CHAPTER 12
CHOOSING THE RIGHT VALUATION APPROACHa
In picking a comparable company for use in multiple-based valuation, the choice depends on the multiple being used. Much better results can be obtained by using a warranted-multiple approach to select peer companies. One advantage of this approach is that it allows the integration of relative and direct valuation techniques.
This chapter has two objectives. First, I will explain how valuation models are related and provide a brief overview of the different valuation approaches for equity. In particular, I will focus on multiple-based and discounted cash flow (DCF) approaches and show how they are essentially two pieces of the same puzzle. Second, I will discuss a new valuation tool for equity that has emerged from academic research, focusing on recent research that uses a valuation-based approach to select comparable companies for multiple-based valuation.1
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