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Damodaran on Valuation - 2nd Edition
This web site is designed to support "Damodaran on Valuation", the second edition. The publisher is John Wiley and Sons. You can navigate the site by either going to individual chapters and getting supporting material by chapter, or by going to the supporting material directly. The supporting material includes:
  1. Chapter Outlines and overheads: These are saved as pdf files, and you need Adobe Acrobat to read them. You can download Adobe Acrobat by going to the Adobe site. (www.adobe.com) The overheads are categorized by topic, rather than chapter. To go to overheads, click here.
  2. Derivations and Discussion: These represent interesting questions that often come up in the context of the specified topic, with discussions and analyses.
  3. Readings: These are readings from business and academic publications that supplement the specific topic.
  4. Powerpoint Presentations: These are power point presentations that are designed for use by instructors. You will need a password to download these as well.
  5. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel format, and can be used on either a Mac or Windows system.
  6. Datasets: These are useful datasets to supplement each chapter. They generally include industry averages for key variables and represent updates on many of the tables in the book.
  7. Web Casts: These are webcasts of the lectures from the valuation class that I teach at Stern. You can use the lecture notes and the text book to follow the lectures.
You can read the preface to the book by clicking here. If you are an instructor using this book, please click here.

You can pick the chapter that you would like to go to, to see illustrations, solutions and other supporting material.
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12
Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18

Or you can pick the material that you are interested in.
Spreadsheets Overheads
Powerpoint Presentations Datasets

Chapter 1: Introduction to Valuation
Topic Details
Overheads
Readings
  1. The Rise of Jack Grubman
  2. The Fall of Jack Grubman
  3. The Consequences of a Sell Recommendation
  4. A Sage on Enron
  5. Fairness Opinion: What's fair about it?
  6. Second Opinions?
  7. Regulation FD: The SEC's shot at evening the playing field
  8. For more readings, go here.

Chapter 2: Estimating Discount Rates
Topic Details
Overheads Download as pdf file
Illustrations

Illustration 2.1: Estimating CAPM risk parameters for Disney
Illustration 2.2. Bottom-up Beta for Disney
Illustration 2.3: Bottom-up Beta and Total Beta for Kristin Kandy
Illustration 2.4: Cost of Equity for an emerging market company: Embraer
Illustration 2.5: Estimating Costs of Debt: Kristin Kandy
Illustration 2.6: Breaking down a convertible bond into debt and equity components: Disney
Illustration 2.7: Market Value and Book Value Debt Ratios - Disney
Illustration 2.8: Estimating Cost of Capital: Disney, Kristin Kandy and Embraer


Data Sets histretSP.xls: Summarizes historical returns on stocks, T.Bonds and T.Bills going back to 1928.
ratings.xls: This dataset includes default spreads for bonds in different ratings classes.
ctryprem.xls: Contains the updated ratings for countries and the risk premiums associated with each.
histimpl.xls: Shows the inputs used to calculate the premium in each year for the U.S. market.
betas.xls: Updated betas and unlevered betas by business sector in the United States.
spearn.xls: Earnings changes, by year, for the S&P 500 going back to 1960.
wacc.xls: Costs of debt, costs of equity, debt ratios and costs of capital, by industry group, for firms in the United States.
Spreadsheets implprem.xls: This spreadsheet allows you to estimate the implied equity premium in a market.
accbeta.xls: Estimate the accounting beta on a division or firm.
risk.xls: Run a regression of stock returns against market returns and estimate risk parameters.
levbeta.xls: Estimate the unlevered beta for a firm and compute the betas as a function of the leverage of the firm.
ratings.xls: This spreadsheet allows you to estimate the synthetic rating and cost of debt for any firm.
oplease.xls: This spreadsheet allows you to convert operating lease expenses into debt.
wacccalc.xls: This spreadsheet allows you to convert book values of debt into market values.
Readings
  1. Market Risk and Time Horizon
  2. Investors must recall risk
  3. New Definitions of Risk
  4. Diversification matters
  5. Risk Premium in Emerging Markets
  6. Classic Rule of Risk Premium under Attack
  7. Are risk premiums too low? (Greenspan testimony)
  8. Historical Risk premiums: A reexamination
  9. A contrary view on betas
  10. Margin for Safety.. An alternative to beta?
  11. For more readings, go here.

Chapter 3: Estimating Cash Flows

Topic Details
Overheads Download as pdf file
Illustrations

Illustration 3.1: Updated Earnings for Google: September 2005
Illustration 3.2: Capitalizing R&D expenses: Cisco in 2005
Illustration 3.3: Adjusting Operating Income for Operating Leases: Target in 2005
Illustration 3.4: Effect of Tax Assumptions on Value
Illustration 3.5: The Effect of Net Operating Loss on Value - Sirius
Illustration 3.6: Tax Benefit from Expensing: Cisco in 2005
Illustration 3.7: Estimating Normalized Net Capital Expenditures - Titan Cement
Illustration 3.8: Effect of Capitalizing R&D- Cisco
Illustration 3.9: The Effect of Acquisitions: Cisco in 2005
Illustration 3.10: Working Capital versus Non-cash Working Capital - Target
Illustration 3.11: Estimating Non-cash Working Capital Needs - Target

Data Sets taxrate.xls: There is a dataset on the web that summarizes average effective tax rates by industry group in the United States for the most recent quarter.
wcdata.xls: There is a dataset on the web that summarizes non-cash working capital needs by industry group in the United States for the most recent quarter.
capex.xls: Summarizes capital expenditures as a percent of depreciation, by industry group.
Operating Lease effect on debt: This summarizes the impact of converting operating lease commitments into debt on market debt to capital ratios, operating income and return on capital, categorized by industry.
Spreadsheets R&Dconv.xls: This spreadsheet allows you to convert R&D expenses from operating to capital expenses.
oplease.xls: This spreadsheet allows you to convert operating lease expenses into debt.
Readings
  1. Measuring Earnings
  2. The Content of an Annual Report
  3. Low Points in Accounting History
  4. Operating Leases as Debt
  5. R& D's effects on earnings
  6. Smoothing Earnings
  7. Is this debt?
  8. One-time Write off?
  9. The Accounting Black Box
  10. The Practices of Five Companies: GE, Coke, AIG, Williams and IBM
  11. Warnings Signs in Earnings Reports
  12. Accounting versus Cash Earnings
  13. Off Balance Sheet Items?
  14. Special Purpose Entities
  15. A Primer on Financial Statements
  16. Adjusting for Operating Leases
  17. Adjusting for R&D Expenses
  18. Accounting versus Cash Earnings
  19. Working Capital and Cashflows
  20. For more readings, go here.

Chapter 4: Estimating Growth and Terminal Value
Topic  Details
Overheads Download as pdf file
Illustrations Illustration 4.1: Length of Growth Period
Illustration 4.2: Differences between Arithmetic and Geometric Averages: Ryanair
Illustration 4.3: Growth in Earnings per Share: Examples
Illustration 4.4: Growth in Net Income: Toyota and Exxon Mobil
Illustration 4.5: Breaking down Return on Equity: Exxon Mobil and Toyota
Illustration 4.6: Effects of Changing Return on Equity: J.P. Morgan Chase
Illustration 4.7: Measuring the Reinvestment Rate, Return on Capital and Expected Growth Rate - Titan Cement and SAP
Illustration 4.8: Current, Historical and Industry Averages
Illustration 4.9: Estimating Expected Growth with Changing Return on Capital - Blockbuster
Illustration 4.10: Estimating Revenues at Sirius
Illustration 4.11: Estimating Operating Margins - Sirius
Illustration 4.12: Estimating Sales to Capital Ratio - Sirius
Illustration 4.13: Stable Growth Rates and Excess Returns
Illustration 4.14: Stable Growth Inputs (See full valuations in chapters 5 &6)
Data Sets

histgr.xls: There is a dataset on the web that summarizes historical growth rates in earnings and revenues by industry group for the United States.
fundgrEB.xls: There is a dataset on the web that summarizes reinvestment rates and return on capital by industry group in the United States for the most recent quarter.
margins.xls: This dataset on the web summarizes operating margins, by industry, for the United States.
wacc.xls: This dataset on the web summarizes the debt ratios and costs of debt, by industry group, for firms in the United States.
capex.xls: This dataset on the web summarizes the reinvestment rates, by industry group, for firms in the United States.

Spreadsheets chgrowth.xls: This spreadsheet allows you to estimate the expected growth rate in operating income for a firm where the return on capital is expected to change over time.
impliedROC.xls: Solves for the return on capital implied in terminal value assumptions about growth and reinvestment.
Readings
  1. The inside of earnings growth in the 1990s
  2. Evaluating analyst growth estimates
  3. Return on Capital, not growth....
  4. Competitive Advantage Period
  5. For more readings, go here.

Chapter 5: Equity DCF Models
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 5.1: Valuation with Stable Growth DDM: J.P. Morgan Chase
Illustration 5.2: Valuing a firm wtih the two-stage DDM: Goldman Sachs
Illustration 5.3: Valuing with the H Model: Barclays Bank
Illustration 5.4: Valuing with the Three-stage DDM: Canara Bank
Illustration 5.5: Valuing with modified DDM: Exxon Mobil
Illustration 5.6: Valuing the S&P 500 using a modified DDM: January 1, 2005
Illustration 5.7: FCFE Stable Growth Model: Exxon Mobil
Illustration 5.8: Two-Stage FCFE Model: Toyota
Illustration 5.9: Three-stage FCFE Model: Tsingtao Breweries
Illustration 5.10: Equivalence of the FCFE and DDM models

Data Sets divfund.xls: This dataset on the web summarizes retention ratios, by industry group, for firms in the United States.
divfcfe.xls: There is a dataset on the web that summarizes dividends, cash returned to stockholders and free cash flows to equity, by sector, in the United States.
Spreadsheets

DDMst.xls: This spreadsheet allows you to value a stable growth firm, with stable firm characteristics (beta and retun on equity) and dividends that roughly match cash flows.
DDM2st.xls: This spreadsheet allows you to value a firm with a temporary period of high earnings followed by stable growth.
DDMH.xls: This spreadsheet allows you to use the H model to value a stock.
DDM3st.xls: This spreadsheet allows you to value a firm with a period of high growth followed by a transition period where growth declines to a stable growth rate.
divginzu.xls
: A complete dividend discount model that can do stable growth, 2-stage or 3-stage valuation. This is your best choice if you are analyzing financial service firms.

Readings
  1. The Dividend Discount Model
  2. The dividend yield matters....
  3. Microsoft faces a call to pay dividends
  4. For more readings, go here.

Chapter 6: Firm Value DCF Models
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 6.1: Valuing a firm with a stable growth FCFF Model: Nintendo
Illustration 6.2: Valuing Titan Cement
Illustration 6.3: Valuing Target: Dealing with Operating Leases
Illustration 6.4: Valuing SAP: Effects of R&D
Illustration 6.5: Valuing a Young, High Growth Company: Sirius
Illustration 6.6: Valuing a firm with APV Approach: Titan Cement
Illustration 6.7: Discounted Cashflow Valuation and Economic Value Added
Illustration 6.8: An EVA Valuation of Titan Cement
Illustraiton 6.9: Analyzing the Capital Structure for Titan Cement
Illustration 6.10: Using the APV Approach to calculate Optimal Debt Ratio for Titan Cement

Data Sets
  1. wacc.xls: This dataset on the web summarizes the cost of capital by industry group, for the United States.
  2. Book and Market Debt Ratios By Industry
  3. eva.xls: This dataset on the web summarizes the returns on capital (equity), costs of capital (equity) and excess returns, by industry group, for firms in the United States.
Spreadsheets fcffginzu.xls: This spreadsheet allows you to estimate the value of a firm using the FCFF approach.
fcffvsfcfe.xls: This spreadsheet allows you to compare the equity values obtained using FCFF and FCFE models
captstru.xls: This spreadsheet allows you to compute the optimal debt ratio firm value for any firm, using the same information used for Boeing. It has updated interest coverage ratios and default spreads built in
apv.xls: This spreadsheet allows you to compute the value of a firm, with leverage, using the adjusted present value approach
Readings
  1. Adjusted Present Value with growth and changing cost of capital
  2. EVA as elixir
  3. An EVA debate

Chapter 7: Relative Valuation- First Principles

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 7.1: Comparing PE ratios and growth rates across firms: Beverage Companies
Illustration 7.2: Revisiting the Beverage Sector: Sector Regression

Data Sets  
Spreadsheets
Readings  

Chapter 8: Equity Multiples
Topic  Details
Overheads Download as pdf file
Illustrations Illustration 8.1: Estimating Equity Multiples for a high growth firm in the two-stage model
Illustration 8.2: Comparing PE across software companies
Illustration 8.3: Comparing PEG ratios across semiconductor companies
Illustration 8.4: Comparing PBV ratios across banks
Illustration 8.5: Comparing price to sales ratios across specialty retailers
Illustration 8.6: PE Ratios across time for the S&P 500
Illustration 8.7: Comparing PBV ratios across time
Illustration 8.8: Comparing PE Ratios across markets
Data Sets pedata.xls: Dataset on the web that summarizes price earnings ratios and fundamentals by industry group in the United States for the most recent year
pbvdata.xls: Dataset on the web that summarizes price to book and value to book multiples and fundamentals by industry group in the United States for the most recent year
Spreadsheets eqmult.xls: This spreadsheet allows you to estimate the price earnings ratio for a stable growth or high growth firm, given its fundamentals.
Readings
  1. Malkiel on PE ratios
  2. Interest rates and PE ratios
  3. PE ratios with R&D
  4. Motley Fool on PEG ratios
  5. Price to Book Value Bargains
  6. For more readings, go here.

Chapter 9: Firm and Enterprise Value Multiples
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 9.1: Estimates of Firm and Enterprise Value
Illustration 9.2: Estimating Value Multiples for a firm
Illustration 9.3: Comparing EV/ Operating Income Multiples - Steel companies
Illustration 9.4: Comparing EV/ Capital Ratios - Cosmetic companies
Illustration 9.5: Comparing EV/ Sales Multiples - Chemical companies

Data Sets vebitda.xls: This is a dataset on the web that summarizes value to earnings multiples and fundamentals by industry group in the United States for the most recent year
psdata.xls: Dataset on the web that summarizes price to sales and value to sales ratios and fundamentals by industry group in the United States for the most recent year.
Spreadsheets firmmult.xls: This spreadsheet allows you to estimate firm value multiples for a stable growth or high growth firm, given its fundamentals.
Readings
  1. Value per customer? An analysis of Amazon's value
  2. Value to Vision? A New Ratio
  3. For more readings, go here.

Chapter 10: Valuing Cash and Cross Holdings
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 10.1: Consolidated versus Separate Valuation - All Equity Firm
Illustration 10.2: Valuing a Levered Firm with Cash: Gross Debt and Net Debt Approaches
Illustration 10.3: Cash Invested at below market rates
Illustration 10.4: Discount for Poor Investments in the Future
Illustration 10.5: Microsoft's Cash and Marketable Securities
Illustration 10.6: Valuing a Closed-end Fund
Illustration 10.7: Valuing Holdings in Other Companies

Data Sets

cash.xls: Dataset on the web that summarizes the value of cash and marketable securities by industry group in the United States for the most recent quarter.

Spreadsheets GrossvsNet.xls: This spreadsheet allows you to reconcile the differences between the Gross debt and Net debt approaches to valuation.
Readings
  1. What is a dollar worth?
  2. Should Microsoft pay dividends?
  3. For more readings, go here.

Chapter 11: Employee Options and Restricted Stock

Topic  Details
Overheads Download as pdf file
Illustrations Illustration 11.1: Fully Diluted approach to estimating Value per share
Illustration 11.2: Treasury Stock Approach
Illustration 11.3: Option Value Approach: Cisco and Google
Illustration 11.4: Adjusting PE Ratio for Options Outstanding
Illustration 11.5: Dealing with Expected Option Issues in the future
Data Sets optoverhang: Estimated option overhang by industry group, for firms in the United States.
Spreadsheets warrants.xls: This spreadsheet allows you to value the options outstanding in a firm, allowing for the dilution effect.
Readings
  1. Option backlash at companies
  2. Options at dot.com firms
  3. For more readings, go here.

Chapter 12: The Value of Intangibles

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 12.1: Valuing the Copyright on "Damodaran on Valuation - 2006
Illustration 12.2: Estimating Brand Name Value - Historical Cost Approach
Illustration 12.3: Estimating the Value of Brand Name - Generic Approach and Excess Return Model
Illustration 12.4: Estimating the Value of Brand Name - Relative Valuation Approach
Illustration 12.5: Valuing a Patent: Avonex in 1997
Illustration 12.6: Valuing an Oil Reserve
Illustration 12.7: Valuing an Oil Company - Gulf Oil in 1984
Illustration 12.8: Valuing an Option to Expand: Ambev and Guarana
Illustration 12.9: Considering the Value of the Option to Expand
Illustration 12.10: Valuing an Option to Abandon: Airbus and Lear Jet

Data Sets optvar.xls: Standard deviations in firm value and equity value by industry group in the United States
Spreadsheets
brandnamevalue.xls: This spreadsheet provides different ways of estimating the value of a brand name, although each comes with some baggage.
delay.xls:
Estimate the value of an option to delay an investment.
product.xls: Estimate the value of a patent.
natres.xls: Estimate the value of an undeveloped natural resource reserve.
expand.xls: This spreadsheet allows you to estimate the value of the option to expand a project to cover new markets or new products, using the Black-Scholes model.
abandon.xls: Estimate the value of the option to abandon an investment.
finflex.xls: Estimate the value of financial flexibility as an option
Readings
  1. Remarks on the Measurement, Valuation and Reporting of Intangible Assets
  2. Brand Valuation Methods
  3. Making real options real
  4. Literature on real options in venture capital and R&D
  5. Real Options and Business Strategy
  6. How much is flexibility worth?
  7. Get Real
  8. For more readings, go here.

Chapter 13: The Value of Control

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 13.1: The Value of Changing Management - SAP: Status Quo versus Optimal value
Illustration 13.2: The Value of Changing Management - Blockbuster: Status Quo versus Optimal value
Illustration 13.3: The Value of Changing Management - Nintendo: Status Quo versus Optimal value
Illustration 13.4: Market Prices and the Expected Value of Control
Illustration 13.5: Valuing Voting and Non-voting Shares
Illustration 13.6: Estimating the Minority Discount

Data Sets  
Spreadsheets

controlvalue.xls: This model analyzes the value of control in a firm.

Readings
  1. Stock prices and Corporate Governance
  2. The Effects of Hostile Takeovers
  3. The Effects of Spinoffs
  4. The Restructuring of Chase
  5. GM: A Restructuring Candidate
  6. For more readings, go here.

Chapter 14: The Value of Liquidity

Topic  Details
Overheads Download as pdf file
Illustrations Illustration 14.1: Estimating the Illiquidity Discount for a Private Firm: Standard approaches and option approach
Illustration 14.2: Estimating the Illiquidity Adjusted Discount Rate for a Private Firm: Kristin Kandy valued with unadjusted rate versus higher discount rate
Illustration 14.3: Estimating Illiquidity Discount in a Relative Valuation
Data Sets Total Beta By Industry Sector: These are betas adjusted to reflect a firm's total exposure to risk rather than just the market risk component.
Spreadsheets liqdisc.xls: Estimates the illiquidity discount that should be applied to a private firm as a function of the firm's size and financial health. Uses both restricted stock approach and bid-ask spread regression.
Readings
  1. IRS view of illiquidity discounts
  2. Firm Value and Marketability Discounts
  3. Restricted stock discounts
  4. For more readings, go here.

Chapter 15: The Value of Synergy

Topic  Details
Overheads Download as pdf file
Illustrations Illustration 15.1: Valuing Cost Synergies
Illustration 15.2: Valuing Growth Synergies: Higher Returns, More investments, longer growth period
Illustration 15.3: Valuing Cost and Growth Synergies: P&G and Gillette
Illustration 15.4: Valuing Cash Slack in a Merger
Illustration 15.5: Valuing a Net Operating Loss Carryforward
Illustration 15.6: Tax Benefits of writing up asset values after takeover: Congoleum
Illustration 15.7: Valuing Additional Debt Capacity in a Merger
Data Sets  
Spreadsheets
synergyvaluation.xls: This program estimates the value of synergy in a merger.
Readings
  1. Synergy in Mergers
  2. The Keys to Success in M & A: The KPMG Report
  3. Stocks versus Cash Acquisitions: The Performance of Acquirers
  4. New Rules on Goodwill
  5. The Merger Bonus: Skewed Incentives?
  6. CEO Egos and Big Mergers
  7. For more readings, go here.

Chapter 16: The Value of Transparency

Topic  Details
Overheads Download as pdf file
Illustrations  
Data Sets  
Spreadsheets complscore.xls: This spreadsheet allows you to measure the complexity in a company and give it a score.
Readings
  1. The Opacity Index (PriceWaterhouseCoopers)
  2. Transparency and Disclosure: US companies (Standard and Poor's)
  3. For more readings, go here.

Chapter 17: The Cost of Distress

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 17.1: Estimating the probability of bankruptcy using bond price: Global Crossing
Illustration 17.2: Estimating Distress Sale Proceeds in January 2002: Global Crossing
Illustration 17.3: Valuing Global Crossing with Distress Valued Separately
Illustration 17.4: Valuing Global Crossing - Adjusted Present Value
Illustration 17.5: Choosing Distressed Comparables
Illustration 17.6: Adjusted Multiple - Global Crossing
Illustration 17.7: Forward Multiples and Distress
Illustration 17.8: Valuing Equity as an Option
Illustration 17.9: Firm Value and Equity Value
Illustration 17.10: Equity Value and Volatility
Illustration 17.11: Probabilities of Default and Default Spreads
Illustration 17.12: Valuing Equity as an Option - Eurotunnel in 1997

Data Sets dbtfund.xls: Dataset on the web that summarizes book and market value debt ratios by industry group in the United States for the most recent year
optvar.xls: Standard deviations in firm value and equity value by industry group in the United States
Spreadsheets normearn.xls: This spreadsheet allows you to normalize the earnings for a firm, using a variety of approaches
distress.xls: Estimates the probability that a firm will cease existence as a going concern - i.e. the probability of distress.
equity.xls: A model that uses option pricing to value the equity in a firm; best suited for highly levered firms in trouble
Readings
  1. Warning signs of distress
  2. How costly is distress?
  3. Vulture Investing
  4. For more readings, go here.

Chapter 18: Closing Thoughts

Topic  Details
Overheads Download as pdf file
Illustrations  
Data Sets  
Spreadsheets model.xls: Chooses the right model to value your firm.
Readings  

Overheads (in pdf format)

Topic Chapters
Introduction to Valuation Chapter 1
Estimating discount rates Chapter 2
Estimating cash flows Chapter 3
Estimating growth rate and terminal value Chapter 4
Discounted Cashflow Valuation: Examples Chapter 5-6
Relative Valuation Chapters 7-9
The Value of Cash and Cross Holdings Chapter 10
Dealing with Employee Options Chapter 11
The Value of Intangibles Chapter 12
The Value of Control Chapter 13
The Value of Liquidity Chapter 14
The Value of Synergy Chapter 15
The Value of Transparency Chapter 16
The Cost of Distress Chapter 17
Closing thoughts

Chapter 18