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Business valuation

Market based methods

3.1 Stock market value (market capitalisation)

For a listed company, the stock market value of the shares (or 'market
capitalisation') should be the starting point for the equity valuation
process.

The market share price is suitable when purchasing a minority stake.
However, a premium usually has to be paid above this in order to
acquire a controlling interest.

3.2 The price / earnings (P/E) method

Value per share = EPS × P/E ratio

Total equity value = Total post-tax earnings × P/E ratio

 The earnings figure should be an expected, future sustainable earnings figure
(so not necessarily just the most recent reported earnings).

 When valuing an unlisted company, a proxy P/E ratio from a similar listed
company has to be used.

Illustrations and further practice

Now try TYU 4 and TYU 5 in Chapter 13

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