crisis08 - September 12 to October 16 Five weeks from Hell!...

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Aswath Damodaran 1 September 12 to October 16 Five weeks from Hell! And the lessons we have learned… Aswath Damodaran
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Aswath Damodaran 2 The way things were. . Before the “troubles” Innocents led to the slaughter…
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Aswath Damodaran 3 Treasuries were riskless… and rates were stable
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Aswath Damodaran 4 And risk premiums did not change over short periods…
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Aswath Damodaran 5 And only gradually over longer periods…
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Aswath Damodaran 6 Real Economic Growth, Earnings Growth and Infation While we accepted the reality oF recessions, we viewed them as bumps in the road to a bigger and better economy. In other words, recessions caused minor blips in real economic growth that would be reversed in Future recoveries. And there was always China and India… We were even more optimistic about earnings growth. Companies could use ±nancial leverage, stock buybacks and ±nancial engineering tools to keep earnings growing Faster than the overall economy. Infation was a minor problem, because central banks had learned their lessons From the 1970s and would ±gure out ways to keep infation in check.
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Aswath Damodaran 7 Current Cashflow to Firm EBIT(1-t)= 5344 (1- .35 )= 3474 - Nt CpX= 350 - Chg WC 691 = FCFF 2433 Reinvestment Rate = 1041/3474 =29.97% Return on capital = 25.19% Expected Growth in EBIT (1-t) .30*.25=.075 7.5% Stable Growth g = 3%; Beta = 1.10; Debt Ratio= 20%; Tax rate=35% Cost of capital = 6.76% ROC= 6.76%; Reinvestment Rate=3/6.76=44% Terminal Value 5 = 2645/(.0676-.03) = 70,409 Cost of Equity 8.32% Cost of Debt (3.72%+. .75%)(1-.35) = 2.91% Weights
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crisis08 - September 12 to October 16 Five weeks from Hell!...

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