Chapter 8 - Relative, Asset-Oriented, and Real Option Valuation Basics

Abstract

This chapter addresses relative valuation (i.e., market-based) methods, asset-oriented methods, real options analysis (i.e., contingent claims), and replacement cost, often used as alternatives to discounted cash flow valuation. Relative valuation methods include comparable company, comparable transactions, comparable industry techniques, and value driver-based valuation. Asset-oriented methods include tangible book value and liquidation- or breakup valuation techniques. This chapter also discusses in detail how to look at M&A valuation in the context of real options and concludes with a summary of the strengths and weaknesses of the alternative valuation methods (including discounted cash flow) and when it is appropriate to apply each methodology.