Conceptual Framework of Relative Valuation

The concept of Relative Valuation has been studied taking into account the equity and the value multiples and other factors that affect the under and over valuation of stocks in the market. A detailed study has been conducted on how the relative valuation should be conducted in order to find the comparables that are closest to the Target Company. Relative valuation is based on the assumption that the value of an asset equals its market value. To do relative valuation, the prices of similar or comparable assets are taken as variables to estimate the value of an asset and to control possible differences. The Relative valuation is based on two fundamental principles including intrinsic value of an asset cannot be estimated by any valuation method. It is always equal to what the market is willing to pay for the asset depending on its unique characteristics. The markets are inefficient and assets are not priced perfectly, but because assets are comparable, errors in pricing can be identified and corrected more easily. Because absolute market prices cannot be compared, they need to be converted into standardized values so that price multiples are created. Then, the multiples of the asset are compared to the multiples of the comparable asset to decide whether the asset is overvalued or undervalued.