the key difference is how the tax shields have been treated

so the tax shield Rd in approach one

Ra in approach two the reason I'm bringing this up is 6.3 dependent on

assuming Rd is the right discount rate for which

company your comparable and

Ra is the right discount rate for your comparable so you have to do

that analysis for bears and you have you have two different Ras

right based on a relatively seemingly minor issue

but you still have to Ras then we did what

you went on to sears and to keep life a little bit simple

I just went ahead and used approach one’s

for approach one here approach two Ra for approach two here

now that is making life a little bit simple why

because it could be possible that you actually

need to use approach one for the financial policy of bears

but approach two for the financial policy of

Sears so there could be crossover use

and we didn't look at these middle

possibilities because instead of using

two and two you would have had two scenarios

two numbers used in four possible

scenarios so just keep that in mind it doesn't have to be the case

that what works as an assumption for your comparable

for its debt policy works for

you in valuing sears or you as an analyst

doing the work for sears I wanted that to be clear

okay we also saw that

all three methods gave the same answer right

so remember we got the same valuation

regardless of whether we used

enterprise value method APV method

or equity valuation method we got the same answer and the reason is

very simple we rigged it so that we got the same answer

and by rigged it I mean this we had perpetuity cash flows without growth

and we had debt to equity ratio remaining the same

but the levels of debt also being the same so it was rigged

so that any inconsistencies between the three method

would rely basically on the assumptions under the three methods right

so we made sure that there was no inconsistency

will this always be the case

will it or even will this usually be the case and the answer is no

and the reason is very simple the

3 sets of assumptions many many times be inconsistent so I’ll

give you a small example and do it for yourself throw in growth rate

the 250 million you had with the

for online throw in some growth rate there and what you’ll find right away

is that you’ll get different answers so please keep that in mind and you’ll see why

that's happening across different methods

which method will you use under what circumstances

now I’m talking about which method of valuation will you use

under what circumstances it depends on what

assumptions are correct so WACC is used a lot because knee-jerk assumption is

that the debt to equity ratio of the firm

online in this case Sears online

will be fixed so using WACC is OK

why because that's the assumption it makes but remember that you have to then

kind of it should be internally consistent assumptions

it shouldn't be an assumption you make and then forget about right

so which method you use depends on the assumptions consistent with it

many times depends on the information available to you too

and I will want to wrap up the valuation takeaways with

one very very important takeaway probably more important than anything

else

many people in finance believe that

or people actually outside of finance believe it more than

people in finance that somehow

that everything is real and all the numbers are right

I would encourage you to think like this yes if you buy a stock

clearly there's reality to it if it says 50 bucks and you can buy it for 50

there’s reality but when you’re making decisions many times

you're making assumptions and assumptions about the future and you’ve a lot of

numbers in there

and they're all assumptions so

it's not your final answer that's key it's how you approach it

that's key and when you approach problems

please make your assumptions as clear as possible

because your analysis is only as good as your way of thinking and your

assumptions

finally throw in common sense again I know I've said this often but I want you to

recognize that

you should use information intelligently

don't use one way of solving a problem

this applies to almost any aspect of finance

so let me ask you the following question suppose

you knew betas but didn't know returns

what would you do well you know the

beta you’re likely to know or calculate has to be beta equity not beta asset

but you don't want betas really you want returns

say in discounting so what else do you need to know

you need to know the risk-free rate and you need to know the risk premium

and then go to return on equity on the other hand if you already know the

return on equity there's no point backtracking

having said that double checking your answers is very important

I think sometimes you’re given the cash flows of equity

and you’re given market value of equity return on equity is embedded in that calculation

right

assuming no growth is just a simple

thing to figure out but it again depends on the information you have

many times you know your levels of debt

and how they are changing and they are changing a lot

so you want to know if you know the levels of your debt

you use APV it's simple but now

you have to also think through how do you discount

the cash flows that are to the tax shield and how do you discount the

cash flows to

the fundamental business throughout you’re making some

set of assumptions that are clear consistent

and I hope going through this section helped you

in that journey all the best