What are the different methods Investment Banks use to value a company?
- Discounted Cash Flow (DCF): values a company by projecting its future cash flows and then using the NPV method to value the firm
- Comparable Company Analysis: values a company through multiples used from similar publicly traded companies (EV/EBITDA, P/E Ratios, etc.).
- Precedent Transactions Method: uses transactions of similar companies that have occurred in the past to estimate how much a company would be purchased for now
- Find the investment banking valuation excel file here: DCF Model + Comps + Precedent
Which method will give the highest valuation?
- Typically Discounted Cash Flow method will give the highest valuation because this type of valuation is very subjective. Assumptions that have to be made are the forecasted growth rate of cash flows, discount rate (WACC), and exit multiples (Terminal Value), etc.
- Precedent transactions will also carry a relatively higher valuation compared to Comparable Company Analysis because precedent transactions take into account market intangibles, control premiums, and synergies that are assumed through the purchase of a Company.