Market value/sales ratio - terminal value
Amram's method estimates the market value in the terminal
year by multiplying the industry's historical market value to sale ratio
times the terminal year sales (and discounts it to the present using
the industry cost of capital). The market value/sales
ratio is based on industry historical data, and the industry's WACC is based
Her assumption is as a product matures, over the long
haul, it should create
value for a firm equal to the value the industry creates
per dollar of sales. Prof. Damodaran at NYU has datasets to determine
market value to sales ratio.
For example, in Jan 2003 the US Electrical
sector ratio was 2.48, and a company would need "$2.48 in assets to create
$1 of sale revenue." If I were buying
the company, that would be my expectaion - I'd pay $2.48 to buy a company
that would generate $1 in sales in one year. The
value added is in the eye of the buyer.
The industry WACC is 10.2%. (I'll
use 10% to be consistent with the other examples in this chapter.)
How do the present values of the two methods compare using
the industry WACC?
Compare Annuity to Market Value/Sales