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Unformatted text preview: Aswath Damodaran 1 Valuation Aswath Damodaran http://www.damodaran.com For the valuations in this presentation, go to Seminars/ Presentations Aswath Damodaran 2 Some Initial Thoughts " One hundred thousand lemmings cannot be wrong" GrafFti Aswath Damodaran 3 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. Aswath Damodaran 4 Approaches to Valuation ! Discounted cashfow valuation , relates the value of an asset to the present value of expected future cashFows 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, cashFows, book value or sales. ! Contingent claim valuation , uses option pricing models to measure the value of assets that share option characteristics. Aswath Damodaran 5 Discounted Cash Flow Valuation ! What is it : In discounted cash fow valuation, the value o¡ an asset is the present value o¡ the expected cash fows on the asset. ! Philosophical Basis : Every asset has an intrinsic value that can be estimated, based upon its characteristics in terms o¡ cash fows, growth and risk. ! Information Needed : To use discounted cash fow valuation, you need • to estimate the li¡e o¡ the asset • to estimate the cash fows during the li¡e o¡ the asset • to estimate the discount rate to apply to these cash fows to get present value ! Market InefFciency : Markets are assumed to make mistakes in pricing assets across time , and are assumed to correct themselves over time, as new in¡ormation comes out about assets. Aswath Damodaran 6 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 li¡e o¡ the asset. Proposition 2: Assets that generate cash fows early in their li¡e will be worth more than assets that generate cash fows later; the latter may however have greater growth and higher cash fows 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.
 Summer '10
 Aswath
 Valuation

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