Valuation

Intangible Asset Valuation in Private Companies Methods for valuing intangible assets like customer lists, trademarks, and technology in private companies using relief-from-royalty and excess earnings approaches.

Intangible Assets and Book Value Distortion in Residual Income Models Internally generated intangibles like brands and R&D are expensed under GAAP, understating book equity and inflating ROE. Learn how analysts adjust.

Interacting Real Options How multiple options embedded in a single investment project interact such that their combined value is less than the sum of individual options, or sometimes more—a critical insight for valuing complex assets.

Intrinsic Value vs Market Price: How the Gap Is Interpreted Learn how investors calculate intrinsic value and what a divergence between intrinsic value and the stock's market price signals about expected returns and risk.

Justified Price-to-Book Ratio A theoretically derived P/B multiple from fundamentals—ROE, cost of equity, and growth—that anchors valuation in residual income logic.

Justified Price-to-Book vs Observed Price-to-Book Ratio Compare the fundamentals-derived justified P/B ratio to the market-observed P/B to spot overvaluation. Learn how residual income models reveal the gap.

Key Assumptions and Limitations of the Residual Income Model The residual income model assumes clean surplus and stable cost of equity. See where it breaks and how to apply it correctly.

Key Person Discount A valuation reduction applied when a private company's financial prospects depend heavily on the skills, relationships, or reputation of one or two irreplaceable individuals.

LBO Exit Multiple The assumed valuation multiple applied to EBITDA at the sale or refinancing of a leveraged buyout, used to project sponsor returns.

Lease Renewal as a Real Option A commercial lease renewal clause is a call option on space: the tenant holds the right to renew at a preset price. Learn to value it using real-options mechanics.

Liquidation Value The estimated cash value of a company's assets if sold immediately and the company is wound down, typically the lowest valuation for a solvent business.

Maintenance versus Growth Capex Splitting capital expenditure into sustaining (maintaining current revenue) and growth (creating new revenue) to refine DCF models.

Market Risk Premium The extra return investors demand for holding the overall stock market instead of risk-free bonds; a core input to cost of equity estimation.

Market Value Added MVA is the cumulative present value of all future Economic Value Added, measuring how much wealth management has created above the cost of invested capital.

Mean Reversion of Valuation Multiples Over Time How P/E ratios, price-to-sales, and other valuation multiples revert toward historical averages and why analysts factor this into long-horizon forecasts.

Mid-Cycle Normalization in Valuation A technique for valuing cyclical businesses by replacing reported earnings with a through-the-cycle average, smoothing distortions from commodity prices and economic booms or busts.

Mid-Year Convention A DCF timing adjustment that assumes cash flows arrive at period midpoints, reducing end-of-year bias in valuations.

Minority Discount in Business Valuation A minority discount in business valuation reduces the value of a non-controlling stake because the owner cannot direct company decisions or extract disproportionate value.

Minority Discount in DCF Valuation A minority discount in DCF valuation reduces equity value to reflect the illiquidity and lack of control inherent in a non-controlling stake.

Minority Interest Discount in Private Company Stakes Why minority shareholders in private companies receive lower valuations than control buyers, and how discounts for lack of control and liquidity stack.

Monte Carlo DCF Simulation Using probability distributions instead of point estimates to calculate a valuation range with confidence intervals.

Monte Carlo Valuation A probabilistic valuation method that simulates thousands of possible scenarios for key assumptions, generating a distribution of possible valuations rather than a single point estimate.

Mothballing Option The right to temporarily suspend operations and restart later without full divestment or liquidation.

Multi-Stage DDM An extension of the dividend discount model that models multiple periods of changing dividend growth rates before converging to a terminal perpetual growth rate.

Multi-Stage Dividend Discount Model Explained With an Example A step-by-step walkthrough of the multi-stage dividend discount model with numerical examples, showing how to forecast near-term dividends and apply stable-growth terminal value.

Multi-Stage Residual Income Model Explained How to split residual income valuation into distinct growth phases—high-growth and mature—with worked example and step-by-step methodology.

Multiple Compression A decline in a stock's valuation multiple, typically from rising rates, slower growth, or sector de-rating, that mutes or reverses returns.

Multiple Expansion An increase in a stock's valuation multiple over time, independent of earnings growth, that amplifies total returns.

Multiple of Invested Capital in Private Equity MOIC measures cash returned relative to capital invested in PE deals. Learn how it's calculated, how it compares to IRR, and why it matters for performance assessment.

Multiples Valuation A market-based valuation method that values a company by applying market-observed price multiples (PE, EV/EBITDA, price-to-sales) to its financial metrics.

Natural Resource Real Option How timing and extraction-rate flexibility in mining, oil, and gas projects create embedded options that traditional valuation methods undervalue.

Negative Working Capital in DCF Models How structurally negative working capital—when suppliers extend credit longer than customers pay—boosts free cash flow projections.

Net Asset Value vs Market Cap: Why They Diverge Why a company's net asset value and market capitalization differ; sources of premium and discount including intangibles, growth, and risk.

Net Operating Loss Carryforwards in DCF Valuation How to value net operating loss carryforwards in DCF models, including tax-shield benefits, Section 382 limits, and expiry schedules.

Nominal vs Real Cash Flows in DCF Understand when to use nominal vs real cash flows in DCF models and how mixing them creates systematic valuation errors.

Normalised Earnings for Cyclical Multiples Explained How analysts smooth cyclical earnings to apply price-to-earnings multiples fairly, valuing companies at mid-cycle profitability rather than distorted peaks or troughs.

Normalised Free Cash Flow Adjusting reported cash flows to remove one-time gains, losses, and anomalies before inserting them into a DCF model.

Normalized Earnings Adjusted historical earnings that remove one-time items, cyclical effects, and accounting anomalies to show the sustainable earning power of a business.

Normalizing Adjustments in Private Company Valuation Normalizing adjustments recast private company financials to reveal economic earnings by removing owner compensation, personal expenses, and one-time items. These adjustments are essential to fair valuation.

NPV with Real Options A valuation method that extends traditional net present value by incorporating the value of management's ability to adapt, defer, expand, or abandon a project.

NTM Multiple in Valuation: Next Twelve Months Explained Learn how NTM multiple valuation works, why it is preferred for fast-growing companies over LTM or single-year metrics, and how forward estimates create the denominator.

Ohlson Model Linear Information Dynamics Explained How the Ohlson model uses autoregressive processes to forecast abnormal earnings and hidden information over time.

Operating Lease Adjustments in DCF Valuation How operating lease adjustments in DCF affect enterprise value: capitalize the lease or treat rent as an operating expense.

Operating Margin Normalisation in DCF Normalising operating margins in DCF removes one-time items and cyclical distortions to forecast sustainable margins. Adjustments prevent inflated or depressed valuations.

Option Exercise Boundary The threshold project value at which immediate exercise of a real option becomes optimal, accounting for irreversibility and the cost of relinquishing wait-and-see optionality.

Option Expiration in Real Investments: How Long Does Flexibility Last? Real option expiration dates are set by patent terms, regulatory windows, and competitive dynamics. Learn how they affect project value.

Option Pricing Model for Startup Equity Allocation A framework treating each share class in a complex cap table as a call option to allocate total enterprise value fairly across founders, employees, and investors.

Option to Outsource as a Real Option How the ability to shift production to a third party creates switching value, and when the cost of preserving that flexibility is justified.

Option to Stage an Investment: Phased Capital Commitment How breaking a large capital project into sequential phases creates an embedded option to proceed or halt, and how the staging premium is calculated.

Owner Earnings (Buffett) A concept of sustainable earnings coined by Warren Buffett, calculated as earnings plus depreciation minus capex minus working capital changes, representing true cash available to owners.

P/B Ratio for Banks How the price-to-book multiple is adapted for valuing financial institutions, where book value (equity capital) serves as the primary anchor for profitability and risk assessment.

P/E Ratio for Cyclical Stocks Why the P/E ratio for cyclical stocks can mislead: point-in-cycle earnings distort valuations. Through-the-cycle and normalized earnings provide a clearer picture.

Payout Ratio as a Valuation Input How the dividend-to-earnings ratio links forecasted earnings to dividends in dividend valuation models.

Payout Ratio vs Retention Ratio in Dividend Growth Models Understand how payout ratio and retention ratio drive different dividend growth formulas and affect stock valuation in the dividend discount model.

Peer Group Selection The process of identifying comparable public companies for use in relative valuation; critical to the accuracy of multiples-based valuations.

PEG Ratio Explained: Adjusting P/E for Growth The PEG ratio adjusts the price-to-earnings ratio for growth, aiming to identify whether a stock is cheap or expensive relative to earnings expansion.

PEG Ratio: Earnings Growth The price-to-earnings ratio adjusted for the company's expected earnings growth rate, revealing value relative to growth.

PEGY Ratio An extension of the PEG ratio that adjusts for both earnings growth and dividend yield, capturing total return potential in one number.

Perpetuity Growth Terminal Value The most common terminal value approach, which assumes a company's cash flows grow at a constant rate forever and uses the Gordon growth formula to calculate value.

Personal Goodwill vs Enterprise Goodwill in Business Valuation How appraisers separate owner-dependent personal goodwill from transferable enterprise value in business valuations, affecting taxes and sale proceeds.