Knowledge Base
Explain equity valuation principles
Which valuation method is considered the benchmark for fundamental valuation according to AMF doctrine?
The discounted cash flow (DCF) approach is the benchmark method for fundamental valuation. It stipulates that a company's value equals the sum of its discounted future cash flows, projected over a three-to-seven-year horizon, with a discount rate typically corresponding to the weighted average cost of capital (WACC).
Which directive requires independent valuation and traceability of the methods used?
The AIFM Directive imposes strict valuation requirements, including independent valuation, justification and traceability of the methods used, and separation of the valuation function from operational functions. This aims to enhance the reliability of valuations.
What is the main advantage of the EV/EBITDA multiple compared to the P/E ratio?
The EV/EBITDA multiple (Enterprise Value / EBITDA) has the advantage of neutralising differences in capital structure and depreciation policy, unlike the P/E ratio (Price/Earnings Ratio), which can be influenced by these factors. This makes it more suitable for comparing companies with different capital structures.
The discount rate in the DCF method is always fixed for all companies.
The discount rate in the DCF method is not fixed. It generally corresponds to the weighted average cost of capital (WACC) and varies according to the company's risk profile. For mature companies, it typically ranges between 10% and 15%, while for high-risk startups, it can reach 50%.
The AMF always requires a single value for valuations during public offers.
The AMF requires a multi-criteria approach combining several methods to present a valuation range rather than a single value. This aims to enhance valuation reliability through cross-referencing of results. This requirement is set out in Position-Recommendation 2012-19.
Terminal value formula in DCF
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The terminal value in the DCF method is calculated using the Gordon Growth Model, which divides the normalised cash flow by the difference between the WACC and the anticipated perpetual growth rate. This formula captures the residual value of the company beyond the explicit forecast horizon.
Categorize items by dragging them to the appropriate zones
Items to categorize:
Growth companies without significant earnings
Holding companies and real estate firms
Mature companies with predictable cash flows
Valuation methods are better suited to certain types of companies. The asset-based approach is suitable for holding companies and real estate firms, while the multiples approach is suited to growth companies without significant earnings. These distinctions help in choosing the appropriate method.
According to AMF statistics, what percentage of valuations during public offers use the DCF method?
According to AMF statistics, the DCF method accounts for 84% of valuations during public offers. This underscores its importance as the benchmark method for fundamental valuation.