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- Aswath Damodaran 1 Market Revelations Lessons learned unlearned and relearned from a crisis Aswath Damodaran www.damodaran.com Aswath Damodaran

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Unformatted text preview: Aswath Damodaran 1 Market Revelations Lessons learned, unlearned and relearned from a crisis Aswath Damodaran www.damodaran.com Aswath Damodaran 2 So, this is risk? Aswath Damodaran 3 The fundamentals Aswath Damodaran 4 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 5 The Value of a business rests on.. What are the cashflows from existing assets? What is the value added by growth assets? How risky are the cash flows from both existing assets and growth assets? When will the firm become a mature fiirm, and what are the potential roadblocks? Discount Rates Equity: Cost of equity Firm: Cost of capital Expected cashflows Equity: After debt payments Firm: Before debt payments Terminal Value Equity: Value of equity Firm: Value of firm Value today Equity: Value of equity Firm: Value of operating assets Aswath Damodaran 6 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 7 The way we were: Pre-September 12, Aswath Damodaran 7 The way we were: Pre-September 12, 2008 Aswath Damodaran 8 Treasuries were riskless… and rates were stable Aswath Damodaran 9 Risk premiums did not change over short periods… Aswath Damodaran 10 And only gradually over longer periods… Aswath Damodaran 11 Last year’s earnings and cash fows were a good staring point.....
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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.

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- Aswath Damodaran 1 Market Revelations Lessons learned unlearned and relearned from a crisis Aswath Damodaran www.damodaran.com Aswath Damodaran

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