In this chapter, we have looked at three different methods of valuation:
- Absolute valuation using the discounted cash flow method
- Relative valuation using trading comparatives
- Relative valuation using transaction comparatives
We have learned that the DCF method is widely accepted as the most accurate, but because of its simplicity and ease of application, relative valuation is also popular among investment analysts. We have seen that there is no one correct answer; rather, we arrive at a range of results that give us a range within which the share price should fall. We have also learned how to create a football field chart to display our results and have learned how to interpret them in a meaningful way.
In the next chapter, Model Testing for Reasonableness and Accuracy, we will test our model to see how it responds to changes in certain key variables. We will also...