WST: 4.3 Investment Banking Training - Valuation Multiples

Wall St. Training Self-Study Instructor, Hamilton Lin, CFA illustrates the concept behind how to apply multiples in relative valuation.

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Closed Caption:

hello and welcome to washington
trainings
module on corporate valuation
methodologies my name is Hamilton Lane
present
awash in training and I the background
investment banking and mergers and
acquisitions
had what they call miss axes investment
banking research bankamerica securities
as mergers and acquisitions group except
other boutique investment banks
of August on mergers and acquisitions
please note that these materials are
copyrighted
and may not be disseminated reproduced
without express written approval right
right to say
is that the enterprise value divided by
revenue and keep it up
is the correct ratio in other words
enterprise value and keep it up
these are the crack ratios to use
likewise
for equity value or conversely for
equity value
the only crack is for net income that is
this number down here
and now the question I will post in is
why
is it that enterprise value is the
correct numerator
when you're trying to figure out revenue
multiples as well as be about multiples
and wise equity value the quite number
use for net income
think about that and then you can
forward onto
our explanation of why the numerator is
going to be different for each one is
multiples
in addressing this question here
one must ask yourself who has acclaim on
revenue and keep it up
there are three stickers web claim I
read may keep it up
equity holders the debtholders as well
as the government
on taxes yes the vendors and suppliers
and employees also have a claim
but we estimate that is part normal
course business cuz get we're talking
about capital structure
and the actual debts that are old sup
nah perspective equity debt in
government have a claim
I read me to pick up house and a prized
by constructed
enterprise I is constructed by equity
plus the day as well
and of course the government is just a
libel you have to pay the airport East
cash flows
and these valuations are now alive
enterprise value Laden and keep it up
now take a look at and up at the equity
by over net income
who has a claim on net income only did
equity holders
why do only to equity holders have a
claim a net income
because the debt holders have already
been paid as what the government
why because the debtholders have already
been paid
interest and government has already been
paid the taxes
that's the net income number the net net
number so therefore
what is the only constituency base that
has the claim is that income
equity again therefore equity value is
the correct numerator
for net income said another way
read new belongs to the entire formal
all capital holders at the bottom the
side
as this debate topic this is before
interest payments
earnings before interest and taxes and
therefore dick right time to use for
these guys would be
enterprise value up
and also for net income net income only
belongs to every horses
after interest payments and that's why
you must properly align the multiples
once again let's say that again read new
belongs entire firm
all stakeholders all capital holders as
this keep it up and therefore
who has a claim on this farm the
enterprise by everybody was a component
of capital
that contributes at a price however for
net income because it's after
the taxes have been paid to the
government and after interest expense
after the debt holders have a satisfied
this now means who is the residual claim
on this that of course is the equity
holders as well
and that is what you must properly match
the multiples and if you were to not
property master multiples looking out
for me right hand side you will see that
you have
in crack most was that a ghostly
inaccurate so you must make sure you
fully understand the star
enterprise value