Brazil2008 - Aswath Damodaran 1 Valuation Inferno Dante...

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Unformatted text preview: Aswath Damodaran 1 Valuation Inferno: Dante meets DCF… “ Abandon every hope, ye who enter here” Aswath Damodaran www.damodaran.com Aswath Damodaran 2 DCF Choices: Equity versus Firm Assets Liabilities Assets in Place Debt Equity Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Residual Claim on cash flows Significant Role in management Perpetual Lives Growth Assets Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Equity valuation : Value just the equity claim in the business by discounting cash fows to equity at the cost o¡ equity Firm Valuation : Value the entire business by discounting cash fow to the ¢rm at cost o¡ capital Aswath Damodaran 3 The Value of a business rests on.. Aswath Damodaran 4 Cashflow to Firm EBIT (1-t)- (Cap Ex - Depr)- Change in WC = FCFF Expected Growth Reinvestment Rate * Return on Capital FCFF 1 FCFF 2 FCFF 3 FCFF 4 FCFF 5 Forever Firm is in stable growth: Grows at constant rate forever Terminal Value= FCFF n+1 /(r-g n ) FCFF n ......... Cost of Equity Cost of Debt (Riskfree Rate + Default Spread) (1-t) Weights Based on Market Value Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity)) Value of Operating Assets + Cash & Non-op Assets = Value of Firm- Value of Debt = Value of Equity Riskfree Rate :- No default risk- No reinvestment risk- In same currency and in same terms (real or nominal as cash flows + Beta- Measures market risk X Risk Premium- Premium for average risk investment Type of Business Operating Leverage Financial Leverage Base Equity Premium Country Risk Premium DISCOUNTED CASHFLOW VALUATION Aswath Damodaran 5 The nine circles of valuation hell.. With a special bonus circle… Aswath Damodaran 5 The nine circles of valuation hell.. With a special bonus circle… Aswath Damodaran 6 Illustration 1: Base Year fxation…. You are valuing Exxon Mobil, using the fnancial statements oF the frm From 2007. The Following provides the key numbers: Revenues $377 billion EBIT (1-t) $ 42 billion Net Cap Ex $ 3 billion Chg WC $ 1 billion The cost oF capital For the frm is 8% and you use a very conservative stable growth rate oF 2% to value the frm. The market cap For the frm is $466 billion and it has $ 9 billion in debt outstanding. a. How under or over valued is the equity in the frm? b. Would you buy the stock based on this valuation? Why or why not? Aswath Damodaran 7 Normalization… not easy to do… but… Aswath Damodaran 8 Vale: A Case for Normalization? Year 2004 2005 2006 2007 Revenues $27,544 $33,993 $45,291 $64,764 Operating Income $10,857 $14,854 $20,088 $29,315 Net Income $6,460 $10,443 $13,431 $20,006 Earnings per share $1.40 $2.27 $2.78 $4.14 CRB Metals Index 357.69 440.85 693.88 811.85 Deflated Revenues $27,544.00 $27,580.71 $23,347.18 $28,534.13 1. If you use current earnings as your base, are you likely to Fnd the Frm to be under or over valued?...
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Brazil2008 - Aswath Damodaran 1 Valuation Inferno Dante...

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