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FINA 537 Equity Valuation
Professor Laura Xiaolei Liu
Valuation Using Multiples

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Limitation of DCF
•
What if firm has:
¾
Unknown history
¾
Projecting an unknown growth trajectory ….
DCF is tough!
•
Other DCF Limitations:
¾
DCF is hard to specifically capture options to
redirect
¾
You may need to adjust accounting
treatment, like expense treatment of R&D,
depreciation method. All difficult!

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Valuation Using Multiples
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Multiples or ratios are calculated by scaling
price by some observable variable or
characteristic (e.g. price to earnings or
price to book value)
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If we know the appropriate value for the
multiple (usually obtained from
“comparable” firms) we can value a
security by multiplying the ratio times the
observable characteristic to obtain an
estimate of price

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Large Paper and Paper Products
Companies
29.40
Average
51.42
0.61
31.47
MWV
Meadwestvaco Corp
15.07
2.30
34.68
GP
Georgia-Pacific Corp
15.65
1.24
19.38
UPM
UPM-Kymmene Oyj
20.22
0.68
13.85
SEO
Stora Enso Oyi
56.18
0.71
39.89
IP
International Paper Co
17.88
3.55
63.41
KMB
Kimberly-Clark Corp
P/E
EPS
Price
Symbol
Company

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Answer
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Boise Cascade Corporate (BCC) is a
multinational distributor of office supplies,
paper and packaging products, office
furniture, and building materials
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Its earnings per share last year were $1.71
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If BCC is comparable to the “average” large
paper and paper products company, its
share value would be estimated at
P=E×(P/E)=$1.71×29.40=$50.27

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Advantages of Using Multiples
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Valuation with a multiple is quick, simple
and can be accomplished with few
assumptions
•
It is easy to understand and easy to
present to clients and customers
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Reflects current market prices for
comparable firms and thus current market
conditions

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The Downside of Multiples
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Although valuation with multiples
requires few explicit assumptions, the
implicit (or underlying) assumptions
are not transparent and can lead to
bias, manipulation, and inconsistent
valuations

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Value Drivers
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Price can be standardized using a common variable
such as earnings, revenue, cash flows, book value.
¾
Earnings Multiples
Price/Earnings per share (PE) and variants
Value/EBIT
Value/EBITDA
Value/Sales
Value/Cash Flow
¾
Book Value Multiples
Market value of Equity/Book Value of Equity
Market value of Assets/Book Value of Assets
Market value of Assets/Replacement Cost (Tobin’s Q)
¾
Industry Specific Variable (Price/kwh, Price per ton of
steel…)

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Key Questions in Practice
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Decide which multiple to use
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Find the “comparable” firms
To do these, we need to understand the
multiples

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The Three Steps to Understanding
Multiplies
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Calculate the multiple
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Multiple needs to be calculated uniformly
and consistently
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Describe the multiple
¾
Understand the cross-sectional
distribution of the multiple
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Analyze the multiple
¾
Understand the fundamentals that drive
each multiple

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Calculate Multiples Uniformly
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The PE multiple is price per share divided
by earnings per share. But:
¾
Is the price the current price (usually yes) or an
average of lagged prices?
¾
Is EPS taken from the last fiscal year (yielding