Valuation Using Multiples - Accuracy and Error Determinants

Abstract: The purpose of this thesis is to investigate how accurate multiple valuations are in relation to the DCF. Furthermore, the accuracy of equity and entity multiples will be compared. Finally, we will try to determine the factors underlying the valuation errors. Our results suggest similar performance from the multiples approach in relation to the DCF model in estimating corporate value with eight of ten multiples producing valuation estimates with valuation errors of less than 15 % compared to market value. However, EV/EBITDA which is the closest related multiple to the DCF is outperformed. The equity multiple Price/Earnings yield the most accurate estimation of corporate value. Finally, firm size and market to book ratio are connected to the valuation errors obtained from the multiples valuation approach.