In mergers and acquisitions (M&A), companies can be valued by comparing them to similar M&A deals from the past. (2007) defined Valuation as “the estimation of an asset’s value based either on variables perceived to be related to the future investment returns or on comparisons with similar assets.” When a relative valuation method is used, the company is valued by comparing it to a similar company with the same characteristics in the pre-defined universe (Company Comparable Analysis). Therefore, the main purpose of this paper is to describe each of those methods and to define its suitability and limitations. ![]() The main challenge is to decide which method is suitable for what company. ![]() There are three main absolute valuation methods: Dividend Discount Model (“DDM”), Free Cash Flow to Firm (“FCFF”), and Free Cash Flow to Equity (“FCFE”). Relative valuation methods are based on the principle that the valued company is compared to other companies with the same characteristics in the pre-defined universe (Company Comparable Analysis) or a similar previous deal (Precedent Transaction Analysis).Ībsolute valuation is based on the following methodology – future cash flows are predicted, discounted to the present value, and then the intrinsic value is calculated. There are two main types of valuation methods – absolute and relative. What does it mean? It means that the intrinsic value of the company is lower than the current stock price. ![]() Nowadays, we hear more and more that the stock market is overvalued. Jana wrote this essay in Module 2 and has since completed all five modules of the Valuation Master Class. This is a Valuation Master Class student essay by Jana Kristofova from May 29, 2018.
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