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REVAAM Model to determine a company's value by multiple valuation and linear regression analysis

Author(s): Luis G. Acosta-Calzado | Carlos Acosta-Calzado | Humberto Murrieta-Romo

Journal: Business Intelligence Journal
ISSN 1918-2325

Volume: 3;
Issue: 2;
Start page: 9;
Date: 2010;
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Keywords: Multiples | Relative | Valuation | Linear | Regression | Value | PE | EBITDA | Enterprise | Equity | Cash Flow | Capital | Return | Net Margin | Operating Margin

This paper shows an alternative model to the widely used method of multiple valuation (or relative valuation) in order to calculate the value of a company by using either the Price Earnings (PE) and/or the Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization (EV/EBITDA). When calculating multiples, analysts tend to consider average multiples within an industry and apply them directly to the target company; however, we believe that this practice is not considering differences among the companies being compared, although they belong to the same sector or industry. REVAAM Model uses linear regression to calculate adjusted PE and EV/EBITDA multiples by taking into consideration profitability factors for each multiple in order to differentiate companies in the samples. Calculations are based on public data for US companies, but could be further expanded to other markets. Not only REVAAM Model provides a better estimate to relative valuation analysis than simply using average multiples, but it could be used to compare under/overvalued companies or sectors, and also analyze multiple value changes over time as the intrinsic fundamentals change.
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