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
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
