Equity valuation is a primary application of finance and accounting theory. A typical business school curriculum, therefore, devotes substantial time to this topic. The theoretical emphasis usually focuses on discounted cash flow (DCF) and residual income valuation (RIV) models. These models, however, are often cumbersome to use and sensitive to various assumptions. Consequently, practitioners regularly revert to valuations based on multiples, such as the price to earnings (P/E) multiple, as a substitute to more complex valuation techniques (Lie & Lie 2002, p. 44). These multiples are ubiquitous in analysts’ reports and investment bankers’ fairness opinions. They also appear in valuations associated with corporate transactions. Even advocates of complex valuation techniques frequently resort to using multiples when estimating terminal values or checking their results for plausibility (Bhojraj & Lee 2002, p. 407-408).
KeywordsInitial Public Offering Valuation Model Target Firm Discount Cash Flow Common Equity
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