chapter-16-can-you-value-what-you-cannot-see.ppt

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Aswath Damodaran 1 Information Transparency: Can you  value what you cannot see? Aswath Damodaran
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Aswath Damodaran 2 An Experiment Company A Company B Operating Income $ 1 billion $ 1 billion Tax rate  40% 40% ROIC 10% 10% Expected Growth 5% 5% Cost of capital 8% 8% Business Mix Single Business Multiple Businesses Holdings Simple Complex Accounting Transparent Opaque Which firm would you value more highly?
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Aswath Damodaran 3 Transparency: The Basic Questions Some companies reveal more about themselves in their financials than others.  The key questions that relate to transparency are the following: What is it that we would like to know about companies when we value them? Why are some companies more opaque than others? How do we measure transparency? How, if at all, should we consider transparency in the context of valuation?
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Aswath Damodaran 4 Sources of Complexity Accounting Standards Nature and mix of businesses Structuring of businesses Financing Choices
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Aswath Damodaran 5 1. Accounting Standards Inconsistency in applying accounting principles Operating leases versus Debt Investment in Plant & Equipment versus R&D Pooling versus Purchase Accounting Salary based compensation versus Option based compensation Fuzzy Accounting Standards One-time charges Hidden Assets Earnings Smoothing Unintended Consequences of Increased Disclosure
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Aswath Damodaran 6 2. Nature and Mix of Businesses Industry mix:  Diversification and increasing size has led many firms to enter  multiple businesses which often are very different. This makes the resulting  financial statements difficult to decipher. Country mix:  For other firms the complexity has come from global  expansion. The financial statements have to wrestle with questions of  exchange rate conversions and their effects on asset value and earnings.
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Aswath Damodaran 7 3. Structuring of Businesses Accounting for Cross Holdings: The different and often inconsistent ways in  which cross holdings are accounted for can make valuation hazardous.  With majority active holding, the full consolidation of financials even when the  firm owns less than 100% opens up the question of how to deal with minority  holdings. With minority holdings, tracing the income from the holding and the assets of the  holding can be difficult especially with private holdings. Creative holding structures: Special purpose entities and other such structures  can result in assets and liabilities being moved off the books (for legitimate  and illegitimate purposes).
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Aswath Damodaran 8 4. Financing Choices Financing choices have proliferated in the last two decades. From a simple 
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  • Fall '16
  • Aswath Damodaran

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