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Unformatted text preview: Aswath Damodaran 1 Valuation Aswath Damodaran http://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 Equity Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects only the cost of raising equity financing Growth Assets Figure 5.5: Equity Valuation Cash flows considered are cashflows from assets, after debt payments and after making reinvestments needed for future growth Present value is value of just the equity claims on the firm Aswath Damodaran 7 Firm Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects the cost of raising both debt and equity financing, in proportion to their use Growth Assets Figure 5.6: Firm Valuation Cash flows considered are cashflows from assets, prior to any debt payments but after firm has reinvested to create growth assets Present value is value of the entire firm, and reflects the value of all claims on the firm. Aswath Damodaran...
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 Summer '10
 Aswath
 Valuation

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