Why is used as a multiplier
Entity and equity multiplier method
Would you like to determine the value of your start-up using a comparable company, but you don't know how?
Don't worry, we'll show you how to do it here!
Entity multiplier, equity multiplier and the APV method
There are various ways of evaluating a company using a comparable company. We look at three of them in this video: On the one hand, the determination of the company value using the entity or equity multiplier. And on the other hand in the pension model via the APV method.
Let's start with the entity value multiplier. With the multiplier method, the company value is determined using a multiplier. The value of a suitable comparable company is transferred to the company to be valued by means of a reference value. For this to work, a linear relationship between the two companies is assumed.
The multiplier is calculated by dividing the enterprise value of the comparable company by the respective reference value.
Which reference value you can use depends on whether you want to calculate the entity or the equity multiplier. To determine the value of your start-up, you simply multiply the calculated multiplier by the reference value of your company.
The entity value multiplier is so named because it determines the value of the entire company, i.e. the GK. The EBIT is used as a reference value.
Let's take a look at an example: there is a table with the companies U1 and U2. Both the expected surplus X, the annual surplus and the FK value are given. The EK value is also entered for the company U2. For company 1, this is the value that you should determine using the multiplier method.
The rf is given as 10% and the profit tax rate s as 30%.
The multiplier can be calculated as follows: GK 0 through EBIT. For a company that is not in debt, this is equal to EK 0 divided by E (X). So 1,000 divided by 400 equals 2.5.
In order to determine the GK value of company 1, you multiply the multiplier by the surplus of company 1.
So 2.5 times 800 equals 2,000.
In order to determine the value of the equity now, you have to subtract the FK value from the GK.
So: 2,000 minus 400 equals 1,600.
The equity multiplier
So much for the entity multiplier. Next, let's look at the equity multiplier.
Here, the value of the equity of the company to be valued is determined using the reference value flow to equity.
To do this, you set the equity value of company 2 in relation to the flow to equity of company 2.
The multiplier is therefore 1,000 divided by 280 equals \ .
Now you take the flow to equity of companies 1 times the multiplier. So 532 times 3.571428 equals 1,900. The EK of company 1 has a value of 1,900.
In order to determine the GK accordingly, you calculate 1,900 plus FK equals 400 equals 2,300. The GK value of company 2 is therefore 2300.
As you can see, we get a different result than with the entity multiplier. But which of the two is correct now?
A central problem when using the multiplier method is that the different capital structures of the companies are usually not taken into account. With some multipliers, a correct valuation is therefore not possible if there are different capital structures.
Calculation using the AVP method
So that you understand the problem a little better, let's finally take a look at how one would determine the equity value of company 1 using the APV method. In order for us to be able to use this, the two companies must belong to the same risk class. As you already know from the previous videos, companies in one risk class have a uniform cost rate.
First of all, you have to determine the cost of equity k EK of company U2.
For this we use the well-known formula “EK 0 equals E CF U 2 divided by k EK”.
We then simply have to convert this to kEK, so that we get “kEK is equal to the expected cash flow divided by the equity”. But since we did not give the CF, we have to calculate it first.
The formula for this is "CF equals X times in brackets 1 minus s",
in this case for company 1:
And for company 2: 400 times in brackets 1 minus 0.3 equals 280.
Now you determine the EK cost rate for company 2. This works in the same way as for company 1. So you get a k ek of 280 divided by 1,000 is equal to 0.28.
In the next step we want to determine the GK value of company 1 with the help of this cost rate. Since company 1, in contrast to company 2, is also financed by debt, we have to take into account the tax advantage due to the proportionate FK financing. It looks like this: GK 0 equals ECF of company 1 divided by k EK plus s times NFK.
So 560 divided by 0.28 plus 0.3 times 400 equals 2120.
Since the total value is always determined with the APV method, but the table asks for the value of the EK, we still have to subtract the FK from the GK value.
As you can see, there is a difference between the three EK values. The equity value determined with the equity multiplier does not take into account the different capital structure and accordingly leads to an incorrect equity value for company 1.
You may have noticed that the difference between the values of the APV method and the entity multiplier is the tax shield of 0.3 times 400. This is precisely why the value that is determined using the APV method is also correct. Because here the different capital structure of the two companies is taken into account: Company 2 is purely equity-financed, while Company 1 is partly financed by outside parties. Of course, you have to take this into account when calculating.
Well, now all you need is a suitable comparison company and you can determine the value of your own company!
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