Question

The methods of valuation are the following, market multiples of peer firms, book value, liquidation value, replacement cost, market value, and comparable transaction multiples. After looking through valuation techniques, which one do you think is the most effective and why? (You can research other valuation techniques outside of the ones listed in the notes as well). (200 words)

Answer 1

Among the methods of valuation under consideration - Market multiples of peer firms, Book Value, Liquidation value, replacement value, market value, comparable transaction multiples and DCF, I would say the most effective is "MARKET MULTIPLES OF PEER FIRMS". Below are the reasons to support my answer:

1. The multiples of peer firms would correctly reflect the market conditions and the industry conditions. This would not be reflected in the other methods of valuation. A good approximation of a multiple used to value a company is the average of peer firms in the same market and same business. This would reflect the political and  economic conditions of the country of operations as well.

2. The multiples of peer firms are accounted for risk.

3. This is independent of the capital structure of the firm

4. It can be used to value companies which are not yet EBIT / EBITDA / operating income positive (Example - Tech companies). A method like DCF would not be able to value such companies. For example, a tech company which is not yet operating income positive can be valued using the FV/Revenue multiple.

5. A method like comparable transaction multiples has the "premium" included in the valuation. This is because the companies which are usually sold announce the deal value as the firm value including the premium. Premiums paid for different firms in different countries can be very different.

6. Market value is not a good approximation to value a company since it is very volatile. It is directly dependent on the share price of the company which can fluctuate significantly with market conditions.

Thus, amongst the methods mentioned, the market multiples of peer firms is the most effective.

Hope this helps. All the best and thanks!