Not all valuation methods use discounted cash flow (DCF). Suppose Juan runs a sm

Question

Not all valuation methods use discounted cash flow (DCF). Suppose Juan runs a small startup that doesn't yet generate revenue but has users which may become valuable in the future. Use the internet to find a valuation method Juan could apply to his firm that doesn't depend (at least not directly) on discounting projected cash flows and making projected financial statements. Describe the method you find, discuss the pros and cons of the method, and compare & contrast your method with DCF/NPV-based methods (all methods in chapter 10 of the book are DCF-based methods).

Leach, J. Chris; Melicher, Ronald W.. Entrepreneurial Finance 6th Edition

Explanation / Answer

Evaluation that does not depend on the discounted project cash flows and projected financial statements is multiples valuation approach.

P/E (price to earnings) multiple -It compares a company's market capitalisation to its annual income. To ascertain the value of the company its current equity value is divided by the companies at income deriving the PE ratio.

EBITDA Multiples-It denotes the untaxed and unadjusted profits.To ascertain the ratio, we divide enterprise value by EBITDA.

Earnings multiplier-It bases price value on business earnings potential and best suited for small companies.

In DCF approach, we need a required rate of return in order to find the discounted value whereas multiples method does not require discounting.

Projections of future cash flows are required for NPV method while Multiple method do not require projections.

Thank you.

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