...Aswath Damodaran 1 VALUATION Cynic: A person who knows the price of everything but the value of nothing.. Oscar Wilde First Principles 2 Maximize the value of the business (firm) The Investment Decision Invest in assets that earn a return greater than the minimum acceptable hurdle rate The Financing Decision Find the right kind of debt for your firm and the right mix of debt and equity to fund your operations The Dividend Decision If you cannot find investments that make your minimum acceptable rate, return the cash to owners of your business The hurdle rate should reflect the riskiness of the investment and the mix of debt and equity used to fund it. The return should reflect the magnitude and the timing of the cashflows as welll as all side effects. The optimal mix of debt and equity maximizes firm value The right kind of debt matches the tenor of your assets How much cash you can return depends upon current & potential investment opportunities How you choose to return cash to the owners will depend on whether they prefer dividends or buybacks Aswath Damodaran 2 Three approaches to valuaEon 3 ¨ ¨ ¨ Intrinsic valuaEon: The value of an asset is a funcEon of its fundamentals – cash flows, growth and risk. In general, ...
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...PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS INTERNATIONAL BUSINESS SCHOOL COURSE WORK « Business Valuation on the basis of Damodaran model » Corporate Finance Student: Pavel Terefera Supervisor: Irina Sokolnikova Moscow 2015 Contents Introduction _____________________________________________ 3 Chapter 1. Valuation______________________________________ 4 1.1 Valuation in portfolio management_________________________ 7 1.2 Valuation in acquisition__________________________________ 10 1.3 Valuation in corporate finance_____________________________ 10 Chapter 2. Approaches to Valuation___________________________ 11 2.1 Profitable Approach_____________________________________ 12 2.1.2 Income capitalization approach __________________________ 12 2.1.3Method of discounted cash flows__________________________ 14 2.1.4 Discounted Cash Flow Valuation on example of JSC NLMK____ 20 2.2 Relative Valuation Approach______________________________ 23 Conclusion _______________________________________________ 28 Bibliography ______________________________________________ 29 Introduction. Knowing the value of an asset may not be a guarantee for success for investor, but it does help us make more informed judgments. A postulate of sound investing is that an investor does not pay more for an asset than its worth. In conditions of market economy when all transactions are made "on fear and risk" their participants, both seller...
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...Basics Aswath Damodaran Aswath Damodaran 1 Discounted Cashflow Valuation: Basis for Approach t = n CF t Value = ∑ t t = 1( 1 +r) where CFt is the cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and t is the life of the asset. Proposition 1: For an asset to have value, the expected cash flows have to be positive some time over the life of the asset. Proposition 2: Assets that generate cash flows early in their life will be worth more than assets that generate cash flows later; the latter may however have greater growth and higher cash flows to compensate. Aswath Damodaran 2 Equity Valuation versus Firm Valuation n n Value just the equity stake in the business Value the entire business, which includes, besides equity, the other claimholders in the firm Aswath Damodaran 3 I.Equity Valuation n The value of equity is obtained by discounting expected cashflows to equity, i.e., the residual cashflows after meeting all expenses, tax obligations and interest and principal payments, at the cost of equity, i.e., the rate of return required by equity investors in the firm. t=n Value of Equity = CF to Equity t ∑ (1+ k )t t=1 e where, CF to Equityt = Expected Cashflow to Equity in period t ke = Cost of Equity n The dividend discount model is a specialized case of equity valuation, and the value of a stock is the present value of expected future dividends. Aswath Damodaran 4 II...
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...Structure Decision Aswath Damodaran Stern School of Business Aswath Damodaran 1 First Principles n Invest in projects that yield a return greater than the minimum acceptable hurdle rate. • The hurdle rate should be higher for riskier projects and reflect the financing mix used - owners’ funds (equity) or borrowed money (debt) • Returns on projects should be measured based on cash flows generated and the timing of these cash flows; they should also consider both positive and negative side effects of these projects. n n Choose a financing mix that minimizes the hurdle rate and matches the assets being financed. If there are not enough investments that earn the hurdle rate, return the cash to stockholders. • The form of returns - dividends and stock buybacks - will depend upon the stockholders’ characteristics. Aswath Damodaran 2 The Agenda n n n n What is debt? What determines the optimal mix of debt and equity for a company? How does altering the mix of debt and equity affect investment analysis and value at a company? What is the right kind of debt for a company? Aswath Damodaran 3 What is debt... n General Rule: Debt generally has the following characteristics: • Commitment to make fixed payments in the future • The fixed payments are tax deductible • Failure to make the payments can lead to either default or loss of control of the firm to the party to whom payments are due. Aswath Damodaran 4 What would you...
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...Corporate Finance Lecture Note Packet 2 Capital Structure, Dividend Policy and Valuation B40.2302 Aswath Damodaran Aswath Damodaran! 1! Capital Structure: The Choices and the Trade off Neither a borrower nor a lender be Someone who obviously hated this part of corporate finance Aswath Damodaran! 2! First Principles Aswath Damodaran! 3! The Choices in Financing There are only two ways in which a business can make money. • The first is debt. The essence of debt is that you promise to make fixed payments in the future (interest payments and repaying principal). If you fail to make those payments, you lose control of your business. • The other is equity. With equity, you do get whatever cash flows are left over after you have made debt payments. Aswath Damodaran! 4! Global Patterns in Financing… Aswath Damodaran! 5! And a much greater dependence on bank loans outside the US… Aswath Damodaran! 6! Assessing the existing financing choices: Disney, Aracruz and Tata Chemicals Aswath Damodaran! 7! Financing Choices across the life cycle Revenues $ Revenues/ Earnings Earnings Time External funding needs High, but constrained by infrastructure High, relative to firm value. Moderate, relative to firm value. Declining, as a percent of firm value Low, as projects dry up. Internal financing Negative or low Owner’s Equity Bank...
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...ideas . . . . . 12 4 Conclusion 19 ∗ Freie Universität Berlin, Germany, Chair of Finance and Banking, E-Mail LK@wacc.de. † Universität Paderborn, Germany, Chair of Finance and Investment, E-Mail AL@wacc.de. ‡ Universität Graz, Austria, Chair of Accounting and Auditing, E-Mail Gerwald.Mandl@uni-graz.at. 1 Electronic copy available at: http://ssrn.com/abstract=1651466 1 Introduction For several years, when setting discount rates Damodaran has advocated more consideration of country risk premiums (CRP ) when it comes to assessing companies with activities in emerging markets. We have to acknowledge that his approach is enjoying growing support among investment banks and auditing firms. At the same time, it is to be noted that Damodaran’s concept has failed to resonate sufficiently with the academic community. This is reason enough to perform a systematic analysis and critical discussion of his country risk premium concept. Damodaran’s initial considerations concerning a country risk premium can be found in Damodaran (1999a) and Damodaran (2003), with further essentially unchanged mentions in his more recent publications. In our contribution we will concentrate on the two aforementioned sources. 2 CRP concept In the following, we intend to give a neutral, that is, non-judgmental description of Damodaran’s country risk premium concept (CRPC). We will also attempt to provide a detailed reconstruction of Damodaran’s thought process which led to this approach. Risk-return...
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...Debt and Value: Beyond MillerModigliani Aswath Damodaran Stern School of Business Aswath Damodaran 1 The fundamental question: Does the mix of debt and equity affect the value of a business? 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 Assets in Place Debt Liabilities Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible Growth Assets Equity Residual Claim on cash flows Significant Role in management Perpetual Lives Different Value? Different Financing Mix? Aswath Damodaran 2 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. Aswath Damodaran 3 Valuation Models Asset Based Valuation Discounted Cashflow Models Relative Valuation Contingent Claim Models Liquidation Value Stable Replacement Cost Two-stage Three-stage or n-stage Current Equity Firm Sector Option to delay Option to expand Young firms Option to liquidate Equity in...
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...Acquisition Valuation Aswath Damodaran Aswath Damodaran 1 Issues in Acquisition Valuation I Acquisition valuations are complex, because the valuation often involved issues like synergy and control, which go beyond just valuing a target firm. It is important on the right sequence, including • When should you consider synergy? • Where does the method of payment enter the process. I I Can synergy be valued, and if so, how? What is the value of control? How can you estimate the value? Aswath Damodaran 2 Steps involved in an Acquisition Valuation I I I I I Step 1: Establish a motive for the acquisition Step 2: Choose a target Step 3: Value the target with the acquisition motive built in. Step 4: Decide on the mode of payment - cash or stock, and if cash, arrange for financing - debt or equity. Step 5: Choose the accounting method for the merger/acquisition purchase or pooling. Aswath Damodaran 3 Step 1: Motives behind acquisitions (1) Simplest rationale is undervaluation, i.e., that firms that are undervalued by financial markets, relative to true value, will be targeted for acquisition by those who recognize this anomaly. (2) A more controversial reason is diversification, with the intent of stabilizing earnings and reducing risk. (3) Synergy refers to the potential additional value from combining two firms, either from operational or financial sources. • • Operating Synergy can come from higher growth or lower costs Financial Synergy...
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...Instructor: Dr Xianming Zhou E‐mail: xianming.zhou@anu.edu.au Consultation hours: Thursday 2‐4pm Tutors Jan Drienkou (jan.drienko@anu.edu.au) Xiang Gao (xiang.gao@anu.edu.au) The purpose of this course is to offer students an applicationoriented approach to understanding how concepts and theories of finance are applied to investment decisions. Students will learn to value corporate entities using various techniques, including discounted cash flow and multiple based valuations. The methods and analytical techniques discussed in this course are heavily used in practice, which are helpful not only to financial managers in modern corporations but also to investors in financial markets. Introduction 2 Textbook and Course Materials Prescribed textbook: Damodaran, A. (2012), Investment Valuation, Wiley & Sons (3rd University edition) Lecture notes: available on the course Wattle site Valuation cases: Darden Business School cases to be distributed in class Recommended reading: Ross, S., Westerfield, R., and Jaffe, J., (2013) Corporate Finance. McGraw-Hill (10th edition) (RWJ) Study Groups All assignments and case reports are group-based. Form your study team by the end of week 2, each consisting 4 to 6 students. Students attendance is required for case discussions. A 2% penalty applies to each absence. At the conclusion of this course, each student will submit a confidential assessment of each group member’s overall contribution to the group’s work and performance. Introduction 3 ...
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...Aswath Damodaran 1 Sony: Background on Japanese firms n Japanese firms have proved to be among the most difficult to value for several reasons: • The earnings in 1999 for most Japanese firms was depressed relative to earnings earlier in the decade and in the 1980s, reflecting the Japanese economy • Japanese accounting standards tend to understate earnings and overstate book value of equity, as firms are allowed to set aside provisions for unspecified expenses • The earnings of many export oriented Japanese firms tends to be heavily influenced by exchange rate movements • The cross holdings that Japanese firms have in other firms, and the lack of transparency in these holdings, makes it difficult to value these holdings. Aswath Damodaran 2 Valuing Sony: August 2000 n n n n Sony had net income of 31 billion JPY in 1999, down from 76 billion JPY in 1997 and 38 billion in 1998. The return on equity at Sony dropped from 5.25% in 1997 to 2.13% in 1999. The firm paid out dividends of 21 billion JPY in 1999. Capital expenditures in 1999 amounted to 103 billion JPY, whereas depreciation is 76 billion JPY. Non-cash working capital at Sony in 1999 was 220 billion JPY on revenues of 2593 billion yet, yielding a non-cash working capital to revenue ratio of 8.48%. The long term government bond rate in Japan was 2% at the time of this valuation. Aswath Damodaran 3 Sony: Rationale for Model n n n n n We will normalize earnings to reflect...
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...University of South Carolina Moore School of Business FINA 761 (800): Advanced Corporate Finance Fall 2013 Instructor: Eric Powers |Class time: |T/TH 2:50 – 5:35 | |Location: |364 | |Office Hours: |TBD | |Office Hour Location: |BA 462 | |E-mail: |epowers@moore.sc.edu | |Course website: |blackboard.sc.edu | The objective of this course is deepen your understanding of the many issues faced by firms as they identify valuable investment opportunities, raise funds for those investment opportunities, distribute profits to share-holders and debt-holders and deal with the consequences of both good and bad investment financing decisions. We will expand on the concepts that you have learned in FINA 760 or in DMSB 715. Class time will be divided between lectures and case studies. My lectures will briefly review concepts from prior courses. The bulk of my lectures will present advanced material that will be new to you. It is assumed that you understand the concepts from your earlier finance and accounting courses. If not, it is your responsibility to review. In order to reduce your note-taking, my lecture notes will be available...
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...Analysis & Recommendations We estimate the range of values for the 48% common equity stake of ACS to be between $647 to 684 million under the Damodaran Modified World CAPM approach .This range of values is based on WACC values that range between 6.74% and 7.03% when the cost of equity capital is calculated using the Damodaran Modified World CAPM. At these valuations, the range of the total value of the 100% common equity of Autopista Central goes from $1.3 to 1.4 billion. This range of values is significantly higher than the amount of invested capital in the project of $813 million (including subordinated debt). Besides the fact that asking for an initial high price is a good idea in negotiations, we believe that ACS should ask for the highest value obtained in the Damodaran Modified World CAPM model or $685 million. This is recommended because we believe that Abertis and Santander should pay a control premium of 10 – 20% given the macro economic conditions of the time and the strategic value that the Autopista Central asset means for each prospective buyer. If we apply the 20% control premium to the highest range of the EHV based valuation of $556 million, we obtain a value of $667 million. This value is within range that ACS will be pressing to use under the more favorable discount rate that using the Damodaran Modified World CAPM provides them. Abertis, who is an expert in managing existing toll roads, would presumably be able to generate cost synergies if not...
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...AMITY INTERNATIONAL BUSINESS SCHOOL MBA (International Business) Course Title: Economic Analysis Programme Name: MBA (IB)/3C MBA Course Code: MIB 106 Semester: I Classroom contact hours: 40 hours Faculty: Prof. Ajit K Pandey Prof. Kshamta Chauhan Credit Units: 04 Prof. Harendra K Pandey Self Study hours: 80 hours Course Objective This course aims to integrate various principles and concepts from different fields of economics with typical problems of managerial decision-making and policy formulation in business organizations whether in a local or global context. Understanding the application of economic principles to key management decisions will provide guidance to increase value creation within organizations, and allows a better understanding of the external business environment in which organizations operate. Learning Outcomes At the end of this course the student will be able to • − Use the theory of the firm to model business organizations • − Apply demand theory to establish the elasticity of demand • − Use demand estimation to forecast demand trends and change • − Apply production theory to manage production • − Use cost theory to establish short and long run behavior • − Describe market structures to establish market equilibrium • − Use pricing strategies to enable organizational coherence • − Use macroeconomic principles to address market...
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...a brand is going to be largely created due to previous experiences with that brand. The company’s brand represents instant standards of that company for the customer, and once they are familiar, they can expect a certain level of standard. For example, a parent going to the movies will assume that a Disney movie is going to be family-friendly, or a coffee customer knows that a coffee from Starbucks will taste (relatively) the same every time they go to buy one. Another reason a brand is so important is because it is the most sustainable competitive advantage. According to Aswath Damodaran, professor of finance at New York University's Stern School of Business, a brand's value is simply about the extent to which it can sell its goods and services at a premium price. For example, Coca-Cola’s branding accounts for 80% of its market value, and is still going strong. Damodaran suggests that in order to keep this competitive advantage, you must preserve the illusion. When you mess with the illusion, you mess with how the brand is perceived. To use Coca-Cola again as an example, when they came out with the “New Coke” campaign in the 1980’s, they changed the entire formula based on market research to better suit their customers. However, the change proved to be disastrous as people did not accept the “new coke”. As a result, they returned back to the old formula, calling...
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...This paper addresses the valuation of firms by cash flow discounting. The first part shows that the four most commonly used discounted cash flow valuation methods (free cash flow discounted at the WACC; cash flow for equityholders discounted at the required return on the equity flows; capital cash flow discounted at the WACC before taxes; and Adjusted Present Value) always give the same value. The disagreements in the various theories on the valuation of the firm arise from the calculation of the discounted value of tax shields (VTS). The paper shows and analyses 7 different theories on the calculation of the VTS: Modigliani and Miller (1963), Myers (1974), Miller (1977), Miles and Ezzell (1980), Harris and Pringle (1985), Ruback (1995), Damodaran (1994), and Practitioners method. The paper also shows the changes that take place in the valuation formulas when the debt's market value does not match its book value. JEL Classification: G12, G31, M21 October 16, 2008 (First version: July 2, 1999) Another version of this paper may be found in chapters 17, 18, 19 and 21 of the author's book Valuation Methods and Shareholder Value Creation, 2002 Academic Press, San Diego, CA. Pablo Fernández. IESE Business School ∗ -2- This paper addresses the valuation of firms by cash flow discounting. The first part shows that the four most commonly used discounted cash flow valuation methods (free cash flow discounted at the WACC; cash flow for equityholders discounted at...
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