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Practitioner's Complete Guide to M&As: An All-Inclusive Reference, with Website by David T. Emott

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Topic 59

Converting FCFM to P/Es and Other Valuation Multiples and Deriving Slot Multiples for Public Companies

Topic 59 explores the methodology to convert free cash flow multiples to other valuation multiples and vice versa and presents the price/earnings (P/E) eviscerator as a means to evaluate public company P/Es and valuations.

The reader is encouraged to take the time to read the text in conjunction with the referenced Appendices to gain the appropriate level of understanding of the subject matter discussed in the narrative. Appendices are either presented at the end of this and each remaining Topic or are available for review and download on this book's companion Web site (see the About the Web Site page for login information).

UNDERSTAND THE SUSTAINABLE RELATIONSHIPS BETWEEN FCF AND OTHER EARNINGS FUNDAMENTALS

  • Adjusted free cash flow (FCF) multiples (FCFM) are used to corroborate discounted cash flow (DCF) enterprise basis valuations.
  • Sales multiples (Sales M), earnings before interest and tax (EBIT) multiples (EBITM), and earnings before interest, tax, depreciation, and amortization (EBITDA) multiples (EBITDAM) derive corroborating enterprise basis valuations.
  • Price-to-earnings (P/E) multiples derive corroborating equity basis valuations.
  • Sales, P/E, EBIT, and EBITDA multiples may be derived from FCFM and from one another by following the derivation formulas in the next section. These formulas capture the effect of sustainable relationships between the target's FCF, ...

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