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Aswath Damodaran
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.
• Truth 1.2: The direction and magnitude of the bias in your valuation is
directly proportional to who pays you and how much you are paid.
■ Myth 2.: A good valuation provides a precise estimate of value
• Truth 2.1: There are no precise valuations
• Truth 2.2: The payoff to valuation is greatest when valuation is least
precise.
■ Myth 3: . The more quantitative a model, the better the valuation
• Truth 3.1: One’s understanding of a valuation model is inversely
proportional to the number of inputs required for the model.
• Truth 3.2: Simpler valuation models do much better than complex ones.
Aswath Damodaran
Approaches to Valuation
Valuation Models
Equity Valuation Firm Valuation
Models Models
Patent Undeveloped
Reserves
Dividends
Aswath Damodaran
Basis for all valuation approaches
■ The use of valuation models in investment decisions (i.e., in decisions
on which assets are under valued and which are over valued) are based
upon
• a perception that markets are inefficient and make mistakes in assessing
value
• an assumption about how and when these inefficiencies will get corrected
■ In an efficient market, the market price is the best estimate of value.
The purpose of any valuation model is then the justification of this
value.
Aswath Damodaran
Discounted Cash Flow Valuation
■ What is it: In discounted cash flow valuation, the value of an asset is
the present value of the expected cash flows on the asset.
■ Philosophical Basis: Every asset has an intrinsic value that can be
estimated, based upon its characteristics in terms of cash flows,
growth and risk.
■ Information Needed: To use discounted cash flow valuation, you
need
• to estimate the life of the asset
• to estimate the cash flows during the life of the asset
• to estimate the discount rate to apply to these cash flows to get present
value
■ Market Inefficiency: Markets are assumed to make mistakes in
pricing assets across time, and are assumed to correct themselves over
time, as new information comes out about assets.
Aswath Damodaran
Discounted Cashflow Valuation: Basis for
Approach
t = n CF
Value = ∑ t
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
Equity Valuation versus Firm Valuation
■ Value just the equity stake in the business
■ Value the entire business, which includes, besides equity, the other
claimholders in the firm
Aswath Damodaran
I.Equity Valuation
■ 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 CF to Equity
Value of Equity= ∑ (1+ k e ) t
t
t=1
where,
CF to Equityt = Expected Cashflow to Equity in period t
ke = Cost of Equity
■ Forms: 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. In the more general
version, you can consider the cashflows left over after debt payments and reinvestment
needs as the free cashflow to equity.
Aswath Damodaran
II. Firm Valuation
■ Cost of capital approach: The value of the firm is obtained by
discounting expected cashflows to the firm, i.e., the residual cashflows
after meeting all operating expenses and taxes, but prior to debt
payments, at the weighted average cost of capital, which is the cost of
the different components of financing used by the firm, weighted by
their market value proportions.
t= n
CF to Firm t
Value of Firm = ∑ t
t =1 (1+ WACC)
■ APV approach: The value of the firm can also be written as the sum
of the value of the unlevered firm and the effects (good and bad) of
debt.
Firm Value = Unlevered Firm Value + PV of tax benefits of debt Expected
Bankruptcy Cost
Aswath Damodaran
Generic DCF Valuation Model
DISCOUNTED CASHFLOW VALUATION
Expected Growth
Cash flows Firm: Growth in
Firm: Predebt cash Operating Earnings
flow Equity: Growth in
Equity: After debt Net Income/EPS Firm is in stable growth:
cash flows Grows at constant rate
forever
Terminal Value
CF1 CF2 CF3 CF4 CF5 CFn
Value .........
Firm: Value of Firm Forever
Equity: Value of Equity
Length of Period of High Growth
Discount Rate
Firm:Cost of Capital
Equity: Cost of Equity
Aswath Damodaran 1
VALUING ABN AMRO
ROE = 16%
Retention
Ratio =
Dividends 41.56% Expected Growth
EPS = 1.54 Eur 41.56% * g =4%: ROE = 8.95%(=Cost of equity)
* Payout Ratio 58.44% 16% = 6.65% Beta = 1.00
DPS = 0.90 Eur Payout = (1 4/8.95) = .553
Terminal Value= EPS 6*Payout/(rg)
= (2.21*.553)/(.0895.04) = 24.69
EPS 1.64 Eur 1.75 Eur 1.87 Eur 1.99 Eur 2.12 Eur
Value of Equity per
share = 20.48 Eur DPS 0.96 Eur 1.02 Eur 1.09 Eur 1.16 Eur 1.24 Eur
.........
Forever
Discount at Cost of Equity
Cost of Equity
4.95% + 0.95 (4%) = 8.75%
Riskfree Rate :
Long term bond rate in
Risk Premium
Euros Beta 4%
4.95% + 0.95 X
Average beta for European banks =
0.95 Mature Market Country Risk
4% 0%
Aswath Damodaran 1
Aswath Damodaran 1
Avg Reinvestment
rate = 25.08%
Embraer: Status Quo ($) Return on Capital
Reinvestment Rate 21.85%
25.08% Stable Growth
Current Cashflow to Firm Expected Growth g = 4.17%; Beta = 1.00;
EBIT(1t) : $ 404 in EBIT (1t) Country Premium= 5%
Nt CpX 23 .2185*.2508=.0548 Cost of capital = 8.76%
Chg WC 9 5.48% ROC= 8.76%; Tax rate=34%
= FCFF $ 372 Reinvestment Rate=g/ROC
Reinvestment Rate = 32/404= 7.9% =4.17/8.76= 47.62%
Terminal Value
5= 288/(.0876.0417) = 6272
$ Cashflows
Op. Assets $ 5,272 Term Yr
+ Cash: 795 Year 1 2 3 4 5 549
Debt 717 EBIT(1t) 426 449 474 500 527 261
Minor. Int. 12 Reinvestment 107 113 119 126 132 = 288
=Equity 5,349 = FCFF 319 336 355 374 395
Options 28
Value/Share $7.47
R$ 21.75 $ Cost of Capital (WACC) = 10.52% (.84) + 6.05% (0.16) = 9.81%
Discount at
On October 6, 2003
Cost of Equity Cost of Debt Embraer Price = R$15.51
10.52 % (4.17%+1%+4%)(1.34) Weights
= 6.05% E = 84% D = 16%
Riskfree Rate:
$ Riskfree Rate= 4.17% Beta Mature market Country Equity Risk
+ 1.07 X premium + Lambda
0.27
X Premium
4 % 7.67%
Aswath Damodaran 1
Current Current
Revenue Margin: Stable Growth
$ 3,804 49.82% Cap ex growth slows Stable
and net cap ex Stable Stable ROC=7.36%
decreases Revenue EBITDA/ Reinvest
EBIT Growth: 5% Sales 67.93%
1895m Revenue EBITDA/Sales 30%
Growth: > 30%
NOL: 13.33%
2,076m Terminal Value= 677(.0736.05)
=$ 28,683
Term. Year
Revenues $3,804 $5,326 $6,923 $8,308 $9,139 $10,053 $11,058 $11,942 $12,659 $13,292 $13,902
EBITDA ($95) $ 0 $346 $831 $1,371 $1,809 $2,322 $2,508 $3,038 $3,589 $ 4,187
EBIT ($1,675) ($1,738) ($1,565) ($1,272) $320 $1,074 $1,550 $1,697 $2,186 $2,694 $ 3,248
EBIT (1t) ($1,675) ($1,738) ($1,565) ($1,272) $320 $1,074 $1,550 $1,697 $2,186 $2,276 $ 2,111
+ Depreciation $1,580 $1,738 $1,911 $2,102 $1,051 $736 $773 $811 $852 $894 $ 939
Cap Ex $3,431 $1,716 $1,201 $1,261 $1,324 $1,390 $1,460 $1,533 $1,609 $1,690 $ 2,353
Chg WC $ 0 $46 $48 $42 $25 $27 $30 $27 $21 $19 $ 20
Value of Op Assets $ 5,530 FCFF ($3,526) ($1,761) ($903) ($472) $22 $392 $832 $949 $1,407 $1,461 $ 677
+ Cash & Nonop $ 2,260 1 2 3 4 5 6 7 8 9 10
= Value of Firm $ 7,790 Forever
Value of Debt $ 4,923 Beta 3.00 3.00 3.00 3.00 3.00 2.60 2.20 1.80 1.40 1.00
= Value of Equity $ 2867 Cost of Equity 16.80% 16.80% 16.80% 16.80% 16.80% 15.20% 13.60% 12.00% 10.40% 8.80%
Equity Options $ 14 Cost of Debt 12.80% 12.80% 12.80% 12.80% 12.80% 11.84% 10.88% 9.92% 8.96% 6.76%
Value per share $ 3.22 Debt Ratio 74.91% 74.91% 74.91% 74.91% 74.91% 67.93% 60.95% 53.96% 46.98% 40.00%
Cost of Capital 13.80% 13.80% 13.80% 13.80% 13.80% 12.92% 11.94% 10.88% 9.72% 7.98%
Riskfree Rate :
T. Bond rate = 4.8% Risk Premium
Global Crossing
Beta 4% November 2001
+ 3.00> 1.10 X Stock price = $1.86
Aswath Damodaran 1
Valuing Global Crossing with Distress
■ Probability of distress
• Price of 8 year, 12% bond issued by Global Crossing = $ 653
t=8
120(1−πDistress ) t 1000(1−πDistress ) 8
653 =∑ +
t=1 (1.05) t (1.05) 8
• Probability of distress = 13.53% a year
• Cumulative probability of survival over 10 years = (1 .1353)10 = 23.37%
■ Distress sale value of equity
• Book value of capital = $14,531 million
• Distress sale value = 15% of book value = .15*14531 = $2,180 million
• Book value of debt = $7,647 million
• Distress sale value of equity = $ 0
■ Distress adjusted value of equity
• Value of Global Crossing = $3.22 (.2337) + $0.00 (.7663) = $0.75
Aswath Damodaran 1
Adjusted Present Value Model
■ In the adjusted present value approach, the value of the firm is written
as the sum of the value of the firm without debt (the unlevered firm)
and the effect of debt on firm value
■ Firm Value = Unlevered Firm Value + (Tax Benefits of Debt
Expected Bankruptcy Cost from the Debt)
• The unlevered firm value can be estimated by discounting the free
cashflows to the firm at the unlevered cost of equity
• The tax benefit of debt reflects the present value of the expected tax
benefits. In its simplest form,
Tax Benefit = Tax rate * Debt
• The expected bankruptcy cost is a function of the probability of
bankruptcy and the cost of bankruptcy (direct as well as indirect) as a
percent of firm value.
Aswath Damodaran 1
Excess Return Models
■ You can present any discounted cashflow model in terms of excess
returns, with the value being written as:
• Value = Capital Invested + Present value of excess returns on current
investments + Present value of excess returns on future investments
■ This model can be stated in terms of firm value (EVA) or equity
value.
Aswath Damodaran 1
EQUITY VALUATION WITH EQUITY EVA
Firm is in stable growth:
Current EVA Expected Growth Growth rate = 5%
Net Income = $ 3104 .60 * 20% =12% Return on Equity = 15%
Equity cost = $ 1645 Cost of equity =9.40%
Equity EVA = $ 1459
Terminal Value= $2220/(.094.05)=50,459
Net Income $3,599 $4,031 $4,515 $5,057 $5,664
Equity Cost (see below) $1,908 $2,137 $2,393 $2,680 $3,002
Excess Equity Return $1,692 $1,895 $2,122 $2,377 $2,662
Book Equity= 17997
+ PV of EVA= 38334 Forever
= Equity EVA=56331
Value/sh = $50.26 Discount at Cost of Equity
Cost of Equity
10.60%
Risk Premium
Beta 4.00%
Riskfree Rate :
5.00%
+ 1.40 X
Base Equity Country Risk
Premium = 4% Premium=0%
Aswath Damodaran 1
Choosing the right Discounted Cashflow Model
Use current Is the cause
Is leverage stable or Use dividend earnings as temporary? Stable growth Are the firm’s
likely to change over discount model base model competitive
time? advantges time
limited?
Yes No
Stable Unstable
leverage leverage Replace current Is the firm Yes No
earnings with likely to
normalized survive?
earnings 3stage or
FCFE FCFF 2stage nstage
model model
Yes No
Adjust Does the firm
margins over have a lot of
time to nurse debt?
firm to financial
health
No
Yes
Value Equity Estimate
as an option liquidation
to liquidate value
Aswath Damodaran 1
Relative Valuation
■ What is it?: The value of any asset can be estimated by looking at
how the market prices “similar” or ‘comparable” assets.
■ Philosophical Basis: The intrinsic value of an asset is impossible (or
close to impossible) to estimate. The value of an asset is whatever the
market is willing to pay for it (based upon its characteristics)
■ Information Needed: To do a relative valuation, you need
• an identical asset, or a group of comparable or similar assets
• a standardized measure of value (in equity, this is obtained by dividing
the price by a common variable, such as earnings or book value)
• and if the assets are not perfectly comparable, variables to control for the
differences
■ Market Inefficiency: Pricing errors made across similar or
comparable assets are easier to spot, easier to exploit and are much
more quickly corrected.
Aswath Damodaran 2
Variations on Multiples
■ Equity versus Firm Value
• Equity multiples (Price per share or Market value of equity)
• Firm value multiplies (Firm value or Enterprise value)
■ Scaling variable
• Earnings (EPS, Net Income, EBIT, EBITDA)
• Book value (Book value of equity, Book value of assets, Book value of capital)
• Revenues
• Sector specific variables
■ Base year
• Most recent financial year (Current)
• Last four quarters (Trailing)
• Average over last few years (Normalized)
• Expected future year (Forward)
■ Comparables
• Sector
• Market
Aswath Damodaran 2
Definitional Tests
■ Is the multiple consistently defined?
• Proposition 1: Both the value (the numerator) and the standardizing
variable ( the denominator) should be to the same claimholders in the
firm. In other words, the value of equity should be divided by equity
earnings or equity book value, and firm value should be divided by
firm earnings or book value.
■ Is the multiple uniformally estimated?
• The variables used in defining the multiple should be estimated uniformly
across assets in the “comparable firm” list.
• If earningsbased multiples are used, the accounting rules to measure
earnings should be applied consistently across assets. The same rule
applies with bookvalue based multiples.
Aswath Damodaran 2
An Example: Price Earnings Ratio: Definition
PE = Market Price per Share / Earnings per Share
■ There are a number of variants on the basic PE ratio in use. They are
based upon how the price and the earnings are defined.
■ Price: is usually the current price
is sometimes the average price for the year
■ EPS: earnings per share in most recent financial 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
Aswath Damodaran 2
Descriptive Tests
■ What is the average and standard deviation for this multiple, across
the universe (market)?
■ What is the median for this multiple?
• The median for this multiple is often a more reliable comparison point.
■ How large are the outliers to the distribution, and how do we deal with
the outliers?
• Throwing out the outliers may seem like an obvious solution, but if the
outliers all lie on one side of the distribution (they usually are large
positive numbers), this can lead to a biased estimate.
■ Are there cases where the multiple cannot be estimated? Will ignoring
these cases lead to a biased estimate of the multiple?
■ How has this multiple changed over time?
Aswath Damodaran 2
PE Ratio: Descriptive Statistics
Aswath Damodaran 2
PE: Deciphering the Distribution
Aswath Damodaran 2
8 Times EBITDA is not cheap…
Aswath Damodaran 2
Analytical Tests
■ What are the fundamentals that determine and drive these multiples?
• Proposition 2: Embedded in every multiple are all of the variables that
drive every discounted cash flow valuation growth, risk and cash flow
patterns.
• In fact, using a simple discounted cash flow model and basic algebra
should yield the fundamentals that drive a multiple
■ How do changes in these fundamentals change the multiple?
• The relationship between a fundamental (like growth) and a multiple
(such as PE) is seldom linear. For example, if firm A has twice the growth
rate of firm B, it will generally not trade at twice its PE ratio
• Proposition 3: It is impossible to properly compare firms on a
multiple, if we do not know the nature of the relationship between
fundamentals and the multiple.
Aswath Damodaran 2
Relative Value and Fundamentals
Value of Stock = DPS1/(ke g)
Equity Multiples
Firm Multiples
Value of Firm = FCFF
1/(WACC g)
Aswath Damodaran 2
What to control for...
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
Aswath Damodaran 3
Application Tests
■ Given the firm that we are valuing, what is a “comparable” firm?
• While traditional analysis is built on the premise that firms in the same
sector are comparable firms, valuation theory would suggest that a
comparable firm is one which is similar to the one being analyzed in
terms of fundamentals.
• Proposition 4: There is no reason why a firm cannot be compared
with another firm in a very different business, if the two firms have
the same risk, growth and cash flow characteristics.
■ Given the comparable firms, how do we adjust for differences across
firms on the fundamentals?
• Proposition 5: It is impossible to find an exactly identical firm to the
one you are valuing.
Aswath Damodaran 3
Comparing PE Ratios across a Sector
Company Name PE Growth
PT Indosat ADR 7.8 0.06
Telebras ADR 8.9 0.075
Telecom Corporation of New Zealand ADR 11.2 0.11
Telecom Argentina Stet - France Telecom SA ADR B 12.5 0.08
Hellenic Telecommunication Organization SA ADR 12.8 0.12
Telecomunicaciones de Chile ADR 16.6 0.08
Swisscom AG ADR 18.3 0.11
Asia Satellite Telecom Holdings ADR 19.6 0.16
Portugal Telecom SA ADR 20.8 0.13
Telefonos de Mexico ADR L 21.1 0.14
Matav RT ADR 21.5 0.22
Telstra ADR 21.7 0.12
Gilat Communications 22.7 0.31
Deutsche Telekom AG ADR 24.6 0.11
British Telecommunications PLC ADR 25.7 0.07
Tele Danmark AS ADR 27 0.09
Telekomunikasi Indonesia ADR 28.4 0.32
Cable & Wireless PLC ADR 29.8 0.14
APT Satellite Holdings ADR 31 0.33
Telefonica SA ADR 32.5 0.18
Royal KPN NV ADR 35.7 0.13
Telecom Italia SPA ADR 42.2 0.14
Nippon Telegraph & Telephone ADR 44.3 0.2
France Telecom SA ADR 45.2 0.19
Korea Telecom ADR 71.3 0.44
Aswath Damodaran 3
PE, Growth and Risk
Dependent variable is: PE
R squared = 66.2% R squared (adjusted) = 63.1%
Aswath Damodaran 3
Is Telebras under valued?
■ Predicted PE = 13.12 + 121.22 (.075) 13.85 (1) = 8.35
■ At an actual price to earnings ratio of 8.9, Telebras is slightly
overvalued.
Aswath Damodaran 3
PE Ratio without a constant US Stocks
Model Summary
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Relative Valuation: Choosing the Right Model
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Contingent Claim (Option) Valuation
■ Options have several features
• They derive their value from an underlying asset, which has value
• The payoff on a call (put) option occurs only if the value of the
underlying asset is greater (lesser) than an exercise price that is specified
at the time the option is created. If this contingency does not occur, the
option is worthless.
• They have a fixed life
■ Any security that shares these features can be valued as an option.
Aswath Damodaran 3
Option Payoff Diagrams
Strike Price Value of Asset
Put Option
Call Option
Aswath Damodaran 3
Underlying Theme: Searching for an Elusive
Premium
■ Traditional discounted cashflow models under estimate the value of
investments, where there are options embedded in the investments to
• Delay or defer making the investment (delay)
• Adjust or alter production schedules as price changes (flexibility)
• Expand into new markets or products at later stages in the process, based
upon observing favorable outcomes at the early stages (expansion)
• Stop production or abandon investments if the outcomes are unfavorable
at early stages (abandonment)
■ Put another way, real option advocates believe that you should be
paying a premium on discounted cashflow value estimates.
Aswath Damodaran 3
Three Basic Questions
■ When is there a real option embedded in a decision or an asset?
• There has to be a clearly defined underlying asset whose value changes over time in
unpredictable ways.
• The payoffs on this asset (real option) have to be contingent on an specified event
occurring within a finite period.
■ When does that real option have significant economic value?
• For an option to have significant economic value, there has to be a restriction on
competition in the event of the contingency.
• At the limit, real options are most valuable when you have exclusivity you and
only you can take advantage of the contingency. They become less valuable as the
barriers to competition become less steep.
■ Can that value be estimated using an option pricing model?
• The underlying asset is traded this yield not only observable prices and volatility
as inputs to option pricing models but allows for the possibility of creating
replicating portfolios
• An active marketplace exists for the option itself.
• The cost of exercising the option is known with some degree of certaint
Aswath Damodaran 4
Putting Natural Resource Options to the Test
■ The Option Test:
• Underlying Asset: Oil or gold in reserve
• Contingency: If value > Cost of development: Value Dev Cost
If value < Cost of development: 0
■ The Exclusivity Test:
• Natural resource reserves are limited (at least for the short term)
• It takes time and resources to develop new reserves
■ The Option Pricing Test
• Underlying Asset: While the reserve or mine may not be traded, the commodity is. If we
assume that we know the quantity with a fair degree of certainty, you can trade the underlying
asset
• Option: Oil companies buy and sell reserves from each other regularly.
• Cost of Exercising the Option: This is the cost of developing a reserve. Given the experience
that commodity companies have with this, they can estimate this cost with a fair degree of
precision.
■ Bottom Line: Real option pricing models work well with natural resource options.
Aswath Damodaran 4
The Real Options Test: Patents and
Technology
■ The Option Test:
• Underlying Asset: Product that would be generated by the patent
• Contingency:
If PV of CFs from development > Cost of development: PV Cost
If PV of CFs from development < Cost of development: 0
■ The Exclusivity Test:
• Patents restrict competitors from developing similar products
• Patents do not restrict competitors from developing other products to treat the same disease.
■ The Pricing Test
• Underlying Asset: Patents are not traded. Not only do you therefore have to estimate the
present values and volatilities yourself, you cannot construct replicating positions or do
arbitrage.
• Option: Patents are bought and sold, though not as frequently as oil reserves or mines.
• Cost of Exercising the Option: This is the cost of converting the patent for commercial
production. Here, experience does help and drug firms can make fairly precise estimates of the
cost.
■ Bottom Line: Use real option pricing arguments with caution.
Aswath Damodaran 4
The Real Options Test for Growth (Expansion)
Options
■ The Options Test
• Underlying Asset: Expansion Project
• Contingency
If PV of CF from expansion > Expansion Cost: PV Expansion Cost
If PV of CF from expansion < Expansion Cost: 0
■ The Exclusivity Test
• Barriers may range from strong (exclusive licenses granted by the government) to weaker
(brand name, knowledge of the market) to weakest (first mover).
■ The Pricing Test
• Underlying Asset: As with patents, there is no trading in the underlying asset and you have to
estimate value and volatility.
• Option: Licenses are sometimes bought and sold, but more diffuse expansion options are not.
• Cost of Exercising the Option: Not known with any precision and may itself evolve over time
as the market evolves.
■ Bottom Line: Using option pricing models to value expansion options will not only
yield extremely noisy estimates, but may attach inappropriate premiums to discounted
cashflow estimates.
Aswath Damodaran 4
Summarizing the Real Options Argument
■ There are real options everywhere.
■ Most of them have no significant economic value because there is no
exclusivity associated with using them.
■ When options have significant economic value, the inputs needed to
value them in a binomial model can be used in more traditional
approaches (decision trees) to yield equivalent value.
■ The real value from real options lies in
• Recognizing that building in flexibility and escape hatches into large
decisions has value
• Insights we get on understanding how and why companies behave the
way they do in investment analysis and capital structure choices.
Aswath Damodaran 4
Valuation Models
Equity Valuation Firm Valuation
Models Models
Patent Undeveloped
Reserves
Dividends
Aswath Damodaran 4
Which approach should you use? Depends
upon the asset being valued..
Asset Marketability and Valuation Approaches
Mature businesses Growth businesses
Separable & marketable assets Linked and nonmarketable assets
Liquidation & Other valuation models
Replacement cost
valuation
Cash Flows and Valuation Approaches
Large number of similar
Unique asset or business assets that are priced
Discounted cashflow Relative valuation models
or option pricing
models
Aswath Damodaran 4
And the analyst doing the valuation….
Investor Time Horizon and Valuation Approaches
Very short time horizon
Long Time Horizon
Views on market and Valuation Approaches
Option pricing models
Aswath Damodaran 4