Relative valuation is an important method for equity analysis and evaluation, which is highly popular among market practitioners. P/E, price to book value, price to cash flow and price to sales are the four key multiples that form part of the relative valuation toolbox. (Sehgal and Pandey, 2010)

Required:

(a)Discuss the advantages and disadvantages of using multiples, or “relative valuation” in stock valuation as compared to the absolute valuation approach. [10 marks]

(b)Discuss why the valuation of private companies is needed and the factors to be considered when valuing private companies as compared to public companies. [10 marks]