Company Valuation Introduction

See Also:
Cost of Capital
Capital Asset Pricing Model
Common Stock
Cash Flow After Tax
Discount Rate
Why Valuation Matters
Valuation Methods
Liquidation Valuation

Company Valuation Introduction

How do you value a company and its equity? How do you calculate a company’s fair value? Have you overvalued or undervalued your company? As we dive into our company valuation introduction, we are going to look at the following are the three approaches to valuation:

• Discounted cash flow approach (DCF)
• Market valuation multiples
• Comparable transactions

DCF Approach

The most fundamental approach is DCF approach, which extends the present value principles to analyze projects to value a company. The following four factors determine the value of a company:

• Its capacity to generate cash flows from assets
• The expected growth rate of expected cash flows
• The length of time it will take for the company to reach stable growth
• The cost of capital

Market Valuation Multiples

Market valuation multiples which include the following:

• Price/earnings multiples (P/E multiples compares a company’s market capitalization to its annual incomes)
• EBITDA multiples (EBITDA Valuation)
• Others are used to compare stocks within an industry sector

Comparable Transactions

Comparable transactions approach of valuing a company involves using a price multiple to evaluate whether an asset is relatively fairly valued, or undervalued, or overvalued when looked at the comparable transactions that have taken place in the industry and compared to a benchmark value of the multiple.
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