Question

You will have noticed that the previous parts to this question have provided different valuations for a share in Blue Sky Ltd. Discuss the implications of different valuation methodologies for an investor looking to use the methods to help in the asset selection process. You should include at least one method you have come across in your additional reading for this module. Your answer may also benefit from the inclusion of a relevant example, to help explain the techniques you mention, along with your opinion as to when each method may be appropriate to use in a real world investment context.

Answer 1

For valuation,  an investor looking to use the methods to help in the asset selection process can use:

1) Absolute valuation methods like DDM (dividend discount model) or DCF (Discounted cash flow)

2) Relative valuation methods like peer analysis (PE multiple, PB multiple, EV/EBITDA multiples)

One can also use multiples like EV/EBITDAR multiple (where EBITDAR is Earnings Before Interest, D&A and Rent) and is more appropriate for airline companies as rent of airlines is a significant cost. EV/EBITDAR multiple is a relatiev valuation measure that will help analyse airline companies.