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Flip side
Key points
- The law of one price says there should not be two different prices for the same asset at the same time.
- An earnings multiplicand is essentially a long range forecast of future earnings.
- Discounted cash flow and earnings multiples methods do the same thing but under different assumptions.
- Earnings before interest tax depreciation and amortisation (EBITDA) can be a rough proxy for free cash flow in a discounted cash flow.
- An EBITDA multiple can be inverted to give a proxy discount rate in a discounted cash flow.
When discussing fiscal valuations valuation practitioners often seem to fall into two disparate camps: those who favour an earnings multiples approach and others who prefer discounted cash flow (DCF). HMRC’s Shares and Assets Valuations (SAV) division appears to prefer the former because its webpage discussion of DCF is light to say the least. Perhaps the divide is why valuation...
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