Principles of business valuation

11 important questions on Principles of business valuation

What are the three principles of business valuation?

  1. Principle of business reproduction
  2. Principle of business anticipation
  3. Principle of business substitutes

What kind of valuation methods are linked to business reproduction?

Asset-based valuation methods

  • Price / book value
  • Price / net tangible assets

What kind of valuation methods are linked to business anticipation?

Earnings and cash flow-based valuation methods

  • DCF
  • Divided discount
  • Discounted future earnings multiples
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What kind of valuation methods are linked to business substitution?

Comparable multiple-based valuation methods

  • Price / sales (P/S)
  • Price / earnings (P/E)
  • EV/EBITDA

When is price/book value (asset-based valuation method) applicable?

Applicable when the book value reflects the market value well.

When is DCF (earnings and cash flow-based valuation methods) applicable?

Applicable as a valuation sanity check and when competition is difficult to find.

When is price / sales (P/S) (multiple-based valuation methods) applicable?

Applicable for every comparable businesses.

When is price / earnings (P/E) (multiple-based valuation methods) applicable?

Broadly applicable as a very easy valuation metric.

When an Apple EPS 2020E earnings are $13.17 and its share price $267.25, what is its P/E ratio? And what is the risk premium compared to a 10-year US government bond of 1.85%?

Price / earnings

267.25 / 13.17 = 20.29

13.17 / 267.25 = 4.92 - 1.85 = 3.08 risk premium.

When is EV / EBITDA (multiple-based valuation methods) applicable?

Very broadly applicable in PE, VC, and institution investment.

A vanilla industry has a EV/EBITDA multiple of what?

8.0x

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