Enterprise value multiples look at market value of the
operatingassetsofthefirmandnotjusttheequityinvestedin
them.Thus,theyprovideabroadermeasureofvaluethatis
lessaffectedbyfinancialleveragedecisions.Inthischapter,
thevariousmeasuresofenterprisevaluewerefirstintroduced,
with theemphasis onconsistency. Cross holdings in other
companies, whether classified as majority or minority
holdings,canwreakhavocontheunsuspectinganalystwhen
it comes to enterprise value multiples.
The determinants ofenterprise value multiplescome from
lookingatasimplediscountedcashflowmodelforthefirm.
Not surprisingly, the same variables that determine firm
value—cost of capital, growth rates, and reinvestment
rates—affectenterprisevaluemultiplesaswell.Eachmultiple
alsohasonevariablethatitismost closelylinkedto;with
EV/capitalratios,itisthereturnoncapital,whereaswithEV/
sales ratios, it is the after-tax operating margin.
In thefinal section,we lookedatpotential applications of
enterprise value multiplesin valuation and presented three
ways of controlling for differences across companies—a
subjectiveapproachwherewelookforqualitativereasonsfor
deviationsfromsectoraverages,amatrixapproachwherewe
graph enterprise value multiples against the key variables
determining these multiples, and multiple regressions.