Market Valuation

• The idea behind the market approach is that the value of the business can be determined by reference to reasonably comparable guideline companies for which transaction values are known.
• In Market Approach, the values may be known because these companies are publicly traded or because they were recently sold, and the terms of the transaction were disclosed.
• The market based valuation approach others the view of business market value that is both easy to grasp and straightforward to apply
• The mechanics of market approach involve nding a price multiple of the benchmark, i.e. price to earnings ratio, EV to EBITDA, price to book value, etc. The price multiple is then multiplied with the relevant financial metric of the business being valued to arrive at a valuation estimate
• All business valuation methods under the market approach fall within one or more of the following categories. It is either based on statistics/empirical and/or heuristics and/or combination of these methods
• Heuristic Pricing Model uses expert opinions of professional practitioners.
• Comparative private company sales data is formerly known as comparative transaction method.
• The guideline public company method involves identifying a comparable company and obtaining the stock price for the company's listed securities.
• The prior transaction method involves looking up historical transactions in securities of the business undervaluation.
• The market approach is favorable since it is easy to apply and makes use of real- world transactions to derive a value. If a business is worth what someone is willing to pay for it, then the market approach is the most appropriate methodology to determine that value.
• The major challenge with the market approach is finding sufficient private company market data to reach a valid valuation conclusion.
• A key difference between the various market-based business valuation methods is how these pricing multiples are determined
• Market approach based valuation methods rely on the so-called pricing multiples which determine a relationship between the business economic performance, such as its revenues or profits, and its potential selling price
• In Market Approach, Sales of businesses which closely resemble the business being valued are most commonly used to estimate the pricing multiples.
• To calculate value or price of a company, in simple terms, uses pricing multiple derived from a particular nancial ratio of the company or average of similar companies where the subject company is being compared.
• Market Approach has 2 methods empirical/statistical and heuristics. Empirical/ Statistical approaches composed of 3 methods dependent on the sources of comparable data: Comparative private company sale data, Guideline public company data and Prior transactions method
• The advantage of this Guideline Public Company Data is that there are plenty of transaction data available from the public capital markets.
• Comparable company analysis is a technique that uses relevant drivers for growth and performance that can be used as proxy to set a reasonable estimate for the

  value of an asset or investment prospective.
• P/E ratio sends the signal on how much the market perceives the value of the

  company as compared to what it actually earns.
• Book-to-Market ratio is used to determine the appreciation of the market to the value of the company as compared to the value it reported under its Statement of Financial Position
• If Book-to-Market approach is used for comparable company analysis, the key component of th finanancial statement needed is the Balance Sheet.
• Dividend Yield Ratio describes the relationship between the dividends received per share and the appreciation of the market value of the company.
• Dividend-Yield Ratio is also known as dividend multiple and is a pricing earnings
• Indirectly, EBITDA can be computed from net income plus depreciation and

  amortization and incorporating working capital adjustments.
• EBITDA can serve as a proxy of cash flows from operating activities before tax.
• EBITDA per share is derived by dividing EBITDA by outstanding share for

  common shares.
• Book Value per share can be derived by dividing the net book value to the number of outstanding shares available to common and ordinary shares
• Net book value is the dierence of the total assets and the total liabilities. This represents the claim of the equity stockholders and creditors of the company.
• Market Value Approach follows the concept that the value of the business can be determined by reference to reasonably comparable guideline companies for which transaction values are known