multiples used to estimate corporate value.pdfVIP

Multiples Used to Estimate Corporate Value Erik Lie and Heidi J. Lie We evaluated various multiples practitioners use to estimate company value. We found, first, that the asset multiple (market value to book value of assets) generally generates more precise and less biased estimates than do the sales and the earnings multiples. Second, although adjusting for companies’ cash levels does not improve estimates of company value, using forecasted earnings rather than trailing earnings does. Third, the earnings before interest, taxes, depreciation, and amortization (EBITDA) multiple generally yields better estimates than does the EBIT multiple. Finally, the accuracy and bias of value estimates, as well as the relative performance of the multiples, vary greatly by company size, company profitability, and the extent of intangible value in the company. he valuation of companies is a primary reported here was to examine the bias and valua- application of finance theory. The typical tion accuracy of multiples based on earnings, sales, T finance curriculum, therefore, devotes or book value of assets for several categories of substantial time to this topic. The theoret- companies. ical emphasis is usually on the discounted cash Our research is relevant to practitioners, such flow valuation (DCF) technique, but it is often cum- as investment bankers and analysts, who use mul- bersome to use and is sensitive to a host of assump- tiples to value companies, as well as to academic tions. Consequently, invest