Hi All
Just wanted to ask a question, I was rereading the chapter in Damodaran's Valuation book on valuing financial services firms as I was trying to do a valuation of a discount broker.
Reading thru it, the chapter says to use either the Dividend discount method, the excess return method, cashflow to equity, asset based valuations or relative valuations.
Just wanted to ask, what is everyone's preferred method? and why?
The idea of FCFE really made sense to me while valuing normal firms as there seemed to be this idea of "gravity" of the cash flows to which the firm's value would eventually gravitate towards.
Looking at the balance sheets of discount brokers like Interactive brokers, as is written in the book, it varies wildly.
I tried to look up the dividends paid by a mature broker such as Charles Schwab but their payout ratio and dividend was low, so unlike a bank, I wasn't sure if that was going to be the highest payout they could achieve. So using the dividend method didn't seem that great
In short, I guess the dividend, excess and cash flow to equity all required me to make some estimates and that made me think of using a relative valuation, but then that lacks that 'gravity' of cash flows.
Thanks so much!
Submitted May 17, 2021 at 01:11AM by Cardzilla https://ift.tt/3hvgDmx
