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panies that we feel are very similar to Vaporware, Inc Since these are software developers, the different companies could be well-known names such as Microsoft, or they could be lesser known names Since Vaporware has sales of $75 million, Microsoft is too large to be an appropriate Guideline Company Instead, we use data from firms in the same size category as Vaporware, as measured by sales and book value The above table contains two sections In the first section, Step 1, we develop the valuation ratios, and in the second, Step 2, we apply the average valuation ratios (in real life we frequently make adjustments to the ratios, so we are often not using unadjusted averages) to Vaporware, Inc We begin with the data on the first Guideline Company (GC), ie, GC 1, which has a market capitalization of $15 million (cell B9), sales of $20 million (C9), net income after taxes of $1 million (D9), and net book value of $125 million (E9) Next we develop the valuation multiples The market capitalization is the FMV of the firm, which we denote as P, for price We divide the $15 million FMV for GC 1 by its sales of $20 million to calculate a Price-to-Sales multiple (P/S) of 0750 (F9) Similarly, we divide the FMV by net income and book value to calculate the Price-to-Earnings (PE) multiple of 15000 (G9) and the Price-to-Book Value multiple (P/BV) of 1200 (H9) Then we repeat the calculations for the rest of the Guideline Companies in rows 10 through 13 Row 14 shows the averages for all of the raw data and calculated ratios Let s focus on column F The high Price-to-Sales ratio is 1500 (F11), while the low is 0480 (F13), which is less than one-third of the high P/S ratio It is fairly common to find a wide dispersion in ratios, which is one reason why there may be a lot of inaccuracy in using this method In any case, let s proceed with the valuation in Step 2 In B19 through B21 we list Vaporware s sales, net income, and book value, respectively In C19 through C21 we list the average valuation ratios from F14, G14, and H14 We then multiply column B times column C to calculate each variable s Indication of Fair Market Value An indication of FMV is not necessarily our conclusion of FMV It is merely the calculation of FMV using one valuation ratio or one valuation method Us-.



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