ownerdies,andfordivorceproceedingswhencouplesbreak
up. Whilethe principlesof valuationmaynot be different
whenvaluingabusinessforlegalproceedings,theobjective
oftenbecomesprovidingavaluationthatthecourtwillaccept
ratherthanthe“right” valuation.After all,legalprecedents
andthelanguageofthelawoftentrumpcommonsenseinthe
courtroom.
CONCLUSION
Valuation plays a key role in many areas of finance—in
corporate finance, in mergers and acquisitions, and in
portfolio management. Themodels presented in this book
providearangeoftoolsthatanalystsineachoftheseareas
will find of use, but the cautionary note sounded in this
chapter bears repeating. Valuation is not an objective
exercise,and anypreconceptionsandbiasesthatan analyst
brings to the process will find their way into the value.
1 There are approximately five times as many buy
recommendationsissuedbyanalystsonWallStreetasthere
are sell recommendations.
2 Theincomefromcashisrisklessandshouldbediscounted
back at a riskless rate. Instead, analysts use risk-adjusted
discountrates(costsofequityorcapital)todiscountthecash
income, thus resulting in a discount on face value. When
analysts use multiples, they often use the average
price-earnings (P/E) ratio of peer group companies as the
multiple for cash income.
3 Whenbookvalueweightsareused,thecostsofcapitaltend
tobemuchlowerformanyU.S.firms,sincebookequityis