TenErrorsBrazil2011

TenErrorsBrazil2011 - Aswath Damodaran 1 Valuation Inferno...

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Unformatted text preview: Aswath Damodaran 1 Valuation Inferno: Dante meets DCF… l Abandon every hope, ye who enter here z 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 l true z 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 DCF Choices: Equity versus Firm 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 Equity valuation : Value just the equity claim in the business by discounting cash fows to equity at the cost o¡ equity Firm Valuation : Value the entire business by discounting cash fow to the ¢rm at cost o¡ capital Aswath Damodaran 5 The Value of a business rests on... Aswath Damodaran 6 Cashflow to Firm EBIT (1-t)- (Cap Ex - Depr)- Change in WC = FCFF Expected Growth Reinvestment Rate * Return on Capital FCFF 1 FCFF 2 FCFF 3 FCFF 4 FCFF 5 Forever Firm is in stable growth: Grows at constant rate forever Terminal Value= FCFF n+1 /(r-g n ) FCFF n ......... Cost of Equity Cost of Debt (Riskfree Rate + Default Spread) (1-t) Weights Based on Market Value Discount at WACC= Cost of Equity (Equity/(Debt + Equity)) + Cost of Debt (Debt/(Debt+ Equity)) Value of Operating Assets + Cash & Non-op Assets = Value of Firm- Value of Debt = Value of Equity Riskfree Rate :- No default risk- No reinvestment risk- In same currency and in same terms (real or nominal as cash flows + Beta- Measures market risk X Risk Premium- Premium for average risk investment Type of Business Operating Leverage Financial Leverage Base Equity Premium Country Risk Premium DISCOUNTED CASHFLOW VALUATION Aswath Damodaran 7 Current Cashflow to Firm EBIT(1-t)= :7336(1- .28 )= 6058- Nt CpX= 6443 - Chg WC 37 = FCFF - 423 Reinvestment Rate = 6480/6058 =106.98% Return on capital = 18.26% Expected Growth in EBIT (1-t) .60*.16=.096 9.6% Stable Growth g = 4%; Beta = 1.10; Debt Ratio= 20%; Tax rate=35 Cost of capital = 8.08% Cost of capital = 8....
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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.

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TenErrorsBrazil2011 - Aswath Damodaran 1 Valuation Inferno...

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