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Relative Valuation IIIa

Relative Valuation IIIa. Which multiple should you use in relative valuation?.

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Relative Valuation IIIa

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  1. Relative Valuation IIIa

  2. Which multiple should you use in relative valuation? You can do relative valuation using a variety of multiples, ranging from earnings multiples to book value multiples to revenue multiples. Assume that you are trying to do a relative valuation of Zyloft, a software company and are trying to decide which multiple to use in your valuation. Which one should you choose? • The multiple that yields the highest R-squared in a regression • I won’t pick one. I will take an average across the different values (from different multiples) • The multiple that most other analysts & investors tracing this company use. • The multiple that yields a value that best fits what I am trying to do with the valuation (show that it is cheap, expensive or correctly values) • None of the above

  3. Relative versus Intrinsic valuatoin You have just completed an intrinsic valuation of Zyloft Inc., a publicly traded software company and arrived at a value of $10/share and the stock is trading at $15. You value Zyloft, using a PE ratio against other software companies and estimate a value per share of $20. Based on these numbers, you would conclude that • The stock is under valued (its price < relative value) • The stock is over valued (its price > intrinsic value) • The stock is correctly valued (its price = average of relative & intrinsic value) • The stock is both under and over valued. • None of the above Explain.

  4. Peer group versus Market relative valuation Now assume that you value Zyloft using a market regression for PE and arrive at a value per share of $10 again. (Remember the price is $15/share and the relative valuation against software companies yielded $20/share). Based on these numbers, you would conclude that • The stock is under valued (its price < peer group relative value) • The stock is over valued (its price > market relative value) • The stock is correctly valued (its price = average of peer & market relative values) • The stock is both under and over valued • None of the above Explain.

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