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Pros and Cons of each Valuation method Questions and Answers

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Pros and Cons of each Valuation method Questions and Answers Pros of DCF theoretically the most sound valuation based on intrinsic values Less influenced by the temperaments of the current market Can value components of the business or synergies separately Cons of DCF Pvs are sensitive to assumptions and the methods you use Terminal value is large portion of the valuation and very sensitive Need realistic projected financial statements over 5-10 years Trading Comps Pros Based in market realitly, Efficient market hypothesis Sanity check on the DCF Trading Comps Cons no 2 companies are the same "apples to oranges" Doesn't reflect the intrinsic value of the company (stock market is emotional) Issue with liquidity depending on the size of the company Transaction comps pros Recent transactions reflect supply and demandd of the market Realistic in the sense of past transactions were successfully completed Trends may become clear Transaction comps cons Apples to oranges Public data can be misleading Market conditions can distort the prices Premiums and multiples change over time Find info you need can be hard LBO Pros Can acquire larger businesses due to debt Increased rate of return Minimizes size of equity contribution LBO cons Minimal financial cushion to manage problems Equity can disappear quickly Hard to get additional financing

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Pros and Cons of each Valuation
method Questions and Answers
Pros of DCF – answer theoretically the most sound valuation based on intrinsic values
Less influenced by the temperaments of the current market
Can value components of the business or synergies separately

Cons of DCF – answer Pvs are sensitive to assumptions and the methods you use
Terminal value is large portion of the valuation and very sensitive
Need realistic projected financial statements over 5-10 years

Trading Comps Pros - answer Based in market realitly, Efficient market hypothesis
Sanity check on the DCF

Trading Comps Cons – answer no 2 companies are the same "apples to oranges"
Doesn't reflect the intrinsic value of the company (stock market is emotional)
Issue with liquidity depending on the size of the company

Transaction comps pros - answerRecent transactions reflect supply and demandd of the
market
Realistic in the sense of past transactions were successfully completed
Trends may become clear

Transaction comps cons - answerApples to oranges
Public data can be misleading
Market conditions can distort the prices
Premiums and multiples change over time
Find info you need can be hard

LBO Pros - answerCan acquire larger businesses due to debt
Increased rate of return
Minimizes size of equity contribution

LBO cons - answerMinimal financial cushion to manage problems
Equity can disappear quickly
Hard to get additional financing

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