forfirms/assetswhosecurrentearningsmaybedistortedby
either temporary factors or cyclical effects.
Inthecontextofmultiplesusedinrelativevaluation,wecan
useeitherequityorfirmvalueasthemeasureofvalueand
relate it to a number of firm-specific variables—earnings,
book value, and sales. The multiples themselves can be
estimatedbyusingcomparablefirmsinthesamebusinessor
fromcross-sectionalregressionsthatusethebroaderuniverse.
Forotherassets,suchasrealestate,thepricecanbesimilarly
expressedasa functionofgrossincomeor costpersquare
foot of space. Here, the comparables would be other
properties in the same locale with similar characteristics.
Contingent claim modelscanalso be usedin a variety of
scenarios.Whenweconsider theoptionthata firmhasto
delaymakinginvestmentdecisions,wecanvalueapatentor
an undeveloped natural resourcereserveas an option.The
option to expandmay make young firms with potentially
largemarkets tradeata premium ontheir discountedcash
flowvalues.Finally,equityinvestorsmayderivevaluefrom
the option to liquidate troubled firms with substantial debt.
WHICH APPROACH SHOULD WE USE?
Thevaluesthatweobtainfrom thefourapproachescanbe
verydifferent,anddecidingwhichonetousecanbeacritical
step.Thisjudgment,however,willdependonseveralfactors,
someofwhichrelatetothebusinessbeingvaluedbutmany
of which relate to us, as the analysts.
Asset or Business Characteristics