Corporate Finance, 4th Edition

Chapter 31Valuation techniques

Just how rosy is the future?

Perhaps without knowing it, you already have the knowledge of all the tools that you will need to value a company. You discovered what discounting was about in Chapter 16 and learnt all about the right discount rate to use in Chapters 19 and 29. Finally, the comparable method was explained in Chapter 22. This chapter contains an in-depth look at the different valuation techniques and presents the problems (and solutions!) you will probably encounter when using them. Nevertheless, we want to stress that valuation is not a simple use of mathematical formula, it requires the valuator to have good accounting and tax skills. You will also need to fully understand the business model of the firm to be valued in order to assess the reliability of the business plan supporting the valuation. Reading this chapter will only be a first step towards becoming a good valuator and, in addition, a great deal of practice and application will be needed.

Section 31.1 Overview of the different methods

Generally, we want to value a company in order to determine the value of its shares or of its equity capital.

Broadly speaking, there are two methods used to value equity: the direct method and the indirect method. In the direct method, obviously, we value equity directly. In the indirect method, we first value the firm as a whole (what we call “enterprise” or “firm” value), then subtract the value of net debt to get the equity value.

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