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Unformatted text preview: Aswath Damodaran 1 Valuation: Part I Discounted Cash Flow Valuation B40.3331 Aswath Damodaran Aswath Damodaran 2 Risk Adjusted Value: Three Basic Propositions The value of an asset is the present value of the expected cash ows on that asset, over its expected life: Proposition 1: If it does not affect the cash Fows or alter risk (thus changing discount rates), it cannot affect value. Proposition 2: or an asset to have value, the expected cash Fows have to be positive some time over the life of the asset. Proposition 3: Assets that generate cash Fows early in their life will be worth more than assets that generate cash Fows later; the latter may however have greater growth and higher cash Fows to compensate. Aswath Damodaran 3 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 shortlived(working capital) assets Expected Value that will be created by future investments Equity valuation : Value just the equity claim in the business Firm Valuation : Value the entire business Aswath Damodaran 4 Equity Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects only the cost of raising equity financing Growth Assets Figure 5.5: Equity Valuation Cash flows considered are cashflows from assets, after debt payments and after making reinvestments needed for future growth Present value is value of just the equity claims on the firm Aswath Damodaran 5 Firm Valuation Assets Liabilities Assets in Place Debt Equity Discount rate reflects the cost of raising both debt and equity financing, in proportion to their use Growth Assets Figure 5.6: Firm Valuation Cash flows considered are cashflows from assets, prior to any debt payments but after firm has reinvested to create growth assets Present value is value of the entire firm, and reflects the value of all claims on the firm. Aswath Damodaran 6 Firm Value and Equity Value To get from rm value to equity value, which of the following would you need to do? A. Subtract out the value of long term debt B. Subtract out the value of all debt C. Subtract the value of any debt that was included in the cost of capital calculation D. Subtract out the value of all liabilities in the rm Doing so, will give you a value for the equity which is A. greater than the value you would have got in an equity valuation B. lesser than the value you would have got in an equity valuation C. equal to the value you would have got in an equity valuation Aswath Damodaran 7 Cash Flows and Discount Rates Assume that you are analyzing a company with the following cashows for the next ve years....
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 Fall '11
 BANKO
 Valuation

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