Valuation Methods

Valuation Methods

See Also:
Financial Ratios
Required Rate of Return
Internal Rate of Return Method
EBITDA Valuation
What is a Term Sheet?
Adjusted EBITDA
Multiple of Earnings
Business Valuation Purposes

Valuation Methods Definition

There are a variety of approaches to valuing a firm and its equity. Two of the most popular approaches are discounted cash flow (DCF) methods and market earnings multiple based methods.

Discounted Cash Flow (DCF) Methods

Discounted cash flow methods generally project future expected cash flows. This method accomplishes that by discounting the value of each of those flows to present value using a discounted rate. Then, the method takes the sum of those discounted values to represent the total value of the firm or the total value of the equity.

Free Cash Flow to the Firm (FCFF)

This Free Cash Flow to the Firm (FCFF) method arrives at a total firm value. Free cash flow to equity (FCFE) values the total equity in a firm.

Market Earnings Multiple Methods

Market earnings multiple methods typically project out a future adjusted earnings amount for the next twelve months. This earning amount typically uses EBITDA (earnings before interest, taxes, depreciation, and amortization) or net income. It then multiplies that earnings estimate by a multiple which is within the range of what other similar firms have sold for in recent transactions.

Valuation Methods Synopsis

As one might expect, valuations can often become complex. The subject of the proper discount rate has spawned numerous books itself. Valuation can also bring up contentious issues, particularly when the ownership interest represents a controlling stake or there is a less than liquid market for that interest.
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