dcfval - Valuation Aswath Damodaran http:/www.damodaran.com...

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Aswath Damodaran Valuation Aswath Damodaran http://www.damodaran.com
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Aswath Damodaran Some Initial Thoughts " One hundred thousand lemmings cannot be wrong" Graffiti
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Aswath Damodaran Misconceptions about Valuation Myth 1: A valuation is an objective search for “true” value Truth 1.1: All valuations are biased. The only questions are how much and in which direction. Truth 1.2: The direction and magnitude of the bias in your valuation is directly proportional to who pays you and how much you are paid. Myth 2.: A good valuation provides a precise estimate of value Truth 2.1: There are no precise valuations Truth 2.2: The payoff to valuation is greatest when valuation is least precise. Myth 3: . The more quantitative a model, the better the valuation Truth 3.1: One’s understanding of a valuation model is inversely proportional to the number of inputs required for the model. Truth 3.2: Simpler valuation models do much better than complex ones.
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Aswath Damodaran Approaches to Valuation Discounted cashflow valuation , relates the value of an asset to the present value of expected future cashflows on that asset. Relative valuation , estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales. Contingent claim valuation , uses option pricing models to measure the value of assets that share option characteristics.
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Aswath Damodaran Discounted Cash Flow Valuation What is it : In discounted cash flow valuation, the value of an asset is the present value of the expected cash flows on the asset. Philosophical Basis : Every asset has an intrinsic value that can be estimated, based upon its characteristics in terms of cash flows, growth and risk. Information Needed : To use discounted cash flow valuation, you need to estimate the life of the asset to estimate the cash flows during the life of the asset to estimate the discount rate to apply to these cash flows to get present value Market Inefficiency : Markets are assumed to make mistakes in pricing assets across time , and are assumed to correct themselves over time, as new information comes out about assets.
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Aswath Damodaran 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.
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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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dcfval - Valuation Aswath Damodaran http:/www.damodaran.com...

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