Join Jim Stice for an in-depth discussion in this video WhatsApp acquisition and using other multiples, part of Finance Foundations: Business Valuation.
- We have looked at three common price multiples…that can be used to estimate the value of a business:…Price-to-Earnings ratio, P/E;…Price-to-Book ratio, P/B;…and Price-to-Sales ratio, P/S.…For some very young companies…these traditional financial statement numbers…don't reflect the true economic value of a company.…Let's look at this issue by examining one particular case,…the 22 billion dollar acquisition of WharsApp by Facebook…in 2014.…Now, note, the original purchase price…was reported to be 19 billion dollars,…but most of the payment was in the form of Facebook stock.…
And by the time the deal was finalized,…an increase in the value of Facebook stock…pushed the total acquisition price to 22 billion dollars,…and I'll use the 22 billion dollar number…in my calculations.…First, let's assume that Facebook knew what it was doing…in agreeing to pay 22 billion dollars for WhatsApp.…With that we will then see what kind of price multiples…are implicit in that number.…Well, after the acquisition WhatsApp released…
Make sure to check out the Stice brothers' other accounting and finance courses to understand the other economic factors that impact your business.
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- Using price-to-sales ratios to value companies
- Using discounted cash-flow analysis to estimate value
- Valuing McDonald's as a case study