Damodaran equity valuation pdf

Equity represents a residual cashflow rather than a promised cashflow. Every asset has an intrinsic value that can be estimated, based upon its characteristics in terms of cash. This spreadsheet allows you to value a stable growth firm, with stable firm characteristics beta and return on equity and dividends that roughly match cash flows. For instance, a self valuation done by a target firm in a takeover is likely to be positively biased. The more accurate and realistic the valuation is, the more accurate will be the price to be paid. The two key numbers that drive value are the cost of equity, which is a function of the risk that emanates from the firms investments, and the return on equity, which is determined by the companys investment choices and regulatory restrictions. He has been called wall streets dean of valuation, and is widely respected as one of the. This makes that the structure of equity in a startup is very heterogeneous. Startups are generally characterised by negative earnings, pure equity financing and binary business models. As of now it is the best finance book i have ever read. Taught by professor aswath damodaran, one of the leaders in the field, advanced valuation is for analysts, financial officers, and portfolio managers seeking a deeper understanding of valuation, and the skills and knowledge to confidently make financial decisions.

Aswath damodaran 203 equity valuation the value of equity is obtained by discounting expected cash. Valuation with aswath damodaran nyu stern executive education. For several years, when setting discount rates aswath damodaran, ph. There are dozens of valuation models but only two valuation approaches. Even if we use the modified version of the model and treat stock buybacks as dividends, we may misvalue firms that consistently return. A survey of professional practice pinto, robinson, and stowe 2015, had the objective of documenting professional practice in the selection of equity valuation approaches. Buy investment valuation 3rd edition 9781118735 by aswath damodaran for up to 90% off at. Nov 26, 2017 consequently, changes in the regulatory environment can create large shifts in value. How to value a company, pick a stock, and profit by aswath damodaran how do you determine if a stock is overpriced or a bargain. I describe myself as a teacher first, who also happens to love untangling the puzzles of corporate finance and valuation, and writing about my experiences. Damodaran 21 the value of growth in any valuation model, it is possible to extract the portion of the value that can be attributed to growth, and to break this down further into that portion attributable to high growth and the portion attributable to stable growth. We examine explanations for why active value investing may not provide the promised payoffs.

While value investing looks impressive on paper, the performance of value investors, as a whole, is no better than that of less sensible investors who chose other investment philosophies and strategies. Implied growth rate our value for con ed is different from the market price and this is likely to be the. Professor aswath damodaran is currently a professor of finance at nyus stern school of business. Basis for approach where cf t 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. Given its importance, it is surprising how haphazard the estimation of equity risk premiums remains in practice. Mix play all mix aswath damodaran youtube aswath damodaran laws of valuation. Valuing financial services firms by aswath damodaran ssrn. I am a teacher first, who also happens to love untangling the puzzles of corporate finance and valuation, and writing about my experiences. This is a pdf file and works well if you have an ipad or tablet to read it on if you have trouble printing this file, download the powerpoint file. In the case of the 2stage ddm, this can be accomplished as follows. It is about valuing and pricing small businesses and big ones, simple businesses and complex ones, young firms and those in distress.

Revealing the myths and misconceptions full keynote duration. Introduction to valuation updated for spring 2020 class. Aswath damodaran 5 discounted cash flow valuation what is it. The dividend discount model uses a strict definition of cash flow to equity, whereas the fcfe model uses an expansive definition of cash flow to equity as the residual cash flow after meeting all financial obligations and investment needs. Please calculate the postmoney value of bank of america and of mr a. An application of the equity cash flow and the residual income approach in bank financial accounting statements eleftherios aggelopoulos financial accounting, department of business administration, university of patras, riopatras, greece abstract. Taught by valuation guru aswath damodaran, this program provides the fundamentals of the different valuation approaches, an understanding of the limitations of each approach, and examples of each of the applications. A survey of the theory and evidence aswath damodaran stern school of business, new york university, 44 w. Managing general partner, boston millennia partners michael larsen, senior associate, life sciences introduction you have met with several venture firms, responded to countless due diligence inquiries, and a strong lead. To protect their interests, equity investors in young companies often.

Relative valuation, estimates the value of an asset by looking at the pricing of comparable assets relative to a common variable like earnings, cash. Valuation methods are the methods to value a businesscompany which is the primary task of every financial analyst and there are five methods for valuing company which are discounted cash flow which is present value of future cash flows, comparable company analysis, comparable transaction comps, asset valuation which is fair value of assets and sum of parts where. Damodaran 1994 a measure of free cash flow to equity that. My name is aswath damodaran and i teach corporate finance and valuation at the stern school of business at new york university. Aswath damodaran 2 summarizing the inputs in summary, at this stage in the process, we should have an estimate of the the current cash. A valuation is an objective search for true value truth 1. We argue that financial services firms should be valued using equity valuation models, rather than enterprise valuation models, and with actual or potential dividends used as cash flows. Mar 19, 2018 the equity risk premium is the price of risk in equity markets and is a key input in estimating costs of equity and capital in both corporate finance and valuation. There are as many models for valuing stocks and businesses as there are analysts performing valuations. Pv of the fcf to firm during the horizon period pv of the residual value pv of the tax benefit on the wdv of the assets, 80ia, 10a10b sales tax, etc. Aswath damodaran investment valuation easyonlinebooks. The chapter explains discounted cash flow dcf models that value equity directly. The value of equity for each investor has to take into account those various features in order to determine the firms value for each investor. Chapter 14 free cash flow to equity discount models the dividend discount model is based upon the premise that the only cashflows received by stockholders is dividends.

I n a best selling book on the valuation of c ompanies written by three consultants koller et al. The final value under the fcf to the firm approach the value is the summation of. Aswath damodaran 3 misconceptions about valuation myth 1. Sep 19, 2018 aswath damodaran i am a professor of finance at the stern school of business at nyu. The important point here is the realistic determination of the companys value. Because private equity funds have incentives to acquire, add value, and then exit within the lifetime of the fund, they are considered buytosell investors. Planning the exit route for the investment is a critical role for the gp, and a welltimed and executed investment can be a significant source of realized value. Aswath damodaran has a blunt message for companies considering an acquisition. We also consider forwardlooking measures derived from analysts forecasts of eps earnings per share and longterm growth in eps, such as 2year out consensus eps. Valuation methods guide to top 5 equity valuation models.

Mr a was holding 5% equity before issuing of a share, thus pre money valuation of mr a. Startup valuation of biotech companies with real options a case study of the startup organovo holdings, inc. Damodaran 1994 defines a measure of free cash flow to equity that captures the cash flow left over all reinvestment needs and debt payments9. Security analysis for investment and corporate finance 2nd edition, aswath damodaran this was a great book. Equity discounted cash flow models damodaran on valuation. The one number to value netflix, i bring together the value of existing and new subscribers and net out the corporate cost drag.

Damodaran 15 approaches to valuation discounted cash. Equity valuation using multiples 7 taxes, depreciation, and amortization, and historical accrualbased measures, such as sales, earnings, and book value of equity. While this does not make the valuation worthless, it suggests that the analysis should be viewed with skepticism. I firmly believe that acquisitions are an addiction, that once companies start to grow through acquisitions, they cannot stop, he told the audience at the cfa institute equity research and valuation conference 2018.

Post money valuation overview, formula calculation with. It is about valuation in all its many forms and i hope that by the end of this class, you can value just about anything that has a value and price just about everything else. There are a number of methods used in business valuation, with different methods more. The cfa institute survey of the equity valuation practices of its members, equity valuation. Finally, the last point in time when startups value matters is when this company wants. I teach classes in corporate finance and valuation, primarily to mbas, but generally to anyone who will listen. Cornell and damodaran 2014 studied the role of market sentiment in the case of tesla motors. I teach corporate finance, valuation and investment philosophies at the stern school of business at new york university. Advanced valuation with aswath damodaran nyu stern. This master thesis examines several valuations methods for young companies.