18.7. CONCLUSION
The analyst faced with the task of valuing a firm/asset or its equity has to choose among three different approaches—discounted cash flow valuation, relative valuation, and option pricing models; and within each approach, the analyst must also choose among different models. These choices will be driven largely by the characteristics of the firm/asset being valued—the level of its earnings, its growth potential, the sources of earnings growth, the stability of its leverage, and its dividend policy. Matching the valuation model to the asset or firm being valued is as important a part of valuation as understanding the models and having the right inputs.
Once we decide to go with one or another of these approaches, we have further choices to make—whether to use equity or firm valuation in the context of discounted cash flow valuation, which multiple we should use to value firms or equity, and what type of option is embedded in a firm.
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