Two lenses on the same question
A valuation answers one question: what is this business worth? There are two honest ways to reach an answer. Compare it with what similar businesses sell for, or forecast the cash it will produce and discount that cash back to today.
Multiples are fast and market-anchored. A discounted cash flow is slower, more explicit, and entirely dependent on assumptions you must write down. Using both is not indecision; it is a way to see which assumptions matter.
Both produce a range, not a number. A valuation that arrives at a single precise figure is hiding its uncertainty rather than resolving it.
Key points
- Multiples reflect the market; a DCF reflects your assumptions.
- Agreement between the two is reassuring, not proof.
- Always present a range, not a point.
Comparable multiples
EV = Multiple × Metric
Applies a peer multiple to the company's own metric.
Equity value = Enterprise value − Net debt
Moves from the value of the business to the value of the shares.
A peer trades at 7.5 times EBITDA. If the company earns 40,00,000 of EBITDA, enterprise value is 7.5 × 40,00,000 = 3,00,00,000. That is the value of the whole business, debt and equity together.
Subtracting net debt of 80,00,000 leaves an equity value of 2,20,00,000, the part that belongs to shareholders.
The method is only as good as the peer set. A multiple from a faster-growing, lower-risk comparable will overstate the company in front of you, and no adjustment is mechanical.
Key points
- Enterprise value belongs to all providers of capital, so subtract net debt to reach equity.
- Choose peers on growth, margin, and risk, not on industry label alone.
- A multiple is a summary of many assumptions you did not get to see.
Discounted cash flow
Value = FCF₁ ÷ (WACC − g)
The value of cash flows growing at a constant rate forever.
A business that generates 25,00,000 of free cash flow next year, discounted at a 12% cost of capital and growing at 4% forever, is worth 25,00,000 ÷ (0.12 − 0.04) = 3,12,50,000.
Subtract the same 80,00,000 of net debt and the equity is worth 2,32,50,000. Across 1,00,000 shares that is 232.50 per share.
The formula is unforgiving. A one-point change in the growth rate moves the value by roughly a third, which is why the terminal assumption deserves more scrutiny than any other input.
Key points
- The gap between WACC and growth drives most of the value.
- Small changes in the terminal assumption move the answer a great deal.
- A DCF is an argument about the future written in numbers.
Reconciling the estimates
The multiple implies 2,20,00,000 of equity value; the discounted cash flow implies 2,32,50,000. The two are close enough to be reassuring, and far enough apart to be informative.
If they diverge widely, the cause is usually a mismatched assumption: a peer multiple from a different growth profile, or a terminal growth rate above the long-run growth of the economy.
A useful habit is to reverse the calculation. Ask what growth rate the current market price implies, then decide whether that is plausible. Reversing a valuation exposes optimism faster than defending a forecast.
Key points
- Reconcile the two methods and explain the gap.
- The driver of a disagreement is usually an assumption, not the arithmetic.
- Reverse-engineer the market price to test your own optimism.
Interactive experiment
Dividend discount model
The Gordon growth model values a share as the present value of a dividend stream growing at a constant rate forever.
V₀ = D₁ ÷ (r − g)
Your inputs
Dividend just paid per share.
Expected perpetual growth.
Return investors demand for the risk.
Result
- Value per share
- ৳485
- Next dividend (D₁)
- ৳34
- Dividend yield
- 7.0%
- Required return
- 13.0%
- Growth rate
- 6.0%
- Return − growth spreadA small spread produces a large value.
- 7.0%
- Capital gains component
- ৳224
At a spread of 7.0pp between required return and growth, the model values the share at 484.57.
03 / Apply
Two valuations for one company
A family business is offered for sale. The buyer's multiple-based valuation is well below the owner's discounted cash flow because the owner used a terminal growth rate higher than the industry can sustain.
The assumptions
- Peer multiples come from listed companies with better liquidity.
- The owner's forecast assumes growth above the long-run economy rate indefinitely.
- Net debt is known and agreed by both sides.
What to take away
01
A terminal growth rate above the economy's long-run rate is a warning sign.
02
Listed peers carry a liquidity premium a private business does not.
03
Negotiation is usually about assumptions, not arithmetic.
Your turn
0 of 5 answered
01Question
A peer trades at 7.5 times EBITDA and the target earns ৳40,00,000 of EBITDA. What is the enterprise value?
02Question
The enterprise value is ৳3,00,00,000 and net debt is ৳80,00,000. What is the equity value?
03Question
Free cash flow next year is ৳25,00,000, the cost of capital is 12%, and growth is 4%. What is the value using the perpetuity growth formula?
04Question
Which multiple is least affected by differences in capital structure?
05Question
Equity is worth ৳2,32,50,000 across 1,00,000 shares. What is the value per share?
Take it into the Lab
Experiment with the same idea.
The Lab turns this topic into a workspace: change the drivers, watch the statements move, and see the consequence before you commit to a decision.
What-if analysis
Change price, cost, and working capital. Watch margins, return, and risk move together.
Open the labFormula lab
Understand, manipulate, observe, solve, then apply the formula to a decision.
Walk the formulaStatement playground
See how one driver propagates through the income statement, balance sheet, and cash flow.
Open the playgroundSources & further reading
CFA Institute · Equity valuation ↗OpenStax · Principles of Finance (free textbook) ↗Educational sample content. Worked examples use hypothetical figures. Dates refer to the note's latest content update.