One time and non recurring charges n assume that you

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III. One-Time and Non-recurring Charges n Assume that you are valuing a firm that is reporting a loss of $ 500 million, due to a one-time charge of $ 1 billion. What is the earnings you would use in your valuation? o A loss of $ 500 million o A profit of $ 500 million Would your answer be any different if the firm had reported one-time losses like these once every five years? o Yes o No
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Aswath Damodaran 17 IV. Dealing with Negative or Abnormally Low Earnings A Framework for Analyzing Companies with Negative or Abnormally Low Earnings Why are the earnings negative or abnormally low? Temporary Problems Cyclicality: Eg. Auto firm in recession Life Cycle related reasons: Young firms and firms with infrastructure problems Leverage Problems: Eg. An otherwise healthy firm with too much debt. Long-term Operating Problems: Eg. A firm with significant production or cost problems. Normalize Earnings Value the firm by doing detailed cash flow forecasts starting with revenues and reduce or eliminate the problem over time.: (a) If problem is structura l: Target for operating margins of stable firms in the sector. (b) If problem is leverage : Target for a debt ratio that the firm will be comfortable with by end of period, which could be its own optimal or the industry average. (c) If problem is operating : Target for an industry-average operating margin. If firm’s size has not changed significantly over time Average Dollar Earnings (Net Income if Equity and EBIT if Firm made by the firm over time If firm’s size has changed over time Use firm’s average ROE (if valuing equity) or average ROC (if valuing firm) on current BV of equity (if ROE) or current BV of capital (if ROC)
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  • One '11
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  • Interest, Expense, Generally Accepted Accounting Principles, Operating expense, Aswath Damodaran

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