Question

Corporate Finance I

What are some implicit assumptions that are made when valuing a firm using multiples based on comparable firms?

Answer 1

There are different implicit  assumptions to be considered in relative valuations as mentioned. The first implicit assumption is about risk of investment, return to be achieved and future growth that will resemble as same for the firm that is under the valuation using the multiples. Here, the firm concerned and multiples of the firms used, show the same risk, return and future growth rate. It will make investors to make the firm equivalent to the other similar firm. The second assumption is that investors are rational in nature and on the basis of multiples, investors put the firm under valuation to be equal to other similar firms. The third assumption is the business environment at the time investment and for the considerable period is stable and will show the similar behavior as assumed by the investors. It will give the expected performance by the investments.

Above are some of the implicit assumptions, that can be done by the investors in relative valuation.