SloveniaCroatia2009

SloveniaCroatia2009 - Aswath Damodaran 1 Value: More than a...

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Unformatted text preview: Aswath Damodaran 1 Value: More than a Number Aswath Damodaran http://www.damodaran.com Croatia and Slovenia, May 2010 Aswath Damodaran 2 A motive for valuation and corporate Fnance " One hundred thousand lemmings cannot be wrong" GrafFti Aswath Damodaran 2 A motive for valuation and corporate Fnance " One hundred thousand lemmings cannot be wrong" GrafFti Aswath Damodaran 3 Lets start with an accounting balance sheet Assets Liabilities Fixed Assets Debt Equity Short-term liabilities of the firm Intangible Assets Long Lived Real Assets Assets which are not physical, like patents & trademarks Current Assets Financial Investments Investments in securities & assets of other firms Short-lived Assets Equity investment in firm Debt obligations of firm Current Liabilties Other Liabilities Other long-term obligations The Balance Sheet Aswath Damodaran 4 And replace it with a fnancial balance sheet 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 Aswath Damodaran 5 Corporate Finance: First Principles Aswath Damodaran 6 Connecting to Valuation Current Cashflows These are the cash flows from existing investment,s, net of any reinvestment needed to sustain future growth. They can be computed before debt cashflows (to the firm) or after debt cashflows (to equity investors). Expected Growth during high growth period Growth from new investments Growth created by making new investments; function of amount and quality of investments Efficiency Growth Growth generated by using existing assets better Length of the high growth period Since value creating growth requires excess returns, this is a function of- Magnitude of competitive advantages- Sustainability of competitive advantages Stable growth firm, with no or very limited excess returns Cost of financing (debt or capital) to apply to discounting cashflows Determined by- Operating risk of the company- Default risk of the company- Mix of debt and equity used in financing Terminal Value of firm (equity) Aswath Damodaran 7 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....
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SloveniaCroatia2009 - Aswath Damodaran 1 Value: More than a...

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