Relative Valuation; Determining the Most Accurate Valuation Multiples for the FTSE 100

2015 dissertation for MSc Financial Management. Selected by academic staff as a good example of a masters level dissertation. This dissertation will critically examine five of the most commonly used valuation multiples by experts, price-to-earning, price-to-book value, enterprise value/EBIT, enterprise value/EBITDA, and enterprise value/sales, in an attempt to determine which is the most accurate multiple per sector as well as the most accurate multiples overall, across all sectors. The accuracy is measured in terms of valuation error between the predicted value, calculated based on comparable companies, and the companies listed value. The valuation errors are analyzed using the mean, median, and the percentage of errors within 15 percent of the listed value. The results of the study determines superior valuation multiples in eight out of the ten sectors as well as overall, across all sectors. The study will analyze data collected from Bloomberg Data Terminal of the FTSE 100 with the sample period of January 2010 to December 2014 with monthly frequency. The study supports common believes that certain multiples perform better for specific industries. Earnings are found as the most accurate value driver, however one of the limitations of this dissertation is that it does not include forward data such as forecasted earnings. Recommendation for future research included building on the finding, expanding the sample size as well as including additional multiples, especially forecasted earnings