Relative Valuation
13. Relative Valuation - Using Market Comparables
Zenu Sharma zenu.sharma@edhec.edu
Course Road Map
1. Financial Markets and Management 2. Present Value 3. Introduction to Risk and Return 4. Portfolio Selection 5. The Capital Asset Pricing Model 6. Financing and Capital Structure 7. Interest Rates and the Valuation of Bonds 8. Project Appraisal 9. Capital Budgeting 10. Capital Budgeting with Financial Leverage 11. The Valuation of Companies and Stocks 12. Relative Valuation 13. Options and Real Options
Finance
8. Project Appraisal and Capital Budgeting - Page 2
Introduction
• Relative valuation using market comparables: technique used to value businesses, business units, and other major investments.
– Assumes similar assets should sell at similar prices. – The critical assumption underlying the approach is that the “comparable” assets/transactions are truly comparable to the investment being evaluated.
• Relative valuation should be used to complement DCF analysis
Valuation by Titman & Martin, Damodaran on Valuation
3
Introduction
• The method of comparables involves using a price multiple to evaluate whether an asset is relatively fairly valued, relatively undervalued, or relatively overvalued in relation to a benchmark value of the multiple.
– A current measure of performance (or a single forecast of performance) is converted into a value through application of a multiple for comparable firms.
• Choices for the benchmark value of a multiple include the multiple of a closely matched individual stock and the average or median value of the multiple for the stock’s peer group of companies or industry.
Valuation by Titman & Martin, Damodaran on Valuation
4
Introduction
• The economic rationale underlying the method of comparables is the law of one price—the economic principle that two identical assets should sell at the same price.
– The method of comparables is perhaps the most widely used approach for
Zenu Sharma zenu.sharma@edhec.edu
Course Road Map
1. Financial Markets and Management 2. Present Value 3. Introduction to Risk and Return 4. Portfolio Selection 5. The Capital Asset Pricing Model 6. Financing and Capital Structure 7. Interest Rates and the Valuation of Bonds 8. Project Appraisal 9. Capital Budgeting 10. Capital Budgeting with Financial Leverage 11. The Valuation of Companies and Stocks 12. Relative Valuation 13. Options and Real Options
Finance
8. Project Appraisal and Capital Budgeting - Page 2
Introduction
• Relative valuation using market comparables: technique used to value businesses, business units, and other major investments.
– Assumes similar assets should sell at similar prices. – The critical assumption underlying the approach is that the “comparable” assets/transactions are truly comparable to the investment being evaluated.
• Relative valuation should be used to complement DCF analysis
Valuation by Titman & Martin, Damodaran on Valuation
3
Introduction
• The method of comparables involves using a price multiple to evaluate whether an asset is relatively fairly valued, relatively undervalued, or relatively overvalued in relation to a benchmark value of the multiple.
– A current measure of performance (or a single forecast of performance) is converted into a value through application of a multiple for comparable firms.
• Choices for the benchmark value of a multiple include the multiple of a closely matched individual stock and the average or median value of the multiple for the stock’s peer group of companies or industry.
Valuation by Titman & Martin, Damodaran on Valuation
4
Introduction
• The economic rationale underlying the method of comparables is the law of one price—the economic principle that two identical assets should sell at the same price.
– The method of comparables is perhaps the most widely used approach for