CHAPTER 9
ALTERNATIVE APPROACHES TO VALUATION
I. Introduction

II. Comparables Companies Method
 

A. Factors (1) Similar products

(2) Similar size

(3) Similar age

(4) Recent trends and future prices
 

B. Key Ratios for each company (1) MV of equity to sales

(2) MV of equity to book value

(3) MV of equity to earnings

(4) Sales or revenue per employee

(5) Net sales per employee

(6) Assets needed to provide per $1 of sales
 

C. Key ratios should be aveaged for the group

D. Valuation judgements

 

III. Comparable Transactions Method
  A. Market value refers to completed transactions

B. More directly applicable than company transactions.

C. Limitations of this method.
 

IV. Spreadsheet Approach to M&As

A. Procedures

B. Capital Budgeting Decisions

C. Spreadsheet Projections

D. Evaluation of Spreadsheet Approach

V. Formula Approach
  A. No real distinction between each approach

B. Formulas

C. Key Variables

D. Growth Rate

E. Insights from use of Formula Approach

F. Limitations
 

VI. Cost of Capital
  A. Steps in calculation

B. Cost of Equity

(1) CAPM

(2) APT

(3) Bond Yield + Equity risk Premium

(4) Investor Average Yield

(5) Dividend Growth Model
 

C. Cost of Debt

D. Cost of Preferred Stock

E. Marginal Cost of Capital

VII. Summary