TenErrorsIndia2010

TenErrorsIndia2010 - Valuation Inferno: Dante meets DCF...

Info iconThis preview shows pages 1–10. Sign up to view the full content.

View Full Document Right Arrow Icon
Aswath Damodaran 1 Valuation Inferno: Dante meets DCF… l Abandon every hope, ye who enter here z Aswath Damodaran www.damodaran.com
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 2 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 ²rm at cost o± capital
Background image of page 2
Aswath Damodaran 3 The Value of a business rests on. ..
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 4 The nine circles of valuation hell. . With a special bonus circle… Base Year & Accounting Fixation Death and taxes Grow baby, grow. .. It ! s all in the discount rate. .. Growth isn ! t free Terminal value as an ATM Debt ratios change. . Valuation garnishes. .. Per share value ?
Background image of page 4
Aswath Damodaran 5 Illustration 1: Base Year fxation…. You are valuing Exxon Mobil, using data From the most recent fscal year (2008). The Following provides the key numbers: Revenues $477 billion EBIT (1-t) $ 58 billion Net Cap Ex $ 3 billion Chg WC $ 1 billion ±C±± $ 54 billion The cost oF capital For the frm is 8% and you use a very conservative stable growth rate oF 2% to value the frm. The market cap For the frm is $330 billion and it has $ 10 billion in debt outstanding. a. How under or over valued is the equity in the frm? b. Would you buy the stock based on this valuation? Why or why not?
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 6 Normalization… not easy to do… but you don ` t have a choice…
Background image of page 6
Aswath Damodaran 7 And one possible response… Step 2: Look for relationship Regression of Exxon income against oil price Op Inc = -6,934 + 911 (Price per barrel of oil) R squared = 94% Step 1: Look at history Step 3: Run simulation
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 8 Illustration 2: Taxes and Value Assume that you have been asked to value a company and have been provided with the most recent year ` s fnancial statements: EBITDA 140 - DA 40 EBIT 100 - Interest exp 20 Taxable income 80 Taxes 32 Net Income 48 Assume also that cash Fows will be constant and that there is no growth in perpetuity . What is the ±ree cash Fow to the frm? a) 88 million (Net income + Depreciation) b) 108 million (EBIT – taxes + Depreciation) c) 100 million (EBIT (1-tax rate)+ Depreciation) d) 60 million (EBIT (1- tax rate)) e) 48 million (Net Income) ±) 68 million (EBIT – Taxes) Free Cash fow to ±rm EBIT (1- tax rate) -(Cap Ex – Depreciation) - Change in non-cash WC =FCFF
Background image of page 8
Aswath Damodaran 9 Illustration 3: High Growth for how long… Assume that you are valuing a young, high growth Frm with great potential, just after its initial public offering. How long would you set your high growth period?
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 10
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 12/01/2011 for the course FINANCE 350 taught by Professor Aswath during the Summer '10 term at NYU.

Page1 / 48

TenErrorsIndia2010 - Valuation Inferno: Dante meets DCF...

This preview shows document pages 1 - 10. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online