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dantemeetsdcf - 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 oF equity Firm Valuation : Value the entire business by discounting cash fow to the rm at cost oF capital Aswath Damodaran 3 The Value of a business rests on.. 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 ......... Discount Rate Firm:Cost of Capital Equity: Cost of Equity Value Firm: Value of Firm Equity: Value of Equity DISCOUNTED CASHFLOW VALUATION Length of Period of High Growth Aswath Damodaran 4 The nine circles of valuation hell.. With a special bonus circle Base Year & Accounting Fixation Death and taxes Grow baby, grow... It ! s all in the discount rate... Growth isn ! t free Terminal value as an ATM Debt ratios change.. Valuation garnishes... Per share value ? Aswath Damodaran 5 Illustration 1: Base Year Fixation.. You are valuing Exxon Mobil, using the fnancial statements oF the frm From 2005. The Following provides the key numbers: Revenues $320 billion EBIT (1-t) $ 40 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. Even without working through the numbers, which oF the Following conclusions are you most likely to draw at the end oF your valuation? The value will be greater than the price The value will be less than the price Tough to tell without working through the numbers Aswath Damodaran 6 Lesson 1.1: Normalizing Earnings An Example Aswath Damodaran 7 Lesson 1.2: And don t let accounting categorization trap you Valuation Input Accounting Definition Valuation Definition Capital Expenditures Internal investments in tangible assets Investment in long term assets. Will include a. R&D expenses for tech firms b. Acquisitions of other firms (cash as well as stock) c. Increases in operating lease commitments Depreciation and Amortization Follows accounting rules on depreciation and amortization Tax-deductible depreciation in tax books (not reporting books) Working Capital Current assets Current liabilities Non-cash Current Assets Non- debt current liabilities Aswath Damodaran 8 Illustration 2: Taxes and Value...
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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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dantemeetsdcf - Aswath Damodaran 1 Valuation Inferno: Dante...

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