CHAPTER 9
Value Multiples
Whereas equity multiples focus on the value of equity,
enterpriseandfirmvaluemultiplesarebuiltaroundvaluing
the firm or its operating assets. Just as we gain more
flexibility indealing with changingand divergent financial
leverage when we go from equity to firm valuation in
discounted cash flow valuation, firm value multiples are
easierto workwith thanequity multipleswhencomparing
companieswithdifferentdebtratios.Inthischapter,webegin
by defining firm and enterprise value multiples and then
examine how they are distributed across companies. We
follow up by evaluating the variables that determine each
multiple and how changes in these variables affect the
multiple.Weclosethechapterbylookingatapplicationsof
enterprise value multiples in a variety of contexts.
DEFINITION OF VALUE MULTIPLES
Valuemultiplesrequiretwoinputs—anestimateofthevalue
of a firm or its operating assets in the numerator and a
measure of revenues, earnings, or book value in the
denominator. We begin by looking at variations on
measurement of firm value and at the appropriate and
consistentscalingmeasuresforfirmvalueinthesecondpart
of the section.
Measuring Value