Advanced Valuation
Aswath Damodaran
There are as many models for valuing stocks and businesses as
there are analysts doing valuations. While we often talk about the differences
across valuation models, we seldom talk about what they share in common. In
this seminar, I hope to emphasize the shared foundations of valuation
approaches and how to bridge differences across them.
The first part of the seminar will cover discounted cash flow valuation,
and the estimation issues that arise when information is imprecise or
unavailable; in addition, it will look at value enhancement through the prism
of discounted cash flow models. The second part of the seminar will focus on
what I term the loose ends in valuation and follow up by looking at difficult
to value companies across the spectrum (life cycle, sectors). The third part of
the seminar will examine relative valuation, i.e., the valuation of
assets/businesses by looking at how similar assets/businesses are priced by the
market.
Objective
The objective of the seminar is to provide a big picture
perspective on valuation and to see how the pieces of the valuation puzzle fit
together. In particular, I hope to bring across the idea of valuation as a narrative
about a company, rather than a collection of numbers. By the end of the sessions,
I hope to be able to give you the tools and the confidence to:
The first part of the seminar will establish the fundamentals of
discounted cash flow valuation, with a special emphasis on the estimation
issues that come up when estimating discount rates, cash flows and expected
growth. It will look at the choices in terms of DCF models and how to pick the
right model to value a specific firm. In addition, we will use the basic
structure of the discounted cash flow model to take a comprehensive look at how
to enhance firm value. In addition,
we will focus on a myriad of estimation questions related to cash flows,
discount rates and growth rates. We will end the section by looking at the
terminal value in DCF valuation: how best to estimate it and common errors made
in computation.
The second part will begin with an analysis of what we call the
loose ends in valuation – how to deal with cash, cross holdings and other
assets, what the value of control, synergy and liquidity are and how best to
deal with employee and management equity and option grants. We will then venture into the dark side
of valuation, where we look at companies that are atypical, across the life
cycle (from young start-ups to declining businesses), across sectors
(commodity, cyclical, intangible asset and financial service firms) and across
the ownership cycle (privately owned, VC/PE and publicly traded).
The third part will be dedicated to relative valuation. A range of
multiples that are used currently in valuation, from earnings multiples (such
as PE, Value/EBIT, Value/EBITDA) to sales multiples (Revenue/Sales,
Price/Sales), will be discussed and compared. The relationship between
multiples and discounted cash flow models will be explored, and the notion of a
comparable firm will be examined. (What is a comparable firm? How do you
adjust for differences in growth, risk and cash flow capabilities across firms,
when estimating multiples?) Finally, the special difficulties associated with
comparing multiples across time, and across markets, will be highlighted.
Potential
Audience
The
mix of basic valuation techniques and applications provided in this seminar
should appeal to a widely diverse audience. In particular, it should be useful
for