Corporate Finance: Instructor\'s Manual Applied Corporate Finance

(Amelia) #1
Aswath Damodaran 536

Relative Valuation


! In relative valuation, the value of an asset is derived from the pricing of
'comparable' assets, standardized using a common variable such as earnings,
cashflows, book value or revenues. Examples include - -


  • Price/Earnings (P/E) ratios

    • and variants (EBIT multiples, EBITDA multiples, Cash Flow multiples)



  • Price/Book (P/BV) ratios

    • and variants (Tobin's Q)



  • Price/Sales ratios


This is the preferred mode of valuation on Wall Street. Philosophically, it is a


different way of thinking about valuation.


In relative valuation, we assume that markets make mistakes on individual


investments, but that they are right, on average, in how they price a sector or the


market. (In discounted cash flow valuation, we assume that markets make


mistakes over time.)

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