Damodaran on Valuation

Chapter 9. Value Multiples

Whereas equity multiples focus on the value of equity, enterprise and firm value multiples are built around valuing the firm or its operating assets. Just as we gain more flexibility in dealing with changing and divergent financial leverage when we go from equity to firm valuation in discounted cash flow valuation, firm value multiples are easier to work with than equity multiples when comparing companies with different debt ratios. In this chapter, we begin by defining firm and enterprise value multiples and then examine how they are distributed across companies. We follow up by evaluating the variables that determine each multiple and how changes in these variables affect the multiple. We close the chapter by looking at applications of enterprise value multiples in a variety of contexts.