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.
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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