Question 1 What are the tradeoffs in using Multiples versus DCF analysis?
Forecast revenue for each year for from the firm's financial data.
Select appropriate discount rate based on WACC
Discount each cashflow back to it present value
Obtain the terminal value through an application of terminal value multiple
You add these values together
Using this method, Martin calculates the price of Cox's share to be $54.29
Identify comparable firms that have growth, cashflow and risks similar to those of target firm whose value is in question.
Obtain the individual multiple or ratio of the firm's price to their financial data, such as EBITDA.
Average these multiples to obtain the industry average multiple.
Adjust this industry multiple and apply it to the target firm to get that firm's value.
Using a multiple of 20.9, Laura Martin calculates the price of Cox's share to be $50.00
Advantage of multiple
With multiple, there's no need to go through the process of forecasting future revenue with great uncertainty. It simply relies on current financial statement of comparable firms to obtain the industry average multiple.
This process is simple to understand and easy to apply. As a result, the information is also cheap to obtain compared to the high cost of research and calculation required for DCF analysis.
By basing valuation upon data of comparable firms, it reflects the current mood of the market and obtain a relative value.
Good for private firm when datas are not readily available and prevalent measure among particular industries such as cable industry.
Disadvantage of multiple
According to Martin, Multiple simply doesn't ask the right questions.
In particular, the EBIDTA figure inflates the earning of the firm, as it ignores "all the bad stuff" in its abbreviation. Furthermore, it is a pro forma...