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Unformatted text preview: Aswath Damodaran 1 The Value of Control Aswath Damodaran Home Page : www.damodaran.com EMail : adamodar@stern.nyu.edu Stern School of Business Aswath Damodaran 2 Why control matters When valuing a frm, the value oF control is oFten a key Factor is determining value. or 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. Aswath Damodaran 3 What is the value of control? The value of controlling a Frm derives from the fact that you believe that you or someone else would operate the Frm 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 Frm is operated the probability that this change will occur Aswath Damodaran 4 Discounted Cashfow Valuation: Basis For Approach where C t is the expected cash fow in period t, r is the discount rate appropriate given the riskiness oF the cash fow and n is the liFe oF the asset. Proposition 1: For an asset to have value, the expected cash fows have to be positive some time over the lie o the asset. Proposition 2: Assets that generate cash fows early in their lie will be worth more than assets that generate cash fows later; the latter may however have greater growth and higher cash fows 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 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 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. Aswath Damodaran 7 Valuation with Infnite LiFe Cash flows Firm: Predebt 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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This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.
 Summer '10
 Aswath

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