Valuation Multiples

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Valuation & Accounting

Global

November 2001

Valuation Multiples: A Primer

Global
Equity
Research

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Valuation Primer Series
Peter Suozzo
+852-2971 6121

s

peter.suozzo@ubsw.com

Stephen Cooper
+44-20-7568 1962

s

stephen.cooper@ubsw.com

Issue 1

This is the first in a series of primers on fundamental valuation topics such as discounted cash flow, valuation multiples and cost of capital. This document explains how to calculate and use multiples commonly used in equity analysis.

Gillian Sutherland
+44-20-7568 8369
gillian.sutherland@ubsw.com

Zhen Deng
+1-212-713 9921
zhen.deng@ubsw.com

s

We discuss the differences between equity and enterprise multiples, show how target or ‘fair’ multiples can be derived from underlying value drivers and discuss the ways multiples can be used in valuation. For each multiple, we show its derivation, discuss its strengths and weaknesses, and suggest appropriate use.

Valuation Multiples: A Primer November 2001

Contents
Peter Suozzo
+852-2971 6121
peter.suozzo@ubsw.com

Stephen Cooper
+44-20-7568 1962
stephen.cooper@ubsw.com

Gillian Sutherland
+44-20-7568 8369

page

An Introduction to Multiples ........................................................................... 3 — What Is a Multiple? ......................................................................... 3 — Advantages/Disadvantages of Multiples ........................................... 3 — Enterprise versus Equity Multiples ................................................... 5 — Why Multiples Vary......................................................................... 5

gillian.sutherland@ubsw.com

Zhen Deng
+1-212-713 9921
zhen.deng@ubsw.com

— Choosing the Pricing Date............................................................. 10 Target Valuation Multiples ........................................................................... 13 — What Is a Target Multiple?............................................................. 13 — Single-stage Target Multiples ........................................................ 14 — Two-stage Target Multiples ........................................................... 15 — Examples..................................................................................... 16 — Assumptions Used in Target Multiple Formulas .............................. 17 — The Effect of Growth on Value....................................................... 18 Using Valuation Multiples ............................................................................ 20 Enterprise Value Multiples........................................................................... 24 — What Is Enterprise Value?............................................................. 24 — Why Use Enterprise Value Multiples? ............................................ 25 — Potential Problems in Calculating EV ............................................. 26 — Enterprise Value Multiples............................................................. 28 Equity Multiples .......................................................................................... 37 — What Are Equity Multiples? ........................................................... 37 — Equity Multiples ............................................................................ 37 Appendix: Derivation of Target Multiple Formulas ......................................... 42

For research, valuation models and more on equity analysis go to the Global Valuation Group website...

www.ubswarburg.com/research/gvg

2 UBS Warburg

Valuation Multiples: A Primer November 2001

Section 1

An Introduction to Multiples
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