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Unformatted text preview: Aswath Damodaran 1 Valuation Aswath Damodaran http://www.stern.nyu.edu/~adamodar Aswath Damodaran 2 Some Initial Thoughts " One hundred thousand lemmings cannot be wrong" Graffiti Aswath Damodaran 3 A philosophical basis for Valuation n Many investors believe that the pursuit of 'true value' based upon financial fundamentals is a fruitless one in markets where prices often seem to have little to do with value. n There have always been investors in financial markets who have argued that market prices are determined by the perceptions (and misperceptions) of buyers and sellers, and not by anything as prosaic as cashflows or earnings. n Perceptions matter, but they cannot be all the matter. n Asset prices cannot be justified by merely using the bigger fool theory. Aswath Damodaran 4 Misconceptions about Valuation n 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. n 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. n 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 5 Approaches to Valuation n Discounted cashflow valuation , relates the value of an asset to the present value of expected future cashflows on that asset. n 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. n Contingent claim valuation , uses option pricing models to measure the value of assets that share option characteristics. Aswath Damodaran 6 Discounted Cash Flow Valuation n 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. n Philosophical Basis : Every asset has an intrinsic value that can be estimated, based upon its characteristics in terms of cash flows, growth and risk. n 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 n 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. Aswath Damodaran 7 Valuing a Firm n The value of the firm is obtained by discounting expected cashflows to the firm, i.e., the residual cashflows after meeting all operating expenses andfirm, i....
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 Summer '10
 Aswath
 Valuation

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