What this lesson is about
There's no single 'true' price for a company. Analysts triangulate using three different methods and see where they agree.
Part 1 of 2
There’s no single 'correct' price tag for a company. That’s why analysts use three different methods and see where they land. Comparable companies (comps) check what similar public companies trade at. Discounted cash flow (DCF) projects a company’s future cash and converts it to today’s dollars. Precedent transactions look at what similar companies sold for in real acquisitions.
No single method is treated as gospel. A DCF is only as good as its growth and discount-rate assumptions. Comps can be distorted if the whole sector is over- or under-valued. Precedent deals include buyer-specific premiums that may not apply broadly.
Quick check
What are the three main approaches analysts use to value a company?
These three methods are cross-checked against each other precisely because no single one is perfectly reliable alone.
Part 2 of 2
Quick check
In a 'comparable companies' valuation, what are you doing?
Multiples normalize for size, so a small and a large company can be compared fairly.
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