What is the role of market multiples in valuation?

Market multiples are used in comparative valuation methods, such as the Comparable Company Analysis (CCA) and Precedent Transactions Analysis, where key financial metrics (e.g., P/E ratio, EV/EBITDA) of similar companies are used to estimate the value of the subject company.

What is the terminal value in the DCF method?

Terminal value represents the estimated value of a business beyond the forecast period in a Discounted Cash Flow (DCF) analysis. It accounts for the majority of the total value in many DCF valuations.

Can valuation methods be combined?

Yes, multiple valuation methods can be combined to get a more accurate and comprehensive view of a company’s value. This is known as the triangulation approach, where the results from different methods are analyzed together.

What is the equity value?

Equity Value is the value of the business attributable to equity shareholders. It can also be formulated as:
Equity value = Market capitalization
Add: fair value of all stock options (in the money and out of the money)
Add: Value of convertible securities in excess of what the same securities would be valued without the conversion attribute

What is “enterprise value”?

Enterprise Value is the value attributable to the equity shareholders plus the value of debt and debt like items, minority interest, preference share less the amount of non-operating cash and cash equivalents.

What do you understand by the term “Fair Market Value”?

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having a reasonable knowledge of relevant facts.

What is Rule of Thumb or Benchmark Value?

Rule of thumb or benchmark indicator is used as a reasonable check against the values determined by the use of other valuation approaches in a valuation engagement. • Rule of thumb may provide insight into the value of a business or business ownership interest. Some of the examples of rule of thumb or benchmark valuation would be value based on transaction multiples for capacity or turnover. • It shall not be used as the only method to determine the value of the asset to be valued.

Whether Fair Value is the same as Fair Market Value?

Fair value is usually synonymous to fair market value except in certain circumstances where characteristics of an asset translate into a special asset value for the party(ies) involved.

What is the relevance of valuation in Corporate Finance?

Valuation plays a crucial role at every stage of a firm’s life cycle. For small private businesses looking to expand, valuation becomes essential when approaching foreign investors, venture capitalists, or private equity firms for capital infusion. The share of ownership an investor will demand in exchange for funding depends on the firm’s estimated value. As companies grow and plan to go public, the share price for public issuance is determined based on the firm’s value, aligning with applicable laws and regulations. Additionally, key decisions such as fund allocation, borrowing from financial institutions, and returns to owners are all influenced by the valuation of the firm.

What are the factors that affect the valuation of a business?

• Value is specific in Point of time
• Value principally depends on the ability of the business to generate discretionary cash flow
• Value also depends greatly on the market forces
• Principle of Risk and Return
• Principle of Reasonableness and Reconciliation of Value
• Value is influenced by Underlying Net Tangible Assets
• Value is influenced by Liquidity
• The Value of Minority Interest is less than the Value of a Controlling Interest.