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Valuation Crash Course Simplest Explanation 1689925455

Valuation is the process of determining the theoretically correct value of a company, investment, or asset. It is important for mergers and acquisitions, strategic planning, capital financing, and securities investing. The main techniques are discounted cash flow analysis, comparable company analysis, and precedent transactions analysis. Valuation helps investors, entrepreneurs, and businesses assess value, estimate future potential, and make informed decisions such as when buying or selling a business, for strategic planning, and when seeking capital financing.

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0% found this document useful (0 votes)
36 views9 pages

Valuation Crash Course Simplest Explanation 1689925455

Valuation is the process of determining the theoretically correct value of a company, investment, or asset. It is important for mergers and acquisitions, strategic planning, capital financing, and securities investing. The main techniques are discounted cash flow analysis, comparable company analysis, and precedent transactions analysis. Valuation helps investors, entrepreneurs, and businesses assess value, estimate future potential, and make informed decisions such as when buying or selling a business, for strategic planning, and when seeking capital financing.

Uploaded by

Sarthak Tomar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Valuation -

Crash Course
Explained in simple words
Valuation- Summary

Meaning:

process of determining the theoretically correct


value of a company, investment, or asset, as
opposed to its cost or current market value.

Reasons for performing valuation:

M&A, strategic planning, capital financing, and


investing in securities.

Techniques:

DCF analysis, comparable company analysis, and


precedent transactions.
Why important?
helps investors, entrepreneurs, and businesses
assess their value, estimate future potential, and
make informed decisions.

Buying or selling a business

Buyers and sellers will normally have a difference in


the value of a business. Both parties would benefit
from a valuation when making their ultimate
decision on whether to buy or sell and at what price.

Strategic planning

A company should only invest in projects that


increase its net present value. Therefore, any
investment decision is essentially a mini-valuation
based on the likelihood of future profitability and
value creation.
Why important?

Capital financing

An objective valuation may be useful when


negotiating with banks or any other potential
investors for funding. Documentation of a
company’s worth, and its ability to generate cash
flow, enhances credibility to lenders and equity
investors.

Securities investing

Investing in a security, such as a stock or a bond, is


essentially a bet that the current market price of the
security is not reflective of its intrinsic value. A
valuation is necessary in determining that intrinsic
value.
Methods

a) Market Approach: Comparing the company to


similar businesses in the market.

b) Income Approach: Evaluating the present value


of expected future cash flows.

c) Asset Approach: Assessing the value of the


company's assets and liabilities.
1 DCF

Discounted cash flow (DCF) analysis is

an intrinsic value approach where an analyst


forecasts a business’s unlevered free cash flow

into the future and discounts it back to today at the


firm’s weighted average cost of capital (WACC).

A DCF analysis is performed by building a financial


model in Excel

and requires an extensive amount of detail and


analysis.
2
comparable company analysis

(“comps”)

Comparable company analysis (also called


“trading comps”) is

a relative valuation method in which you compare


the current value of a business to other similar
businesses by looking at trading multiples like P/E,
EV/EBITDA, or other multiples.

The “comps” valuation method provides an


observable value for the business, based on what
other comparable companies are currently worth.
Comps is the most widely used approach, as the
multiples are easy to calculate and always current.
3 Precedent transactions

Precedent transactions analysis is

another form of relative valuation where you


compare the company in question to other
businesses that have recently been sold or
acquired in the same industry.

These transaction values include the take-over


premium included in the price for which they were
acquired.

In depth application of all three approaches will be


explained in future posts.
Thank You :)

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content

@yashikavatsa

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