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A valuation multiple [1] is simply an expression of market value of an asset relative to a key statistic that is assumed to relate to that value. To be useful, that statistic – whether earnings, cash flow or some other measure – must bear a logical relationship to the market value observed; to be seen, in fact, as the driver of that market value.
Developed by social psychologist Milton Rokeach, the instrument is designed for rank-order scaling of 36 values, including 18 terminal and 18 instrumental values. [1] The task for participants in the survey is to arrange the 18 terminal values, followed by the 18 instrumental values, into an order "of importance to YOU, as guiding principles in ...
Next, a divestment price - i.e. a Terminal value - is modelled by assuming an exit multiple consistent with the scenario in question. (The divestment may take various forms.) The cash flows and exit price are then discounted using the investor’s required return, and the sum of these is the value of the business under the scenario in question.
Terminal values are beliefs or conceptions about ultimate goals of existence that are worth surviving for, such as happiness, self-respect, and freedom. [8] The value survey asks subjects to rank the values in order of importance to them. [7] The actual directions are as follows: “Rank each value in its order of importance to you.
The terminal value is hence: (182*1.06 / (0.15–0.06)) × 0.229 = 491. (Given that this is far bigger than the value for the first 5 years, it is suggested that the initial forecast period of 5 years is not long enough, and more time will be required for the company to reach maturity; although see discussion in article.)
Residual income valuation (RIV; also, residual income model and residual income method, RIM) is an approach to equity valuation that formally accounts for the cost of equity capital. Here, "residual" means in excess of any opportunity costs measured relative to the book value of shareholders' equity ; residual income (RI) is then the income ...
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The Present Value of the Terminal Value is then added to the PV of the free cash flows in the projection period to arrive at an implied Enterprise Value. Note that if publicly traded comparable company multiples must be used, the resulting implied enterprise value will not reflect a control premium .