Asset-based valuation models are frequently used together with multiplier models to value private companies. As public companies increase reporting or disclosure of fair values, asset-based valuation may be increasingly used to supplement present value and multiplier models of valuation. Important facts that the practitioner should realise are as follows:
In practice, analysts may have difficulty accurately assessing enterprise value if they do not have access to market quotations for the company’s debt. When current market quotations are not available, bond values may be estimated from current quotations for bonds with similar maturity, sector, and credit characteristics. Substituting the book value of debt for the…
The method of comparables is the most widely used approach for analysts reporting valuation judgments on the basis of price multiples. This method essentially compares relative values estimated using multiples or the relative values of multiples. The economic rationale underlying the method of comparables is the law of one price: Identical assets should sell for…
The term price multiple refers to a ratio that compares the share price with some sort of monetary flow or value to allow evaluation of the relative worth of a company’s stock. Some practitioners use price ratios as a screening mechanism. If the ratio falls below a specified value, the shares are identified as candidates for…
Multistage growth models are often used to model rapidly growing companies. The two-stage DDM assumes that at some point the company will begin to pay dividends that grow at a constant rate, but prior to that time the company will pay dividends that are growing at a higher rate than can be sustained in the long run.…
The Gordon growth model is particularly appropriate for valuing the equity of dividend-paying companies that are relatively insensitive to the business cycle and in a mature growth phase. where g is the constant growth rate. If required return r is assumed to be strictly greater than growth rate g, then the square-bracketed term is an infinite geometric series and sums…
General dividend discount models are relatively easy to apply to preferred shares. In its simplest form, preferred stock is a form of equity (generally, non-voting) that has priority over common stock in the receipt of dividends and on the issuer’s assets in the event of a company’s liquidation. It may have a stated maturity date at…
If the issuing company is assumed to be a going concern, the intrinsic value of a share is the present value of expected future dividends. If a constant required rate of return is also assumed, then the DDM expression for the intrinsic value of a share is: where At the shareholder level, cash received from…
Dividends: Background for the Dividend Discount Model Generally, there are two sources of return from investing in equities: A dividend is a distribution paid to shareholders based on the number of shares owned, and a cash dividend is a cash distribution made to a company’s shareholders. Cash dividends are typically paid out regularly at known intervals;…
Three major categories of equity valuation models are as follows: