Multiple Differences: Selecting Appropriate Value Driver for Multiple based Valuation in FTSEALL index

Abstract

Multiple based valuation is a valuation technique whose use is much frequent in many situations when it comes to equity valuation. According to Damodaran (2006) though Multiple based valuation method of valuing stocks has got very little theoretical evidence, but still it is the most popular in industry. It has even been likened to "an art form" (Bhojraj, 2002). Reason of its widespread use could be attributed to its ease of use, but does this method provide a good valuation tool and if yes, what sort of value drivers are most useful in predicting equity value?. To answer this question, FTSEALL index was considered as it represents more than 98% of the UK market in terms of capitalization. Valuation for each company in FTSEALL index was carried out on 8 separate value drivers, which included both historical and forward looking drivers, resulting in a set of 9 separate valuations or 'Predicted Values' for each company. These valuations were then compared with closing prices to compute the valuation errors, on which detailed statistical analysis was performed to observe which value drivers resulted in least amount of valuation error, indicating its robustness as a value driver.