Stream II - Lecture 5

Question 1

Why is the divider discount model not always useful?

Answer 1

• It is not very suitable for firms that don’t distribute dividends
• It can be difficult to forecast a firm’s payout strategy

Question 2

What are the 3 steps of multiples valuation?

Answer 2

1) Select a measure of performance or value
2) Estimate price multiples for comparable firms using the measure of performance or value
3) Apply the multiples

Question 3

What are some issues of using comparables for multiples valuation?

Answer 3

• Based on the assumption that the pricing of comparable firms is applicable to the firm being valued
• Selection of comparable firms is not easy because of differences in governance structures and capital structures