Difference between relative valuation-discounted cash flow

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When using spot or monthly multiples for valuations, most P/E multiples have fallen between 31 December 2019 and 31 March 20200 (source: PwC analysis). .The decline in multiples is correlated with a general increase in the cost of equity, so theoretically, both discounted cash flow and market multiple-based valuation methodologies should result in generally lower valuations. Our view is that trading multiples are an important tool to benchmark any discounted cash flow valuation.

1. Explain the difference between relative valuation (multiple-based valuation methods) and discounted cash flow and name a specific example of each of the two methods.

2. Do you agree with the statement "trading multiples are an important tool to benchmark any discounted cash flow valuation". In other words, do you think it is important to use both discounted cash flow models and relative valuation techniques in investment analysis. You must motivate your answer.

Reference no: EM132642032

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