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Corporate Finance 1 (Subject) / 7 Enterprise Valuation Comparables (Lesson)
- EBITDA Advantage: Disadvantage: + good measure of the firm’s existing assets' cash flows - ignores the value of the firm’s new investments.
- EBITDA Multiples - Key Points good valuation tool for firm’s existing assets. less useful for evaluating future growth opportunities.
- EBITDA multiples should be adjusted for: Variations in operating leverage Differences between fixed and variable operating costs Differences in expected growth rates
- Examples of nonrecurring items (EBITDA adjustments) Onetime transaction with a customer (downward adjustment) Extraordinary write-offs (upward adjustment)
- Relative Valuation approach is easiest to use when... large number of comparable assets assets are priced in a market common variable to standardize prices
- Relative Valuation tends to work best for investors.... short time horizons judged on a relative benchmark
- Advantages of Relative Valuation reflect market perceptions and moods Securities that are undervalued and overvalued will always exist portfolio managers are judged on relative basis requires less information
- Disadvantages of Relative Valuation relative undervalued stocks may still be overvalued markets can be overvalued or undervalued in the aggregate implicit assumptions are made. If they are wrong the relative valuation will also be wrong.
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