Question

Discuss three valuation methods and under what circumstances you would prefer one to other two?

Answer 1

Well, there are mainly three methods.

1. DCF ANALYSIS

2. COMPARABLE COMPANY ANALYSIS

3. PRECEDENT TRANSACTIONS.

1. DCF ANALYSIS OR DISCOUNT CASH FLOW - In this method researcher look for the unlevered free cash flow in future and using Wieghted average cost capital it discounts it back to today.

This is actually a detailed analysis using excel, it includes assumptions including tax rates, discount rates etc . Among the three this is the most trusted and the deriving valuation is mostly accurate.

2. Comparable analysis:

This is an analysis which is usually done by comparing with other peers. With the help of earning per share ratio, earnings before interest and tax, depreciation and amortization( EBITDA) valuation methods are the common.

3.PRECEDENT TRANSACTIONS:

Comparing the noted company with other companies which are recently sold or acquired in same industry. Take over premium are included in transaction values.

I would personally prefer DCF method among the three methods because this approach provides me about the intrinsic values of different companies, which help me to take wise decisions in equity for long term investments.