Damodaran on Valuation: Security Analysis for Investment and Corporate Finance
Ideally, the price paid for any asset should reflect the expected cash flow on that asset - but there are two problems that arise in every valuation. The first is that estimating cash flows is an exercise fraught with uncertainty, and the second is that picking the right model to use in valuing an asset is seldom easy. This can lead to significant errors in valuation. Sophisticated practitioners can accurately and consistently determine the value of all types of assets, when they rely on the seasoned advice found in Damodaran on Valuation. This applications-oriented tool covers the full range of available valuation models. It also presents the common elements within these models as well as the subtle variations, debunks the myth concerning their utility, and provides a framework for selecting the right model for any valuation scenario. Damodaran on Valuation systematically examines the three basic approaches to valuation - discounted cash-flow valuation, relative valuation, and contingent claim valuation - and the various models within these broad categories. With the help of numerous real-world examples involving both U.S. and international firms, the book illuminates the purpose of each particular model, its advantages and limitations, the step-by-step process involved in putting the model to work, and the kinds of firms to which it is best applied. Among the tools presented are those designed to estimate the cost of equityincluding the capital cost pricing model and arbitrage pricing model; estimate growth rates - with coverage of how to arrive at a weighted average of growth rates by blending three separate approaches; value equity - focusing on the Gordon Growth Model and the two-and three-stage dividend discount model; measure free cash flows to equity - assets that are carefully delineated from the dividends of most firms; value firms - including free cash flow to firm models, which are especially suited to highly leveraged firms; estimate the value of assets by looking at the pricing of comparable assets - with insight into the use and misuse of price/earning and price/book value ratios, and underutilized price-to-sales ratios; and measure the value of assets that share option characteristics - including a comparative look at the classic Black-Scholes and simpler binomial models. Supported by an optional IBM-compatible disk, which consists of spreadsheet programs designed to help users apply the models highlighted in the book, Damodaran on Valuation provides practitioners involved in securities analysis, portfolio management, M&A, and corporate finance with the knowledge they need to value any asset.
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INTRODUCTION TO VALUATION
APPROACHES TO VALUATION
ESTIMATION OF DISCOUNT RATES
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after-tax analysts approach assumptions average beta Black-Scholes bond rate book value call option capital spending CAPM changes comparable firms cost of capital cost of debt cost of equity cyclical firms debt ratio depreciation discount rate dividend yield dividend-discount model EBIT expected growth rate expected-growth rate extraordinary growth FCFF files firm value firm's flows to equity forecasts free cash flows fundamentals future growth Gordon growth model high-growth phase Illustration income increase inputs interest rate investment investors leverage market value option-pricing model P/BV ratio P/E ratio Payout ratio period portfolio present value profit margins projects rate in earnings rate of return regression Required rate restructuring Retention ratio share spreadsheet stable firm stable growth rate stock price strike price synergy T.Bond rate takeovers tax rate terminal price terminal value two-stage underlying asset undervalued valuation models value of equity value of firm variables variance WACC