Hi,
I’m doing a valuation of a company through 3 different methods - DCF, trading comps (EV/Sales and EV/EBITDA) and precedent transaction comps (EV/Sales and EV/EBITDA). I got 5 different EVs for the company I’m valuing. What value should I say the company is worth? The average of the 5 EVs? A weighted average of the 5 EVs with DCF being the heaviest?
Thanks!
Let me try to simplify this.
In essence, you have two valuation APPROACHES: (1) the income approach (using the DCF METHOD) and (2) the market approach using EV/Sales and EV/EBITDA of comparable companies). The market approach will require you to decide how to weight the two estimates of value you will get using EV/Sales and EV/EBITDA. Be sure to deduct the funded debt from EV in order to get the market value of the equity.
The challenge in deploying the DCF method is the proper treatment of any interest-bearing debt. That requires that the mix of funded debt and equity in the WACC should be same as the mix of funded debt and equity in the result. That has to be done iteratively. (Excel has an ‘iterate’ function.)
Your two estimates of value–one using the income approach, the other using the market approach–must then be weighted in a way that is non-arbitrary and makes analytical sense. This is not easy, but it can be done.