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Market Value Method

The document discusses various valuation approaches and financial ratios used to value businesses, including the market approach, empirical/statistical approach, prior transaction method, comparable company analysis, and various multiples like P/E, book-to-market, dividend yield, and EBITDA. It provides examples of calculating these ratios and using them to determine market value per share. The end of the document provides practice problems for readers to work through.

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62 views21 pages

Market Value Method

The document discusses various valuation approaches and financial ratios used to value businesses, including the market approach, empirical/statistical approach, prior transaction method, comparable company analysis, and various multiples like P/E, book-to-market, dividend yield, and EBITDA. It provides examples of calculating these ratios and using them to determine market value per share. The end of the document provides practice problems for readers to work through.

Uploaded by

Undebayn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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MARKET VALUE

APPROACH
MARKET VALUE APPROACH
The market approach is a valuation method used to determine the value
of a subject business by comparing it to other similar businesses in the
marketplace. It is imperative that when doing so, you ensure the
companies are similar.

The market approach is a valuation method used to determine the


appraisal value of a business, intangible asset, business ownership
interest, or security by considering the market prices of comparable
assets or businesses that have been sold recently or those that are still
available.
EMPIRICAL / STATISTICAL APPROACH

Empirical or Statistical approach generally uses research and database


processing in order to come up with conclusion and recommendation.
The approach requires references and evidences to support the
determination and evaluation. Information may take the form of Sales
Data, Financial Performance and other historical information.

Comparative Private Company Sales Data is an empirical approach. This


is formerly known as comparative transaction method. It involves finding
out prior transactions of comparable companies.
PRIOR TRANSACTION METHOD
The prior transaction method involves looking up historical transactions
in securities of the business under valuation. The valuation might be for
minority stake such as historical stock quote from a listed stock exchange
or it might be for a majority stake such as merger and acquisition
transaction involving the business.

The advantage of this approach is that it is already a good reference for


valuation, if data is available. Since this is reliant heavily on the data,
absence of a good data may not enable this approach to produce reliable
results.
COMPARABLE COMPANY ANALYSIS

In Financial Management, financial ratios are used as tools to assess and


analyze business results. Ratios or multiples are useful tools for doing
comparative company analysis. In determining the value using comparable
company analysis, the following factors must be considered:
 Comparators must be at least with the similar operations or in the
similar industry
 Total or absolute values should not be compared
 Period of observation must be comparable
 Non quantitative factors must also be considered
PRICE – EARNINGS RATIO

Price – earnings ratio (P/E) Ratio represents the relationship of the


market value per share and the earnings per share. P/E Ratio is
computed using the formula:

P/E = Market Value Per Share


Earnings Per Share
EXAMPLE:
1. Chandelier Co. is a listed company with the market value per share of P12.0
and reported earnings per share of P4.0. Compute for P/E.
P/E = Market Value Per Share = P12.0 = 3.0
Earnings Per Share P4.0

2. Jopet Hotels is a hospitality company. Based on the income statement of the


company, it reported earnings of P7.0 per share. Based on the listed companies
under hospitality industry, the average P/E ratio is 4.25. Compute for the
market value per share.
Market Value = P/E x EPS = 4.25 x P7.0 = P29.75
BOOK TO MARKET RATIO
Book to Market Ratio is used to determine the appreciation of the market
to the value of the company as compared to the value it reported under its
Statement of Financial Position. It may be recalled that the book values of
the company are based on historical costs and does not purely incorporate
the value in the market now. Book to Market ratio is computed using this
equation:

Book to Market Ratio = Net Book Value Per Share


Market Value Per Share
EXAMPLE:
1. Chandelier Co. reported a Book Value per share of P35.0 and with a
market value per share of P12.50. Compute for the Book to Market Ratio.
Book to Market Ratio = Net Book Value Per Share = P35.00
Market Value Per Share P12.50

2. Jopet Hotels reported a book value per share of P16.5 and the hospitality
industry average Book to Market is 0.50. Compute for the Market Value per
share.
Market Value Per Share = Net Book Value Per Share = P16.50 = P33.0
Book to Market Ratio 0.50
DIVIDEND YIELD RATIO
Dividend Yield Ratio describes the relationship between the dividends
received per share and the appreciation of the market on the price of the
company. It is also known as dividend multiple. It provides investors with
the value which they can actually get from the company. The Dividend
Yield Ratio is computed using this equation:

Dividend Yield Ratio = Dividend Per Share


Market Value Per Share
EXAMPLE:

1. Chandelier Co. declared and paid dividends of P1.50 per share and their
market value per share is P12.50. Compute for the dividend yield ratio.
Dividend Yield Ratio = Dividend Per Share = P 1.50 = 0.12
Market Value Per Share P12.50

2. Jopet Hotels declared P1.5 per share and the average dividend multiple of
the similar industry is 0.047. Compute for the Market Value per share.
Market Value Per Share = Dividend Per Share = P 1.50 = P31.91
Dividend Yield Ratio 0.047
EBITDA MULTIPLE

EBITDA represents for the net amount of revenue after deducting


operating expenses and before deducting financial fixed costs, taxes
and non-cash expenses. EBITDA multiple is determined by this
equation:

EBITDA Multiple = Market Value Per Share


EBITDA Per Share
EXAMPLE:
1. Chandelier Co. reported EBITDA per share of P6.0 and the market value per
share being P12.0. Compute for the EBITDA multiple.
EBITDA Multiple = Market Value Per Share = P12.00 = 2.0
EBITDA Per Share P6.0

2. Jopet Hotels reported an EBITDA multiple of P8.5 per share. The average
EBITDA multiple of the hospitality industry is 3.5. Compute for the Market Value
per share.
Market Value Per Share = EBITDA Multiple x EBITDA per share = P8.5 x 3.5 = 29.75
PRACTICE PROBLEMS
PRACTICE PROBLEMS
PRACTICE PROBLEMS
PRACTICE PROBLEMS
PRACTICE PROBLEMS
PRACTICE PROBLEMS
PRACTICE PROBLEMS
PRACTICE PROBLEMS

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