Make an estimate of the value of the business and the value of equity and compare to the current market price.
Re-estimate the value of the business and the value of equity, with changes that you see as feasible and necessary in investment, financing, and dividend policies.
Value (Price) your company, relative to how other companies in the sector are being valued (priced).
Framework for analysis –
Based on your company’s size, competitive standing, and market size, make a judgment on when you believe that your company will be a “mature” company, growing at a rate less than the economy.
Adjust the rest of the firm (risk, debt ratio, cost of capital, excess returns, and effective tax rates) to reflect its status as a mature company.
5.From DCF value to equity value per share
Add cash, cross holdings, and any other nonoperating assets (that you have not counted yet) to your discounted cash flow value to get to the value of the firm.
Subtract debt, the estimated value of any consolidated companies, and the expected liabilities from lawsuits from the firm value to get to value of equity.
Subtract out the value of employee/management options from the equity value to get to the value of common equity.
Divide by the number of shares to get to the value of equity per share.
Choose the firms that you believe are most comparable to your firm, for pricing purposes.
Decide on a multiple that best fits how these companies are being priced.
Collect information on the variables that are the drivers of this multiple.
Controlling for differences between your firm and the comparable firms on the variables make a judgment on whether your company is fairly priced.
The company is Costco
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