1. Discuss the use of multiples as a means of estimating value and des

QUESTION

1. Discuss the use of multiples as a means of estimating value and describe the process for applying multiples.2. Explain how companies with substandard financial history can draw the attention of investors. Are investors irrational or naieve?3. Explain how a growing company can starve itself to dea
Identification A market multiples analysis can compare companies based on size, industry classification, financial ratios, customers, growth, leverage and technology. Increased reliability and a stronger financial analysis are obtained when comparison companies are highly similar. Usually a financial analyst determines what comparison factors are most important and finds companies that are similar based on these factors. For example, an analyst may decide a new company that creates software for the Internet may be best compared against other Internet-based firms or against software companies. For large corporations with multiple divisions or groups, a market multiples analysis can be performed on the individual units within the company. Size Market multiples analysis can be performed against as many different companies as required to obtain a reliable valuation. For a general reference perspective, a single company analysis can be performed. For more critical analysis and a high level of accuracy, a market multiples analysis should be performed against a significant number of companies within the same industry. Steps Market multiples analysis takes each company to be compared and calculates the primary comparison ratios. Standard financial ratios include liquidity ratios, asset turnover ratios, financial leverage ratios, profitability ratios and dividend policy ratios. An average of the comparison ratios is performed and it results in an assessment value. Based on the

ng value, an analyst makes a valuation judgment based on nonfinancial indicators and may make adjustments accordingly. For example, if an analyst knows a company has recently made a large acquisition that has skewed financial results temporarily, she may make adjustments to the analysis. Benefits Market multiples analyses are easy to understand, apply and use because there is no need for projecting cash flows. Information is also easy to obtain from published reports of publicly traded companies like 10-K submissions or annual reports. A market multiples analysis is a commonly used tool in the legal and investment banking fields. Warnings It can be difficult to find good comparable companies to match up against the analysis company. Without a comparable company, results can be unreliable and can lead to a wide range of valuations. A market multiples analysis also excludes the time value of money and cost of capital from a companys valuation. For example, a market multiples analysis excludes finance charges and interest.

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