It Is All Relative Multiples, Comparables And Value!
It is all relative Multiples,Comparables and Value!Aswath DamodaranAswath Damodaran!1!
The Essence of relative valuation? In relative valuation, the value of an asset is compared to the values assessedby the market for similar or comparable assets.To do relative valuation then, Aswath Damodaran!we need to identify comparable assets and obtain market values for these assetsconvert these market values into standardized values, since the absolute pricescannot be compared. This process of standardizing creates price multiples.compare the standardized value or multiple for the asset being analyzed to thestandardized values for comparable asset, controlling for any differences betweenthe firms that might affect the multiple, to judge whether the asset is under or overvalued2!
Relative valuation is pervasive Most asset valuations are relative.Most equity valuations on Wall Street are relative valuations. Almost 85% of equity research reports are based upon a multiple and comparables.More than 50% of all acquisition valuations are based upon multiplesRules of thumb based on multiples are not only common but are often the basis forfinal valuation judgments.While there are more discounted cashflow valuations in consulting andcorporate finance, they are often relative valuations masquerading asdiscounted cash flow valuations. Aswath Damodaran!The objective in many discounted cashflow valuations is to back into a number thathas been obtained by using a multiple.The terminal value in a significant number of discounted cashflow valuations isestimated using a multiple.3!
The reasons for the allure “If you think I’m crazy, you should see the guy who lives across the hall”Jerry Seinfeld talking about Kramer in a Seinfeld episode“ A little inaccuracy sometimes saves tons of explanation”H.H. Munro“ If you are going to screw up, make sure that you have lots of company”Ex-portfolio managerAswath Damodaran!4!
The Market Imperative . Relative valuation is much more likely to reflect market perceptions andmoods than discounted cash flow valuation. This can be an advantage when itis important that the price reflect these perceptions as is the case when the objective is to sell a security at that price today (as in the case of an IPO)investing on “momentum” based strategiesWith relative valuation, there will always be a significant proportion ofsecurities that are under valued and over valued.Since portfolio managers are judged based upon how they perform on arelative basis (to the market and other money managers), relative valuation ismore tailored to their needsRelative valuation generally requires less information than discounted cashflow valuation (especially when multiples are used as screens)Aswath Damodaran!5!
So, you believe only in intrinsic value? Here’s why youshould still care about relative value Even if you are a true believer in discounted cashflow valuation, presentingyour findings on a relative valuation basis will make it more likely that yourfindings/recommendations will reach a receptive audience.In some cases, relative valuation can help find weak spots in discounted cashflow valuations and fix them.The problem with multiples is not in their use but in their abuse. If we can findways to frame multiples right, we should be able to use them better.Aswath Damodaran!6!
Multiples are just standardized estimates of price You can standardize either the equity value of an asset or the value of the assetitself, which goes in the numerator.You can standardize by dividing by the Earnings of the asset– Net income: Price/Earnings Ratio (PE) and variants (PEG and Relative PE)– Operating income and cash flow: EV/EBIT, EV/EBITDA Book value of the asset– Price/Book Value of Equity (PBV)– Enterprise Value/ Invested Capital, Firm Value/ Book Value of Capital– Enterprise Value/Replacement Cost (Tobin’s Q) Revenues generated by the asset– Price/Sales per Share (PS)– Enterprise Value/Sales Aswath Damodaran!Asset or Industry Specific Variable (Value/kwh, Value/ ton of steel .)7!
The Four Steps to Deconstructing Multiples Define the multiple Describe the multiple Too many people who use a multiple have no idea what its cross sectionaldistribution is. If you do not know what the cross sectional distribution of amultiple is, it is difficult to look at a number and pass judgment on whether it is toohigh or low.Analyze the multiple In use, the same multiple can be defined in different ways by different users. Whencomparing and using multiples, estimated by someone else, it is critical that weunderstand how the multiples have been estimatedIt is critical that we understand the fundamentals that drive each multiple, and thenature of the relationship between the multiple and each variable.Apply the multiple Aswath Damodaran!Defining the comparable universe and controlling for differences is far moredifficult in practice than it is in theory.8!
Definitional Tests Is the multiple consistently defined? Proposition 1: Both the value (the numerator) and the standardizing variable( the denominator) should be to the same claimholders in the firm. In otherwords, the value of equity should be divided by equity earnings or equity bookvalue, and firm value should be divided by firm earnings or book value.Is the multiple uniformly estimated? Aswath Damodaran!The variables used in defining the multiple should be estimated uniformly acrossassets in the “comparable firm” list.If earnings-based multiples are used, the accounting rules to measure earningsshould be applied consistently across assets. The same rule applies with book-valuebased multiples.9!
Example 1: Price Earnings Ratio Consistency testPE Market Price per Share / Earnings per Share There are a number of variants on the basic PE ratio in use. They are based upon howthe price and the earnings are defined.Price: is usually the current price (though some like to use average price over last 6months or year)EPS: Time variants: EPS in most recent financial year (current), EPS in most recent fourquarters (trailing), EPS expected in next fiscal year or next four quartes (both calledforward) or EPS in some future year Primary, diluted or partially diluted Before or after extraordinary items Measured using different accounting rules (options expensed or not, pension fundincome counted or not )Aswath Damodaran!10!
PE ratios: Google and Cisco – May 2009Aswath Damodaran!11!
1.1: PE ratio (Uniformity test) a)b)c)d)e)Assume that you are comparing the PE ratios of a dozen technologycompanies, with varying numbers of management options outstanding. Whichmeasure of PE ratio would you use in your comparison (to ensure uniformity)?Price/ Primary EPSPrice/ Diluted EPSMarket Capitalization / Net Income(Market Capitalization Value of Options)/ (Net Income Option expense)None of the aboveAswath Damodaran!12!
Example 2: Enterprise Value /EBITDA Multiple Consistency test The enterprise value to EBITDA multiple is obtained by netting cash outagainst debt to arrive at enterprise value and dividing by EBITDA.Enterprise Value Market Value of Equity Market Value of Debt - Cash EBITDAEarnings before Interest, Taxes and DepreciationWhy do we net out cash from firm value?What happens if a firm has cross holdings which are categorized as: Aswath Damodaran!Minority interests?Majority active interests?13!
Example 3: Housing Value/ Rental Income (Expense)This is a measure used to measure whether real estate values are reasonable are not.Home Price/ Rental Price Market price of house/ Annual Rental Income (if house wererented) The numerator reflects the market price of a house and the denominator the rent youwould pay on an annual basis if you rented the same house. An alternative interpretationis that the numerator reflects what you would pay for the house today and thedenominator the gross rental income you could generate from the house. According toits users, when this ratio becomes high (relative to historical benchmarks), housingprices are too high. When this ratio is low, real estate is cheap. Is this multiple consistently defined? Aswath Damodaran!14!
Descriptive Tests What is the average and standard deviation for this multiple, across theuniverse (market)?What is the median for this multiple? How large are the outliers to the distribution, and how do we deal with theoutliers? The median for this multiple is often a more reliable comparison point.Throwing out the outliers may seem like an obvious solution, but if the outliers alllie on one side of the distribution (they usually are large positive numbers), this canlead to a biased estimate.Are there cases where the multiple cannot be estimated? Will ignoring thesecases lead to a biased estimate of the multiple?Aswath Damodaran!15!
The distributional characteristics of multiples: PE ratios in January 2010Aswath Damodaran!16!
PE in 2010: Deciphering the DistributionAswath Damodaran!17!
Not just US stocks PE Ratios: US, Europe, Japan and Emerging MarketsAswath Damodaran!18!
Simplistic rules almost always break down 6 timesEBITDA may not be cheap Aswath Damodaran!19!
Analytical Tests What are the fundamentals that determine and drive these multiples? Proposition 2: Embedded in every multiple are all of the variables that drive everydiscounted cash flow valuation - growth, risk and cash flow patterns.In fact, using a simple discounted cash flow model and basic algebra should yieldthe fundamentals that drive a multipleHow do changes in these fundamentals change the multiple? Aswath Damodaran!The relationship between a fundamental (like growth) and a multiple (such as PE)is seldom linear. For example, if firm A has twice the growth rate of firm B, it willgenerally not trade at twice its PE ratioProposition 3: It is impossible to properly compare firms on a multiple, if wedo not know the nature of the relationship between fundamentals and themultiple.20!
A simple way to identify the fundamentals that drivemultiplesEquity Multiple or Firm MultipleEquity MultipleFirm Multiple1. Start with an equity DCF model (a dividend or FCFEmodel)1. Start with a firm DCF model (a FCFF model)2. Isolate the denominator of the multiple in the model3. Do the algebra to arrive at the equation for the multiple2. Isolate the denominator of the multiple in the model3. Do the algebra to arrive at the equation for the multipleAswath Damodaran!21!
I. PE Ratio: Understanding the Fundamentals – Stable growth firm To understand the fundamentals, start with a basic equity discounted cash flowmodel. With the dividend discount model,P0 Dividing both sides by the current earnings per share, DPS1Cost of equity g nP0Payout Ratio * (1 g n ) PE EPS0Cost of equity -g nBottom line: For a stable growth, dividend paying firm, the PE ratio is afunction of three variables – its expected growth rate in EPS, its risk (asmanifested in its cost of equity) and its payout ratio (which is a function of theROE it generates on its investments).Aswath Damodaran!22!
Extending the approach: PE ratio for a high growth firm The price-earnings ratio for a high growth firm can also be related tofundamentals. In the special case of the two-stage dividend discount model,this relationship can be made explicit fairly simply:P0 (1 g)n EPS0 * Payout Ratio *(1 g)* 1 (1 r) n r-gEPS0 * Payout Ratio n *(1 g)n *(1 g n ) (r -g n )(1 r)nFor a firm that does not pay what it can afford to in dividends, substitute FCFE/Earnings for the payout ratio.Dividing both sides by the earnings per share: (1 g)n Payout Ratio * (1 g) * 1 (1 r) n P0Payout Ratio n *(1 g) n * (1 gn ) EPS0r -g(r - g n )(1 r) nAswath Damodaran!23!
A Simple ExampleAssume that you have been asked to estimate the PE ratio for a firm which hasthe following characteristics:VariableHigh Growth PhaseStable Growth PhaseExpected Growth Rate25%8%Payout Ratio20%50%Beta1.001.00Number of years5 yearsForever after year 5 Riskfree rate T.Bond Rate 6% Required rate of return 6% 1(5.5%) 11.5% (1.25) 5 0.2 * (1.25) * 1 5 5 (1.115) 0.5 * (1.25) * (1.08)PE 28.75(.115 - .25)(.115 - .08) (1.115) 5 Aswath Damodaran!24!
a. PE and Growth: Firm grows at x% for 5 years, 8%thereafterAswath Damodaran!25!
b. PE and Risk: A Follow up ExampleAswath Damodaran!26!
c. PE and Payout/ ROEAswath Damodaran!27!
The perfect under valued company If you were looking for the perfect undervalued asset, it would be one With a low PE ratio (it is cheap) With high expected growth in earnings With low risk (and cost of equity) And with high ROEIn other words, it would be cheap with no good reason for being cheap In the real world, most assets that look cheap on a multiple of earnings basisdeserve to be cheap. In other words, one or more of these variables worksagainst the company (It has low growth, high risk or a low ROE).When presented with a cheap stock (low PE), here are the key questions: Aswath Damodaran!What is the expected growth in earnings?What is the risk in the stock?How efficiently does this company generate its growth?28!
Putting the variables to the test: 1. Comparing PE ratios across time for the S&P 500Aswath Damodaran!29!
Is low (high) PE cheap (expensive)? A market strategist argues that stocks are expensive because the PE ratio todayis high relative to the average PE ratio across time. Do you agree? Yes No If you do not agree, what factors might explain the PE ratio today?Aswath Damodaran!30!
E/P Ratios , T.Bond Rates and Term StructureAswath Damodaran!31!
Regression Results There is a strong positive relationship between E/P ratios and T.Bond rates, asevidenced by the correlation of 0.69 between the two variables.In addition, there is evidence that the term structure also affects the PE ratio.In the following regression, using 1960-2009 data, we regress E/P ratiosagainst the level of T.Bond rates and a term structure variable (T.Bond - T.Billrate)E/P 2.66% 0.675 T.Bond Rate - 0.313 (T.Bond Rate-T.Bill Rate)(3.37)(6.41)(-1.36)R squared 47.59%Given the treasury bond rate and treasury bill rate today, is the market under orover valued today?Aswath Damodaran!32!
Putting the variables to the test 2. Emerging Market PE Ratios: February 2010Latin AmericaAswath Damodaran!AsiaEuropeAfrica33!
II. Price to Book Ratios – Determinants for a stable growth firm Going back to a simple dividend discount model,P0 DPS1r gnDefining the return on equity (ROE) EPS0 / Book Value of Equity, the value of equitycan be written as:P0 BV 0 * ROE * Payout Ratio * (1 gn )r-gnP0ROE * Payout Ratio * (1 g n ) PBV BV 0r-gn If the return on equity is based upon expected earnings in the next time period, this canbe simplified to,P0ROE * Payout Ratio PBV BV 0r-gnAswath Damodaran!34!
Price Book Value Ratio: Stable Growth Firm An alternate interpretation This formulation can be simplified even further by relating growth to thereturn on equity:g (1 - Payout ratio) * ROESubstituting back into the P/BV equation,P0ROE - g n PBV BV0r-g n The price-book value ratio of a stable firm is determined by the differentialbetween the return on equity and the required rate of return on its projects. Ineffect, firms that are expected to earn their cost of equity over time shouldtrade at close to book value, whereas firms that expect to generate returns onequity that are higher (lower) than their costs of equity will trade at above(below) book value.Aswath Damodaran!35!
It’s all about finding mismatches: Price to Book versus Return on EquityMV/BVOvervaluedLow ROEHigh MV/BVHigh ROEHigh MV/BVROE-rLow ROELow MV/BVAswath Damodaran!UndervaluedHigh ROELow MV/BV36!
Price to Book vs ROE: Largest Market Cap Firms in theUnited States: January 2010Aswath Damodaran!37!
Bringing in growth into the picture Aswath Damodaran!38!
Or risk CheapestAswath Damodaran!39!
III. From Equity to Enterprise ValueEnterprise Value Market Value of Equity Market Value of Debt - Cash EBITDAEarnings before Interest, Taxes and Depreciation The value of the operating assets of a firm can be written as:FCFF1EV0 WACC - g The numerator can be written as follows:FCFF EBIT (1-t) - (Cex - Depr) - Δ Working Capital (EBITDA - Depr) (1-t) - (Cex - Depr) - Δ Working Capital EBITDA (1-t) Depr (t) - Cex - Δ Working CapitalAswath Damodaran!40!
From Firm Value to EBITDA Multiples Now the Value of the firm can be rewritten as,EBITDA (1- t) Depr (t) - Cex - Δ Working CapitalEV WACC - g Dividing both sides of the equation by EBITDA, EV(1- t)Depr (t)/EBITDACEx/EBITDAΔ Working Capital/EBITDA EBITDAWACC - gWACC - gWACC - gWACC - g Since Reinvestment (CEx – Depreciation Δ Working Capital), thedeterminants of EV/EBITDA are: Aswath Damodaran!The cost of capitalExpected growth rateTax rateReinvestment rate (or ROC)41!
A Simple Example Consider a firm with the following characteristics: Aswath Damodaran!Tax Rate 36%Capital Expenditures/EBITDA 30%Depreciation/EBITDA 20%Cost of Capital 10%The firm has no working capital requirementsThe firm is in stable growth and is expected to grow 5% a year forever.42!
Calculating Value/EBITDA Multiple Value EBITDAIn this case, the Value/EBITDA multiple for this firm can be estimated asfollows:(1- .36).10 -.05Aswath Damodaran! (0.2)(.36)0.30 8.24.10 -.05.10 - .05.10 - .0543!
The Determinants of EV/EBITDA TaxRatesReinvestmentNeedsExcessReturnsAswath Damodaran!44!
The Determinants of Multiples Aswath Damodaran!45!
Application Tests Given the firm that we are valuing, what is a “comparable” firm? While traditional analysis is built on the premise that firms in the same sector arecomparable firms, valuation theory would suggest that a comparable firm is onewhich is similar to the one being analyzed in terms of fundamentals.Proposition 4: There is no reason why a firm cannot be compared with anotherfirm in a very different business, if the two firms have the same risk, growthand cash flow characteristics.Given the comparable firms, how do we adjust for differences across firms onthe fundamentals? Aswath Damodaran!Proposition 5: It is impossible to find an exactly identical firm to the one youare valuing.46!
Comparable firms: Approaches Ideally, you would like to find lots of publicly traded firms that look just likeyour firm, in terms of fundamentals, and compare the pricing of your firm tothe pricing of these other publicly traded firms. Since, they are all just likeyour firm, there will be no need to control for differences.In practice, it is very difficult (and perhaps impossible) to find firms that sharethe same risk, growth and cash flow characteristics of your firm. Even if youare able to find such firms, they will be very few in number. The trade off thenbecomes:Small sample offirms that are“just like” yourfirmAswath Damodaran!Large sampleof firms that aresimilar in somedimensions butdifferent onothers47!
Techniques for comparing across firms Direct comparisons: If the comparable firms are “just like” your firm, you cancompare multiples directly across the firms and conclude that your firm isexpensive (cheap) if it trades at a multiple higher (lower) than the other firms.Story telling: If there is a key dimension on which the firms vary, you can tella story based upon your understanding of how value varies on that dimension. Modified multiple: You can modify the multiple to incorporate the dimensionon which there are differences across firms. An example: This company trades at 12 times earnings, whereas the rest of thesector trades at 10 times earnings, but I think it is cheap because it has a muchhigher growth rate than the rest of the sector.An example: When comparing the PE ratios of technology firms with differentgrowth rates, you can divide the PE ratio by the expected growth rate to arrive at aPEG ratio.Statistical techniques: If your firms vary on more than one dimension, you cantry using multiple regressions (or variants thereof) to arrive at a “controlled”estimate for your firm.Aswath Damodaran!48!
I. Direct Comparisons a)b)c)d)e)f)g)Assuming that you want to find firms that are exactly like your firm, which ofthe following variables would you try to make comparable?Industry, sector or subsectorMarket capitalizationExpected growth rateReturn on invested capitalDebt ratioBetaExpected length of growth periodAswath Damodaran!49!
II. Story telling. Based upon the following information on two stocks, which one would youclassify as cheap? Based upon the following information on two stocks, which one would youclassify as cheap?Aswath Damodaran!50!
III. Modified Multiples The case of PEG ratios The PEG ratio is the ratio of price earnings to expected growth in earnings pershare.PEG PE / Expected Growth Rate in EarningsProponents of this ratio argue that it controls for differences in growth andallows you to therefore compare the pricing of companies with very differentexpected growth rates. For instance, assume that you are comparing the twostocks C and D from the last page:The PEG ratio for D is much lower than the PEG ratio for C, leading to theconclusion that D is under valued.If we come to this conclusion, what is the implicit assumption we are makingabout the relationship between PE and expected growth rates?Aswath Damodaran!51!
Example PEG Ratios: The Beverage SectorCompany NameCoca-Cola BottlingMolson Inc. Ltd. 'A'Anheuser-BuschCorby Distilleries Ltd.Chalone Wine Group Ltd.Andres Wines Ltd. 'A'Todhunter Int'lBrown-Forman 'B'Coors (Adolph) 'B'PepsiCo, Inc.Coca-ColaBoston Beer 'A'Whitman Corp.Mondavi (Robert) 'A'Coca-Cola EnterprisesHansen Natural Corp!Trailing 00%!17.00%!Std 3!0.33!2.00!!Hansen looks really cheap on a PEGratio basis What might we bemissing?Aswath Damodaran!52!
IV. Comparing PE Ratios across a Sector: Regression basedapproachCompany NamePT Indosat ADRTelebras ADRTelecom Corporation of New Zealand ADRTelecom Argentina Stet - France Telecom SA ADR BHellenic Telecommunication Organization SA ADRTelecomunicaciones de Chile ADRSwisscom AG ADRAsia Satellite Telecom Holdings ADRPortugal Telecom SA ADRTelefonos de Mexico ADR LMatav RT ADRTelstra ADRGilat CommunicationsDeutsche Telekom AG ADRBritish Telecommunications PLC ADRTele Danmark AS ADRTelekomunikasi Indonesia ADRCable & Wireless PLC ADRAPT Satellite Holdings ADRTelefonica SA ADRRoyal KPN NV ADRTelecom Italia SPA ADRNippon Telegraph & Telephone ADRFrance Telecom SA ADRKorea Telecom ADRAswath 40.20.190.4453!
PE, Growth and RiskDependent variable is:R squared 66.2%PER squared (adjusted) th rate121.22319.27Emerging Market-13.85313.606Emerging Market is a dummy: 1 if emerging market0 if notAswath Damodaran!t-ratio3.786.29-3.84prob0.0010 0.00010.000954!
Is Telebras under valued? Predicted PE 13.12 121.22 (.075) - 13.85 (1) 8.35At an actual price to earnings ratio of 8.9, Telebras is slightly overvalued.Aswath Damodaran!55!
Example 2: Return to PEG Ratios: The Beverage SectorCompany NameCoca-Cola BottlingMolson Inc. Ltd. 'A'Anheuser-BuschCorby Distilleries Ltd.Chalone Wine Group Ltd.Andres Wines Ltd. 'A'Todhunter Int'lBrown-Forman 'B'Coors (Adolph) 'B'PepsiCo, Inc.Coca-ColaBoston Beer 'A'Whitman Corp.Mondavi (Robert) 'A'Coca-Cola EnterprisesHansen Natural Corp!Trailing 00%!17.00%!Std 3!0.33!2.00!!Aswath Damodaran!56!
Analyzing PE/GrowthGiven that the PEG ratio is still determined by the expected growth rates, riskand cash flow patterns, it is necessary that we control for differences in thesevariables. Regressing PEG against risk and a measure of the growth dispersion, we get:PEG 3.61 -.0286 (Expected Growth) - .0375 (Std Deviation in Prices)R Squared 44.75% In other words, PEG ratios will be lower for high growth companiesPEG ratios will be lower for high risk companiesWe also ran the regression using the deviation of the actual growth rate fromthe industry-average growth rate as the independent variable, with mixedresults.Aswath Damodaran!57!
Estimating the PEG Ratio for Hansen Applying this regression to Hansen, the predicted PEG ratio for the firm canbe estimated using Hansen’s measures for the independent variables: Expected Growth Rate 17.00%Standard Deviation in Stock Prices 62.45%Plugging in,Expected PEG Ratio for Hansen 3.61 - .0286 (17) - .0375 (62.45) 0.78 With its actual PEG ratio of 0.57, Hansen looks undervalued, notwithstandingits high risk. Aswath Damodaran!58!
Example 3: PBV & ROE: European Banks - 2010Aswath Damodaran!59!
Exploring the relationship between Price to Book and ROE We are looking for stocks that trade at low price to book ratios, whilegenerating high returns on equity. But what is a low price to book ratio? Or ahigh return on equity?Taking the sample of 18 banks, we ran a regression of PBV against ROE andstandard deviation in stock prices (as a proxy for risk).PBV 2.27 3.63 ROE2.68 Std dev(5.56)(3.32)(2.33)R squared of regression 79%Aswath Damodaran!60!
Estimating predicted Price to Book ratiosAswath Damodaran!61!
Example 4. Nothing’s working!!! Internet Stocks in early2000Aswath Damodaran!62!
PS Ratios and Margins are not highly correlated Regressing PS ratios against current margins yields the followingPS 81.36(0.49) - 7.54(Net Margin)R2 0.04This is not surprising. These firms are priced based upon expected margins,rather than current margins.Aswath Damodaran!63!
Solution 1: Use proxies for survival and growth: Amazon inearly 2000Hypothesizing that firms with higher revenue growth and higher cash balancesshould have a greater chance of surviving and becoming profitable, we ran thefollowing regression: (The level of revenues was used to control for size)PS 30.61 - 2.77 ln(Rev) 6.42 (Rev Growth) 5.11 (Cash/Rev)(0.66)(2.63)(3.49)R squared 31.8%Predicted PS 30.61 - 2.77(7.1039) 6.42(1.9946) 5.11 (.3069) 30.42Actual PS 25.63Stock is undervalued, relative to other internet stocks. Aswath Damodaran!64!
Solution 2: Use forward multiples Global Crossing lost 1.9 billion in 2001 and is expected to continue to lose money forthe next 3 years. In a discounted cashflow valuation (see notes on DCF valuation) ofGlobal Crossing, we estimated an expected EBITDA for Global Crossing in five years of 1,371 million.The average enterprise value/ EBITDA multiple for healthy telecomm firms is 7.2currently.Applying this multiple to Global Crossing’s EBITDA in year 5, yields a value in year 5of Enterprise Value in year 5 1371 * 7.2 9,871 million Enterprise Value today 9,871 million/ 1.1385 5,172 million(The cost of capital for Global Crossing is 13.80%) The probability that Global Crossing will not make it as a going concern is 77%. Expected Enterprise value today 0.23 (5172) 1,190 millionAswath Damodaran!65!
Can you do this? a)b) Assume that you are valuing a private internet company with revenues of 10million, a revenue growth rate of 40% and a cash balance that is 5% of valuefor an initial public offering. Can you use the pricing of publicly traded stocksto value the internet companies?YesNoWould your answer be different if you were valuing the company for a venturecapitalist?Would your answer change if you were valuing the company for sale in aprivate transaction?Aswath Damodaran!66!
Relative valuation with private businesses With private company valuations, you have two choices for comparables. You can obtain private company transaction values and use them to estimate thevalue of your firm. Thus, if private medical practices typically sell for three timesoverall billing revenues, your firm would be valued at roughly the same number.Advantages: Since these are private company transactions, the values alreadyreflect the liquidity and lack of diversification concerns that tend to depress privatecompany values.Disadvantage: The data on private company transactions has far morecontamination from transactions not being arms length or timely. It is also far moredifficult to obtain other relevant data from the transaction. You can obtain a value from public companies and then adjust that value forilliquidity and lack of diversification considerations, if necessary.Advantage: The data is likely to be cleaner and there is much more of it.Disadvantage: The “adjusting” of public multiples is often arbitrary and can lead tobiased values.Aswath Damodaran!67!
How much is the private company discount?Private versus Public AcquisitionsEV/Book EBITDAEV/RevenuesEV/Book ValuePublicly traded companies16.3910.152.861.32Private compani
Bottom line: For a stable growth, dividend paying firm, the PE ratio is a function of three variables – its expected growth rate in EPS, its risk (as manifested in its cost of equity) and its payout ratio (which is a function of the ROE it generates on its investments).! P 0 EPS 0 PE Payout Ratio*(1 g n) Cost of equity -g n P 0 DPS 1
Valuation Multiples by Industry https://www.eval.tech SIC Sector: (7000-8999) Services Report Date: 31 January 2019 Country: United States of America (U.S.A.) Industry Valuation Multiples The table below provides a summary of median industry enterprise value (EV) valuation multiples, as at the
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Dr. Murray and Anna C. Rockowitz Writing Center, Hunter College, City University of New York GRAMMAR AND MECHANICS Understanding Relative Clauses A relative (or adjective) clause modifies a noun or pronoun and is introduced by a relative pronoun (who, whom, whose, which, or that) or occasionally a relative adverb (usually when, where, or why). Relative clauses function as subordinate or dependent clauses and therefore
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C They are all multiples of 10. D They are all multiples of 5. 8. The table below shows the prices of books at the used book store. The prices of books are multiples of what number? (5-1) Type of Book Price Paperback 12 Hardcover 14 Audio 16 9. Nicholas is riding in a relay bike race for c
Least Common Multiple: Find the least common multiple of 12 and 18. LCM 12,18 List the first 10 multiples of both numbers. Circle all multiples that appear on both lists. Place a triangle around the least of these common multiples.
La gente llevaba/usaba y ahora la gente lleva/usa. 3. Clasifica la ropa del primer ejercicio según la estación: otoño Invierno Primavera Verano 4. ¿Dar/quitar/poner? En pequeños grupos tendréis «dar/quitar/poner» unas prendas de ropa. Sigue las instrucciones: 4. a) Dale algo
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