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EBITDA is not that useful for banks because banks have a lot of interest expenses. Interest expenses are non-cash expenses, so they are excluded from EBITDA. However, interest expenses are a significant cost for banks, so they can have a big impact on a bank's profitability. As a result, EBITDA is not as useful for banks as it is for other companies.
For example, let's say a bank has EBITDA of $10 million and interest expenses of $5 million. This means that the bank's net income is only $5 million. If we exclude interest expenses from the equation, we would think that the bank is much more profitable than it actually is.
As a result, EBITDA is not a very useful measure of profitability for banks. It is better to look at a bank's net income or its return on equity (ROE) to get a more accurate picture of its profitability.
I am aware of the following valuation techniques:
Discounted Cash Flow (DCF): This is the most common valuation technique. It involves estimating the future cash flows of a company and discounting them back to the present day.
Relative valuation: This technique involves comparing the valuation of a company to the valuation of similar companies.
Asset-based valuation: This technique involves valuing a company based on its assets.
Market-based valuation: This technique involves valuing a company based on its market capitalization.
Each of these valuation techniques has its own strengths and weaknesses. DCF is the most comprehensive valuation technique, but it can be difficult to estimate the future cash flows of a company. Relative valuation is a simpler technique, but it can be less accurate if the companies being compared are not similar. Asset-based valuation is a good way to value companies with a lot of tangible assets, but it can be less accurate for companies with a lot of intangible assets. Market-based valuation is a quick and easy way to value a company, but it can be less accurate if the company's stock is not actively traded.
FCFF stands for Free Cash Flow to Firm. It is a measure of a company's cash flow that is available to all investors, including debtholders and equity holders. FCFF is calculated by taking a company's net income and adding back interest expense, taxes, depreciation, and amortization.
The rationale behind the FCFF technique is that it provides a more accurate picture of a company's cash flow than other measures, such as net income. This is because FCFF excludes non-cash expenses, such as interest expense and depreciation, which can distort a company's cash flow.
The discounting rate in the FCFF technique is the weighted average cost of capital (WACC). WACC is a measure of the cost of capital for a company. It is calculated by taking the weighted average of the cost of debt and the cost of equity.
The cost of debt is the interest rate that a company pays on its debt. The cost of equity is the return that investors expect to earn on a company's stock.
The WACC is used to discount future FCFFs because it reflects the risk of the company's cash flows. The higher the WACC, the lower the present value of the future FCFFs.
WACC stands for Weighted Average Cost of Capital. It is a measure of the cost of capital for a company. It is calculated by taking the weighted average of the cost of debt and the cost of equity.
The cost of debt is the interest rate that a company pays on its debt. The cost of equity is the return that investors expect to earn on a company's stock.
The WACC is used to discount future FCFFs because it reflects the risk of the company's cash flows. The higher the WACC, the lower the present value of the future FCFFs.
The growth rate is the rate at which a company's cash flows are expected to grow in the future. The growth rate can be estimated by looking at the company's historical growth rate or by looking at the growth rate of the industry.
The growth rate is used to calculate the future FCFFs. The higher the growth rate, the higher the present value of the future FCFFs.