An Introduction to Valuation. Aswath Damodaran. Some Initial Thoughts. " One hundred thousand lemmings cannot be wrong" Graffiti. We thought we were in the top of the eighth inning, when we were in the bottom of the ninth. Stanley Druckenmiller. A philosophical basis for Valuation.
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" One hundred thousand lemmings cannot be wrong" Graffiti
We thought we were in the top of the eighth inning,
when we were in the bottom of the ninth..
“Valuation is often not a helpful tool in determining when to sell hyper-growth stocks”, Henry Blodget, Merrill Lynch Equity Research Analyst in January 2000, in a report on Internet Capital Group, which was trading at $174 then.
Postscript: Internet Capital Group was trading at $ 3 in January 2001.
where CFt is the expected cash flow in period t, r is the discount rate appropriate given the riskiness of the cash flow and n 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.
In liquidation valuation, we value only investments already made
When valuing a going concern, we value both assets in place and growth assets
Firm Valuation: Value the entire business
Equity valuation: Value just the equity claim in the business
Value of business = Value of business with 100% equity financing + Present value of Expected Tax Benefits of Debt – Expected Bankruptcy Costs