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controlBrazil - T h e V a lu e o f C o n tr o l Aswath...

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Aswath Damodaran 1 The Value of Control Aswath Damodaran Home Page : www.damodaran.com E-Mail : [email protected] Stern School of Business
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Aswath Damodaran 2 Why control matters… When valuing a firm, the value of control is often a key factor is determining value. For instance, In acquisitions, acquirers often pay a premium for control that can be substantial When buying shares in a publicly traded company, investors often pay a premium for voting shares because it gives them a stake in control.\ In private companies, there is often a discount atteched to buying minority stakes in companies because of the absence of control.
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Aswath Damodaran 3 What is the value of control? The value of controlling a firm derives from the fact that you believe that you or someone else would operate the firm differently (and better) from the way it is operated currently. The expected value of control is the product of two variables: the change in value from changing the way a firm is operated the probability that this change will occur
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Aswath Damodaran 4 Discounted Cashflow Valuation: Basis for Approach where CF t is the expected cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and n is the life of the asset. Proposition 1: For an asset to have value, the expected cash flows have to be positive some time over the life of the asset. Proposition 2: Assets that generate cash flows early in their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate. Value of asset = CF 1 (1+r) 1 + CF 2 (1+r) 2 + CF 3 (1+r) 3 + CF 4 (1+r) 4 ..... + CF n (1+r) n
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Aswath Damodaran 5 Equity Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects only the cost of raising equity financing Growth Assets Figure 5.5: Equity Valuation Cash flows considered are cashflows from assets, after debt payments and after making reinvestments needed for future growth Present value is value of just the equity claims on the firm
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Aswath Damodaran 6 Firm Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects the cost of raising both debt and equity financing, in proportion to their use Growth Assets Figure 5.6: Firm Valuation Cash flows considered are cashflows from assets, prior to any debt payments but after firm has reinvested to create growth assets Present value is value of the entire firm, and reflects the value of all claims on the firm.
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Aswath Damodaran 7 Valuation with Infinite Life Cash flows Firm: Pre-debt cash flow Equity: After debt cash flows Expected Growth Firm: Growth in Operating Earnings Equity: Growth in Net Income/EPS CF 1 CF 2 CF 3 CF 4 CF 5 Forever Firm is in stable growth: Grows at constant rate forever Terminal Value CF n .........
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