Valuations of Target Firms

Four Widely Used Methods

APV Approach in Detail

Eg. LBO

Setting the Bid Price

Four Widely Used Methods
1. Market Multiple Analysis
2. The Corporate Valuation Model
3. The Equity Residual Model
4. The Adjusted Present Value Model
1. Market Multiple Analysis
Forecasted EPS = $ 7.70
P/E = 12 (similar company)

Estimated Stock Price

EPS * P/E = $ 7.70 * 12 = $ 92.40 / share
More Judgemental
2. The Corporate Valuation Model
This model estimate a company’s value as the present
value of FCF, discounted at WACC.

Value of Firm – Value of Debt = Value of Equity

Estimated Share Price = Value of Equity / No. of shares

Valid for stable capital structure

WACC = Ke*We + Kd*(1-t)*Wd

3. The Equity Residual Model
The model estimates the value of Equity as
thepresent value of projected FCFE, discounted at Ke.

Estimated share price = Value of Equity / No. of

shares

Valid for stable capital structure

Ke = Ko + ( Ko – Kd)*(D/E)*(1 – t)
4. The APV Model
Using debt increases firm’s value as interest payments
are tax deductible.

APV technique recognizes this as,

VFirm = Vunlevered firm + VTax Shield

This model estimates Value of Unlevered Firm as the

present value of FCF, discounted at Ko.

Value of Tax shield is, tax rate * Kd * Debt (t-1) ,

discounted at Kd