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Unformatted text preview: Aswath Damodaran 1 Valuation: Many a slip between the cup and the lip Aswath Damodaran www.damodaran.com 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: Ones 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 lie o the asset to estimate the cash fows during the lie 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 inormation comes out about assets. Aswath Damodaran 6 DCF Choices: Equity Valuation versus Firm Valuation 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 shortlived(working capital) assets Expected Value that will be created by future investments Equity valuation : Value just the equity claim in the business Firm Valuation : Value the entire business Aswath Damodaran 7 Valuation with Infnite LiFe Cash flows Firm: Predebt cash flow Equity: After debt cash flows Expected Growth...
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 Summer '10
 Aswath
 Valuation

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