Damodaran on Valuation

8.1. DEFINITIONS OF EQUITY MULTIPLES

An equity multiple requires two inputs, one for the market value of the equity and one for the variable to which equity value is scaled—earnings, book value of equity, or revenues, for instance. In this section, we first consider how best to estimate the market value of equity and then move on to look at the choices when it comes to scaling variables.

8.1.1. Measuring the Market Value of Equity

All equity multiples are scaled to the market value of equity. With publicly traded firms, measuring the market value of equity may seem like a trivial exercise since there is, after all, only one stock price at any point in time. There are, however, three decisions that we have to make that can have consequences for how we measure equity value:

1. Per-share or aggregate equity value. The market value of equity can be computed on a per-share basis or as an aggregate value (the market capitalization or market cap). Since the latter is computed by multiplying the number of shares outstanding by the share price, the effects of using one over the other on equity multiples may seem inconsequential, but there are conditions under which the two will diverge. One is when there are multiple classes of shares in the same company, trading at different stock prices. The market capitalization will include the market values of all outstanding shares, whereas the market price will reflect only the class of shares considered. The other is when there is a divergence between ...