This is a book about valuation - the valuation of stocks, bonds, options, futures and real assets. It is a fundamental precept of this book that any asset can be valued, albeit imprecisely in some cases. I have attempted to provide a sense of not only the differences between the models used to value different types of assets, but also the common elements in these models.
The six years between the last edition and this one have been eventful ones to say the least. We have seen the birth of a new sector – new technology – and one of the most incredible surges in value in market history as the values of these companies reached $1.4 trillion in early 2000. In the course of this market, there were many who came to the conclusion that the old valuation metrics and principles were both stodgy and inappropriate and decided to write their own rules for this new market. The last year has illustrated more clearly than ever before that the basic principles of valuation have not changed. Not surprisingly, this book considers the valuation of these young companies, often with low revenues and large operating losses. In addition, we have seen the rise and fall and rise again of emerging markets as the Asian crisis devastated equity values on that continent in 1996 and 1997 and stocks in Latin America and Russia followed soon after. I spend a great deal more time talking about country risk and how best to deal with it in this edition than in the previous one. The surge of interest in stockholder wealth maximization the world over during the 1990s also resulted in the invention of “new and better” value enhancement measures such as economic value added and cashflow return on investment. While I believe that there is little that is new or better about these approaches, they have had the salutary effect of focusing attention on value enhancement, a topic that deserves more attention than it got in the last book. The times seem to have also caught up with a theme that was introduced in the last book – the notion that option pricing models could be useful in valuing businesses and equity. Real options represent not only the theme of the moment but also a fundamental change on how we view value. I spend four chapters on the topic. Finally, the most welcome change in the last seven years is the ease with which readers can access material online. Consequently, every valuation in this book will be put on the web site that will accompany this book (www.damodaran.com) as will a significant number of datasets and spreadsheets. In fact, the valuations in the book will be constantly updated online, allowing the book to have a much closer link to real time valuations.
In the process of presenting and discussing the various aspects of valuation, I have tried to adhere to four basic principles. First, I have attempted to be as comprehensive as possible in covering the range of valuation models that are available to an analyst doing a valuation, while presenting the common elements in these models and providing a framework that can be used to pick the right model for any valuation scenario. Second, the models are presented with real world examples, warts and all, so as to capture some of the problems inherent in applying these models. There is the obvious danger that some of these valuations will appear to be hopelessly wrong in hindsight, but this cost is well worth the benefits. Third, in keeping with my belief that valuation models are universal and not market-specific, illustrations from markets outside the United States are interspersed through the book. Finally, I have tried to make the book as modular as possible, enabling a reader to pick and choose sections of the book to read, without a significant loss of continuity.
Aswath Damodara n
Aswath Damodara n
York, New York
New York, New York