absolute rules, and it goes without saying that blindly
following a model orequation willalmost always lead to
disaster.Acombinationofpragmatism,commonsense,anda
willingness to adapt valuation rules characterizes the best
analysis.
CONCLUSION
Theanalystfacedwiththetaskofvaluingafirm/assetorits
equity has to choose among three different
approaches—discounted cash flow valuation, relative
valuation, and option pricing models; and within each
approach, the analyst must also choose among different
models. These choices will be driven largely by the
characteristicsofthefirm/assetbeingvalued—thelevelofits
earnings,itsgrowthpotential,thesourcesofearningsgrowth,
thestabilityofitsleverage,anditsdividendpolicy.Matching
thevaluationmodelto theassetorfirmbeingvaluedis as
importantapartofvaluationasunderstandingthemodelsand
having the right inputs.
Once we decide to go with one or another of these
approaches,wehavefurtherchoicestomake—whethertouse
equity orfirm valuationin the context ofdiscounted cash
flowvaluation,whichmultipleweshouldusetovaluefirms
or equity, and what type of option is embedded in a firm.