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What are the key differences between the Gordon Growth Model and EBITDA Multiple Relative Valuation approaches to valuing companies? What would be the reasons for using one approach versus another


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What are the key differences between the Gordon Growth Model and EBITDA Multiple Relative Valuation approaches to valuing companies? What would be the reasons for using one approach versus another?

Gordon Growth Model is also known as the dividend discount model.  It is the model, which we use for the calculation of the intrinsic values of the stock on the bases of the future series of the dividends that grow with constant rates. This model also solves the present values of the future dividends of the infinite series. While on the other hand enterprise value EBITDA is the method, in which we apply multiples to a company’s EBITDA for the estimation of enterprise value. It is the simple form and measure for the valuation of the company.  It is the simple evaluation method than the others. According to this approach, if higher the number then the company will be more expensive. The best way to use this approach is to compare it to that of the other similar companies. We use one approach versus to the other approach for knowing the condition of the company; we use that approach which we think that it is simple to use. EBITDA and Gordon Growth Model both are either approach that we use for knowing that companies are going I profit or in loss, by using these approaches we can estimate the future values of the companies. (Damodaran, 2013)

 

What are the primary differences in the calculation approach for WACC and APV valuation models? How are capital structure differences dealt with between each? Which types of companies should be valued using one approach versus another?

APV is the type of the DCF valuation method that value the firms operations assuming that there is the discount at the equity finance and it is the equity finance then values NOL’s, interest tax shields and other non-operating assets are at the discount rates. APV method is use when it is expected to change the structure of the firm over the investment horizon, while WACC is the used as a part of DFC and is a discount rate. It is used when there is possibility to remain stable the structure of the organization. it is used for the valuation of the firm based on after tax cost. Both of these methods are used for the valuation of the assets in place or for the valuation of the operation.

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