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Module 4 Lecture 2 -- Multiples Methods

The document discusses valuation methods for companies, focusing on the Multiples Method, which is useful for comparing companies within a sector. It provides examples of valuation multiples such as Price/Earnings (P/E) ratios and EBITDA multiples, and illustrates how to calculate a company's equity value using these methods. The estimated equity value for Company A, after accounting for debt, ranges between $405 and $465 million.

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Manish kumar Aarya
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10 views13 pages

Module 4 Lecture 2 -- Multiples Methods

The document discusses valuation methods for companies, focusing on the Multiples Method, which is useful for comparing companies within a sector. It provides examples of valuation multiples such as Price/Earnings (P/E) ratios and EBITDA multiples, and illustrates how to calculate a company's equity value using these methods. The estimated equity value for Company A, after accounting for debt, ranges between $405 and $465 million.

Uploaded by

Manish kumar Aarya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Business Tools for Career Readiness

Finance for
Non-Financial Professionals
Module 4

with David Standen, D.B.A.


Valuation Methods

1. Market Valuation
2. Multiples Method
3. Discounted Cash Flow (DCF) Analysis
2. Multiples Method
2. Multiples Method
• Useful for comparing companies in a sector
2. Multiples Method
• Useful for comparing companies in a sector
• Look at which multiples are used for other
companies in the industry to ascertain equity
value
2. Multiples Method
• Useful for comparing companies in a sector
• Look at which multiples are used for other
companies in the industry to ascertain equity
value
• Examples of these valuation multiples include:
• Price/earning multiples (P/E ratios)
• EBITDA multiples
Ex.) Multiples Method

What is the value of Company A which has:


• Debt = $100 million
• Annual sales = $180 million,
• EBITDA = $70 million
• Earnings = $40 million
Common Stock Comparison
Value
Company (Market Sales EBITDA EARNINGS
Cap)

1 900 220 115 82

2 700 190 90 60

3 650 280 68 42

4 320 150 45 26
Multiples
Price-to-Earnings
Sales Multiples EBITDA Multiples
Multiples
Company (Market Cap / (Market Cap /
(Market Cap /
Sales) EBITDA)
Earnings)

1 4.1 7.8 11.0

2 3.7 7.8 11.7

3 2.3 9.6 15.5

4 2.1 7.1 12.3

Average 3.1 8.1 12.6


Multiples Valuation
Using the sales multiple:
Company A’s sales of $180 million x 3.1 (average sales multiple) =
$558 million (Enterprise Value) - $100 million (Net Debt) =
$458 million (Equity Value)

Using the EBITDA multiple:


Company A’s EBITDA of $70 million x 8.1 (average EBITDA multiple) =
$565 million (Enterprise Value) - $100 million (Net Debt) =
$465 million (Equity Value)

Using the price-to-earnings multiple:


Company A’s earnings of $40 million x 12.6 (average price-to-earnings
multiple) = $504 million (Enterprise Value) - $100 million (Net Debt) =
$404 million (Equity Value)
Using the multiples method:

Enterprise Value of our company is estimated


at between $505 and $565 million.

Accounting for debt, our company’s Equity


Value is between $405 and $465 million
dollars.

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