Overview
Valuation aims to determine the economic worth of an asset or company. In finance, particularly investment banking, three primary methodologies are commonly employed to estimate a company’s value.
The Three Methodologies:
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Intrinsic Valuation (DCF Analysis):
- Approach: Values a company based on the net present value (NPV) of its projected future free cash flows, discounted back to the present using an appropriate discount rate (WACC or Cost of Equity (Ke)).
- Focus: Relies on the company’s fundamental ability to generate cash flow, its growth prospects, and its risk profile.
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Comparable Company Analysis (Trading Comps):
- Approach: Values a company by comparing its Valuation Multiples (e.g., EV/EBITDA, P/E) to those of similar publicly traded companies.
- Focus: Based on current market perception and relative pricing of similar assets in the public market.
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Precedent Transaction Analysis (Transaction Comps):
- Approach: Values a company based on the prices paid (and implied multiples) for similar companies in past Mergers & Acquisitions (M&A) transactions.
- Focus: Reflects the value paid to gain control of similar businesses in the M&A market, often incorporating a control premium.
See also: Valuation, Discounted Cash Flow (DCF) Analysis, Comparable Company Analysis (Trading Comps), Precedent Transaction Analysis (Transaction Comps)