FINRA Series 79 valuation methods

The Series 79 tests valuation as part of company and transaction analysis. Candidates may need to select a method, calculate a metric, compare companies, or interpret a result. The key habit is to define the value being measured before doing arithmetic. Enterprise value represents the operating business for all capital providers; equity value is the value attributable to common shareholders after the required capital-structure adjustments.

Begin with the question and the denominator

Read the requested output first. Is the item asking for enterprise value, equity value, a per-share value, an implied offer premium, or a relative multiple? Then identify the numerator and denominator that belong together. EV/EBITDA compares enterprise value with earnings before interest, taxes, depreciation, and amortization. Price to earnings compares share price with earnings per share, or equity value with net income. Using an enterprise-value numerator with an equity-only denominator can create a meaningless comparison.

A basic bridge is: equity value equals enterprise value minus net debt, with other claims and adjustments added when the question supplies them. Net debt is debt minus cash. If enterprise value is $500 million, debt is $120 million, and cash is $20 million, net debt is $100 million and simplified equity value is $400 million. If there are 50 million diluted shares, implied share value is $8.

Common errors include subtracting debt but ignoring cash, dividing EV by shares, using basic rather than diluted shares when the question provides a diluted count, or subtracting an item twice. Write the units as you calculate. If values are in millions and shares are in millions, dividing equity value by shares yields dollars per share.

Comparable-company analysis

Trading comparables estimate value by looking at how similar public companies are priced relative to a financial measure. Analysts often compare EV/EBITDA, EV/sales, P/E, price to book, or price to free cash flow. A company with $30 million in EBITDA and a relevant peer multiple of 9.0x has an illustrative enterprise value of $270 million before the enterprise-to-equity bridge.

The difficult judgment is selecting the peers and metric. A good comparison considers industry, product mix, growth, margins, size, geography, capital intensity, leverage, and risk. A higher multiple may reflect faster expected growth or stronger margins, not necessarily overvaluation. A single peer may be an outlier; a range or median can be more informative if the question asks for a central reference.

Suppose three peers trade at 7.0x, 8.0x, and 11.0x EBITDA. The median is 8.0x. Applying that to target EBITDA of $25 million gives $200 million enterprise value. If the target has $35 million net debt, simplified equity value is $165 million. The high peer multiple could be excluded only if the facts support treating it as less comparable; do not discard it merely because it changes the answer.

Comparable-company analysis is a market snapshot. It depends on the peer set, market conditions, period of earnings, and whether the measure is LTM or forward. If one peer has a one-time gain or unusually low earnings, the multiple may be distorted. Candidates should know whether the question specifies normalized earnings, forecast earnings, or current results.

Precedent transactions

Precedent transaction analysis compares prices paid in earlier acquisitions. It can help estimate what a buyer might pay for control, but transaction terms, timing, competition, synergies, and market conditions matter. A control premium may make acquisition multiples higher than trading multiples. That does not mean a precedent multiple should always be higher; a distressed sale or different asset mix may move it lower.

Example: A comparable acquisition had an enterprise value of $360 million and LTM EBITDA of $40 million, so the transaction multiple was 9.0x. Applied to the target's $32 million LTM EBITDA, that suggests an enterprise value of $288 million. If the target's peer trading analysis indicates $240 million, the $48 million difference is not an automatic valuation uplift. Review deal date, control, growth, assets, debt, and synergies before interpreting the spread.

The Series 79 outline includes review of precedent deals, offerings, capital restructurings, repurchases, rights offerings, and debt issuance. Transaction data can help explain trends, but an earlier deal is not a perfect comp. Always compare the same valuation basis. If one transaction's reported multiple uses adjusted EBITDA and another uses unadjusted LTM EBITDA, the figures are not directly equivalent without reconciliation.

Discounted cash flow

A DCF estimates value from future cash flows discounted to today. In a simplified enterprise DCF, free cash flow to the firm is discounted using WACC, and a terminal value represents cash flows beyond the explicit forecast. Present value of the forecast plus present value of terminal value gives enterprise value. Convert to equity value only after the calculation, using the capital-structure bridge.

A one-year example illustrates discounting. If expected free cash flow is $12 million next year and the discount rate is 10%, its present value is $12 divided by 1.10, or about $10.91 million. A cash flow farther in the future is discounted over more periods. If the discount rate rises, present value falls, all else equal. If projected cash flow rises, value increases, all else equal.

The terminal value often has a large influence on a DCF. A perpetual-growth approach uses next-period cash flow divided by WACC minus perpetual growth, provided WACC exceeds growth. If terminal-year cash flow is $15 million, WACC is 10%, and growth is 3%, terminal value at the end of the forecast is $15 divided by 0.07, or about $214.3 million. That terminal value must still be discounted back to present value.

DCF limitations include forecast uncertainty, sensitivity to WACC and growth, changing capital requirements, and the quality of normalized cash flow. A model can appear precise while relying on uncertain assumptions. Sensitivity analysis shows how value changes when key inputs move. Do not treat a single DCF output as an objective market price.

Other methods in the outline

The outline also names dividend discount models, price to book, price to sales, price to free cash flow, PEG, IRR, net present value, sum-of-the-parts, and other metrics. Match the method to the company and question. A dividend model may be useful for a company with a stable payout policy; EV/sales may be used when profits are low or negative, but it says little about future margin without additional analysis.

Sum-of-the-parts values business segments separately and combines them, with adjustments for corporate costs, debt, and other claims if the problem provides them. Suppose a firm has a core segment worth $300 million and a smaller unit worth $80 million, with $100 million net debt. A simple sum yields $280 million equity value before other adjustments. The method is most helpful when segments have different economics or comparable groups.

IRR measures the annualized rate that equates cash outflows and inflows over time. It is not a valuation multiple. Net present value discounts cash flows and subtracts the investment or cost. Do not confuse return measures with the value of a company or the ratio used to compare securities.

An integrated Series 79 problem

A buyer estimates target EBITDA at $18 million. Comparable companies trade at a median 10.0x EBITDA, while recent acquisitions trade at 11.5x. The target has $40 million debt and $10 million cash, with 15 million diluted shares. The trading-comp value is $180 million enterprise value and $150 million equity value, or $10 per share. The transaction-comp value is $207 million enterprise value and $177 million equity value, or $11.80 per share.

If the buyer proposes $12 per share, the price is above both simplified reference points. The premium relative to the trading-comp estimate is 20%; relative to the transaction-comp estimate it is about 1.7%. Those calculations do not prove the offer is fair or unfair. A recommendation would consider forecast growth, synergies, control, buyer financing, market conditions, diligence findings, and the seller's alternatives. The question may ask only for the arithmetic, so keep an analytical conclusion separate from a recommendation.

A repeatable method for valuation questions

1. Name the requested output and its unit.
2. Select a method and identify its required inputs.
3. Check that the numerator and denominator use the same capital basis.
4. Calculate without mixing millions, thousands, and per-share amounts.
5. Bridge enterprise value to equity value only when requested.
6. Interpret the result with the assumptions and limitations given.

When a distractor differs by one step, find that step. Did it use the wrong multiple, forget net cash, choose the offer price as the premium denominator, or treat terminal value as already discounted? Explaining the exact error is more useful than memorizing the correct number.

Normalize earnings before applying a multiple

A multiple is only as useful as the earnings measure below it. If EBITDA includes a one-time restructuring charge, an analyst may consider an adjustment when estimating normalized earnings. The adjustment must be supported by the facts; calling an expense nonrecurring does not automatically make it irrelevant. A candidate should distinguish reported results from a question's stated adjusted results and use the measure the prompt requests.

For example, reported EBITDA is $28 million and includes a $3 million unusual legal expense. If the question explicitly directs you to add that expense back as a nonrecurring item, adjusted EBITDA is $31 million. At a 7.0x multiple, implied enterprise value is $217 million. Using reported EBITDA produces $196 million. The $21 million difference is not a free increase in value; it depends on the assumption that the cost will not recur and that the adjustment is appropriate.

Be alert to mismatched periods. A multiple based on LTM EBITDA uses the last twelve months, while a forward multiple uses projected results. Comparing one company's LTM multiple with another's forward multiple can be misleading unless the question specifies that convention. Similarly, a fiscal year may not align with the transaction date. Read labels such as LTM, NTM, or forecast year before using the figures.

A two-period DCF example

Suppose a simplified project produces $10 million of free cash flow in year 1 and $12 million in year 2. At a 10% discount rate, the present values are $10 / 1.10 = $9.09 million and $12 / 1.10^2 = $9.92 million. Their combined present value is $19.01 million. If the question gives no terminal value or initial cost, do not invent one.

If an initial investment of $16 million is included, net present value is about $3.01 million. A positive NPV means the forecast discounted inflows exceed the stated investment under those assumptions. It does not establish that the project is risk-free or that forecasts will be realized. If the discount rate rises, the present value of future cash flows declines, with the distant year 2 cash flow affected more than year 1.

A common mistake is to discount year 2 cash flow once instead of twice, producing $10.91 million rather than $9.92 million. Another is to add the undiscounted $22 million and call it present value. Write the year exponent next to each cash flow. This small step makes the timing assumption visible.

Choose the method that fits the business

A high-growth company with limited current earnings may be hard to value on P/E. EV/sales can offer a rough comparison, but two companies with equal revenue can have very different margins, capital needs, and growth. Price to book may be more meaningful for some asset-intensive or financial businesses than for a company whose value rests on intangibles. The method should fit the economics and the question, not merely the numbers that are easiest to find.

A DDM focuses on distributions to shareholders and can be useful when dividends are stable and linked to earnings. A DCF based on free cash flow to the firm values the business before debt payments to equity holders and lenders. A DCF based on free cash flow to equity values the common equity cash flow more directly. Candidates should not discount a cash flow with a rate that does not match its risk and capital basis.

A sum-of-the-parts approach can help when a company contains distinct businesses. If one segment is valued with an industrial peer multiple and another with a software revenue multiple, the assumptions should be justified separately. Then account for corporate costs and financing claims when converting to equity value. Adding segment enterprise values and calling the total common equity value omits the capital structure.

No method eliminates judgment. Comparable sets change, forecasts are uncertain, transaction terms differ, and market multiples move. A valuation range can reveal how sensitive the result is to assumptions. On the exam, however, obey the problem's instruction: if asked to apply a supplied 8x multiple, do that calculation rather than debating whether 8x is fair.

Sources

FINRA Series 79 Content Outline (2025), Function 1: Analysis and Evaluation of Data.