comparable industry.
Primary advantage is the ease of use and
availability of data.
Disadvantages include presumption
industry multiples are actually comparable
and analysts projections are unbiased.
23
Used to adjust relative valuation methods for differences in growth rates among
comparable firms.
Many current models assumes zero or minimal growth
BES/CPS example: BES/CPS 15 & 9% respectively vs industry 12.4 & 11%.
Helpful in determining which of a number of different firms in same industry
exhibiting different growth rates may be the most attractive.
(MVT/VIT) = A and
VITGR
Where A
MVT
VIT
VITGR
24
25
Asset-Based Methods:
Tangible Book Value
Tangible book value (TBV) = (total assets - total
liabilities - goodwill)
Targets estimated value = Targets TBV x [(industry
average or comparable firm market value) /
(industry or comparable firm TBV)].
Often used for valuing
Financial services firms where tangible book
value is primarily cash or liquid assets
Distribution firms where current assets
constitute a large percentage of total assets
Beta
Tech Data
.91
.90
11.6
Synnex Corporation
.70
.40
6.9
Avnet
1.01
1.09
12.1
Arrow
.93
.97
13.2
Based on this information, what is Ingrams tangible book value per share (VI T)? What is the
appropriate industry average market value to tangible book value ratio (MV IND/VIIND)? Estimate
the implied market value per share for Ingram (MVT) using tangible book value as a value
indicator. Based on this analysis, is Ingram under-or-overvalued compared to its 8/21/08
share price?
Note both Beta and 5 Year Growth Rate used to cull out irrelevant Company.
27
Ingrams net tangible book value per share (VI T) = ($3.4 -$.7)/.172 = $15.70
Based on risk as measured by the firm beta and the 5-year projected earnings
growth rate, Synnex is believed to exhibit significantly different risk and growth
characteristics and is excluded from the calculation of the industry average
market value to tangible book value ratio. Therefore, the appropriate industry
average ratio is as follows:
MVIND/VIIND = .95 [i.e., (.91+1.01+.93)/3]
Ingrams implied value per share = MV T = (MVIND/VIIND) x VIT = .95 x $15.70 = $14.92
Based on the implied value per share, Ingram was over-valued on 8/21/08 when its
share price was $19.30
Note, we are deriving tangible book value by assuming it equals equity less intangible assets (goodwill). The
better approach would be to review or project NBV from financial statement.
28
Asset-Based Methods:
Liquidation Method
Nortel Networks Canadian Company
July 1, 2011 pursuant to Bankruptcy
Sold 6,000 patents for $4.5 Billion at auction to
Rockstar Bidco.
Consortium Apple, EMC, Microsoft, RIM & Sony
Google defensive, stalking horse bid to
discourage suits over Android & Chrome.
Intel early bidder but teamed with Google
30
See website, McGraw Hill Faces Breakup Pressures, Business Week, August 2, 2011
32
Estimated
Value ($M)
Relative
Weight
Weighted
Avg. ($M)
220
.30
66.0
234
.40
93.6
224
.20
44.8
150
.10
15.0
1.00
219.4
34
35
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37