valBrazil2007

valBrazil2007 - Valuation: First Principles and Loose Ends...

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Aswath Damodaran 1 Valuation: First Principles and Loose Ends Aswath Damodaran www.damodaran.com
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Aswath Damodaran 2 Some Initial Thoughts " One hundred thousand lemmings cannot be wrong" Graffiti
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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: 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.
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Aswath Damodaran 4 Approaches to Valuation Discounted cashflow valuation , relates the value of an asset to the present value of expected future cashflows 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, cashflows, book value or sales. Contingent claim valuation , uses option pricing models to measure the value of assets that share option characteristics.
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Aswath Damodaran 5 Discounted Cash Flow Valuation 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. Philosophical Basis : Every asset has an intrinsic value that can be estimated, based upon its characteristics in terms of cash flows, growth and risk. 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 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.
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Aswath Damodaran 6 DCF Choices: Equity Valuation versus Firm Valuation 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 cashflows to equity investors at the cost of equity.
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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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valBrazil2007 - Valuation: First Principles and Loose Ends...

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