Which is an approach for valuing a potential target company?

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BlackTom AI · Accepted Answer

The question asks about approaches for valuing a potential target company, so we should examine what each option represents in the context of business valuation.
Option 1: Net present value. NPV is a fundamental financial concept used to assess the value of cash flows over time, and it underpins many valuation techniques. However, on its own, NPV is more of a calculation component rather than a standalone market- or deal-valuation method for a whole company. In practice, NPV concepts feed into broader methods like DCF, but NPV by itself is not typically cited as a complete approach for valuing a target company.
Option 2: Public company comparables. This is a valid valuation approach often used in M&A and investment banking. It involves comparing the target to publicly traded peer companies (multiples like P/E, EV/EBITDA, etc.) to infer value. It addresses relative value and market sentiment, making it a standard method.
Option 3: All of the above. If we recognize that both NPV-based thinking (as part of DCF) and public comparables are used in practice to value targets (with DCF being a primary approach and comparables offering another perspective), then this option captures the idea that multiple methodologies are employed in target valuation.
Option 4: Discounted cash flow. DCF is a core, widely used valuation method for targets. It estimates value based on projected free cash flows discounted to present value, incorporating risk and time preference.
In summary, Option 4 highlights a fundamental method, Option 2 reflects an important comparative method, and Option 1 is a foundational concept that underpins DCF rather than standing alone as a complete approach. Since both DCF and comparables are standard approaches, and NPV concepts underlie these methods, the combined use of these concepts aligns with how practitioners value targets in practice, which supports the idea represented by Option 3.

BU.231.740.52.SP25 Homework #3

Which is an approach for valuing a potential target company?

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