Valuation Models. Aswath Damodaran. 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.
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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.
CF to Equityt = Expected Cashflow to Equity in period t
ke = Cost of Equity
Firm Value = Unlevered Firm Value + PV of tax benefits of debt - Expected Bankruptcy Cost
Tax Benefit = Tax rate * Debt
PE = Market Price per Share / Earnings per Share
is sometimes the average price for the year
earnings per share in trailing 12 months (Trailing PE)
forecasted earnings per share next year (Forward PE)
forecasted earnings per share in future year
Multiple Variables that determine it…
PE Ratio Expected Growth, Risk, Payout Ratio
PBV Ratio Return on Equity, Expected Growth, Risk, Payout
PS Ratio Net Margin, Expected Growth, Risk, Payout Ratio
EVV/EBITDA Expected Growth, Reinvestment rate, Cost of capital
EV/ Sales Operating Margin, Expected Growth, Risk, Reinvestment
Dependent variable is: PE
R squared = 66.2% R squared (adjusted) = 63.1%
Variable Coefficient SE t-ratio prob
Constant 13.1151 3.471 3.78 0.0010
Growth rate 121.223 19.27 6.29 ≤ 0.0001
Emerging Market -13.8531 3.606 -3.84 0.0009
Emerging Market is a dummy: 1 if emerging market
0 if not
If value < Cost of development: 0
If PV of CFs from development > Cost of development: PV - Cost
If PV of CFs from development < Cost of development: 0
If PV of CF from expansion > Expansion Cost: PV - Expansion Cost
If PV of CF from expansion < Expansion Cost: 0