The Dark Side of Valuation by Damodaran, Aswath -- Read -- Imperial Library of Trantor

Index

About This E-Book Title Page Copyright Page Dedication Page Contents at a Glance Contents Acknowledgments About the Author Preface to the Third Edition 1. The Dark Side of Valuation

Foundations of Value

Intrinsic Valuation Determinants of Value

Valuation Across Time

Interest Rates Market Risk Premiums The Macro Environment

Valuation Across the Life Cycle

The Business Life Cycle Early in the Life Cycle: Young Companies The Growth Phase: Growth Companies Maturity (A Mixed Blessing): Mature Firms Winding Down: Dealing with Decline

Valuation Across the Business Spectrum

Financial Services Firms Cyclical and Commodity Companies Businesses with Intangible Assets Emerging-Market Companies Multibusiness and Global Companies User-, Subscriber-, and Customer-Based Businesses

The Dark Side of Valuation Beckons

Input Phase Valuation Phase Post-Valuation Phase

Conclusion

Part I: Enlightenment: The Tools

2. Intrinsic Valuation

Discounted Cash Flow Valuation

The Essence of DCF Valuation Equity Versus Firm Valuation Inputs to a DCF Valuation

Variations on DCF Valuation

Certainty-Adjusted Cash Flow Models Adjusted Present-Value Models Excess-Return Models

What Do Intrinsic Valuation Models Tell Us? Conclusion

3. Probabilistic Valuation: Scenario Analysis, Decision Trees, and Simulations

Scenario Analysis

Best Case/Worst Case Multiple Scenario Analysis

Decision Trees

Steps in Decision Tree Analysis Estimation Issues Risk-Adjusted Value and Decision Trees

Simulations

Steps in Simulation Use in Decision Making Simulations with Constraints Issues with Using Simulations Risk-Adjusted Value and Simulations

An Overall View of Probabilistic Risk Assessment Approaches

Comparing the Approaches A Complement to or Replacement for Risk-Adjusted Value

Conclusion

4. Relative Valuation/Pricing

What Is Relative Valuation? The Ubiquity of Relative Valuation Reasons for Popularity and Potential Pitfalls Standardized Values and Multiples

Earnings Multiples Book Value or Replacement Value Multiples Revenue Multiples Sector-Specific Multiples

The Four Basic Steps of Using Multiples

Definitional Tests Descriptive Tests Analytical Tests Application Tests

Reconciling Relative and Intrinsic Valuations Conclusion

5. Real Options Valuation

The Essence of Real Options Real Options, Risk-Adjusted Value, and Probabilistic Assessments Real Options Examples

The Option to Delay an Investment The Option to Expand an Investment The Option to Abandon an Investment

Caveats for Real Options Conclusion Appendix: Basics of Options and Option Pricing

Option Payoffs Determinants of Option Value Option Pricing Models

Part II: The Dark Side of Macro Inputs

6. A Shaky Base: A “Risky” Risk-Free Rate

What Is a Risk-Free Asset? Why Do Risk-Free Rates Matter? Estimating a Risk-Free Rate

Requirements for an Investment to Be Risk-Free The Purist Solution A Practical Compromise The Currency Effect Real Versus Nominal Risk-Free Rates

Issues in Estimating Risk-Free Rates

There Are No Long-Term Traded Government Bonds The Government Is Not Default-Free The Risk-Free Rate Might Change Over Time

Closing Thoughts on Risk-Free Rates Conclusion Appendix 6.1

7. Risky Ventures: Assessing the Price of Risk

Why Do Risk Premiums Matter? What Are the Determinants of Risk Premiums?

Equity Risk Premiums Default Spreads

Standard Approaches for Estimating Risk Premiums

Equity Risk Premiums Default Spreads Problem Scenarios The Dark Side The Light Side The Dark Side The Light Side The Dark Side The Light Side

Conclusion Appendix 7.1

8. Macro Matters: The Real Economy

Growth in the Real Economy

Why Does Real Economic Growth Matter? Looking at History The Dark Side The Light Side

Expected Inflation

Why Does Expected Inflation Matter? Looking at History U.S. Inflation Rate Across Time The Dark Side The Light Side

Exchange Rates

Why Do Exchange Rates Matter? Looking at History The Dark Side The Light Side

Conclusion

Part III: The Dark Side across the Life Cycle

9. Baby Steps: Young and Start-Up Companies

Young Companies in the Economy

A Life Cycle View of Young Companies Characteristics of Young Companies

Valuation Issues

Intrinsic (DCF) Valuation Relative Valuation

The Dark Side The Light Side

Discounted Cash Flow Valuation Relative Valuation Real Options

Conclusion

10. Shooting Stars: Valuing Growth Companies

Growth Companies

A Life Cycle View of Growth Companies

Characteristics of Growth Companies Valuation Issues

Intrinsic Value

The Dark Side of Valuation

Discounted Cash Flow Valuation Relative Valuation

The Light Side of Valuation

Discounted Cash Flow Valuation Relative Valuation

Conclusion

11. The Grown-Ups: Mature Companies

Mature Companies in the Economy

A Life Cycle View of Mature Companies Characteristics of Mature Companies

Valuation Issues

Intrinsic (DCF) Valuation Relative Valuation

The Dark Side of Valuation

Growth in Mature Companies Acquisition Inconsistencies Unreal Restructuring Debt and Value

Relative Valuation The Light Side of Valuation

Growth and Acquisitions Changing Management The Expected Value of Control

Conclusion

12. Winding Down: Declining Companies

Declining Companies in the Economy

A Life Cycle View of Declining Companies Characteristics of Declining Companies

Valuation Issues

Intrinsic (DCF) Valuation From Operating Assets to Equity Value per Share Relative Valuation

The Dark Side of Valuation

Autopilot Optimism Discount Rate Contortions Divestiture Follies Book Capital Dealing with Distress Relative Valuation

The Light Side of Valuation

A Framework for Dealing with Decline and Distress Irreversible Decline, Low Distress Reversible Decline, Low Distress Distress

Conclusion

Part IV: The Dark Side Across Company Types

13. Ups and Downs: Cyclical and Commodity Companies

The Setting

Cyclical Companies Commodity Companies Characteristics

The Dark Side of Valuation

Base Year Fixation The Macro Crystal Ball Macro Point of View (POV) Valuations Selective Normalization False Stability

The Light Side of Valuation

Discounted Cash Flow Valuation Relative Valuation The Real Options Argument for Undeveloped Reserves

Conclusion

14. Mark to Market: Valuing Financial Services Companies

Financial Services Firms: The Big Picture Characteristics of Financial Services Firms

The Regulatory Overlay Differences in Accounting Rules Debt and Equity Estimating Cash Flows Is Difficult

The Dark Side of Valuation

Debt Cash Flow Substitutes Go with the Flow: Dividends Trusting Book Value Regulation and Risk The Light Side of Valuation Discounted Cash Flow Models Asset-Based Valuation Relative Valuation

Conclusion

15. Invisible Investments: Valuing Firms with Intangible Assets

Firms with Intangible Assets

Intangible Assets in the Overall Economy Characteristics of Firms with Intangible Assets Valuation Consequences

The Dark Side of Valuation

Intrinsic Valuation Relative Valuation

The Light Side of Valuation

Regaining Accounting Consistency Dealing with Equity Options Debt and Cash The Compressed Life Cycle

Conclusion

16. Volatility Rules: Emerging-Market Companies

The Role of Emerging-Market Companies

Emerging-Market Companies in the Global Economy Why Do Emerging Economies Matter? Characteristics of Emerging-Market Companies

The Dark Side of Valuation

Currency Mismatches Miscounting and Double-Counting Country Risk Risk Parameters Incorporation Effect Ignoring Missing Information Corporate Governance Mood Swings Post-Valuation Discounts

The Light Side of Valuation

Discounted Cash Flow Valuation Relative Valuation

Conclusion

17. Going to Pieces: Disaggregated Value

Aggregation versus Disaggregation Multinational Conglomerates

Role in the Economy Characteristics Valuation Issues

The Dark Side of Valuation

Intrinsic Valuation Relative Valuation

The Light Side of Valuation

Discounted Cash Flow Valuation Relative Valuation

User/Subscriber/Customer Companies

The Rise of the User Valuation Issues The Dark Side of Valuation The Light Side of Valuation

Conclusion

18. The Cynic’s Corner: Value versus Price

Value versus Price Investing versus Trading

The Value Game versus the Pricing Game Investing versus Trading The Dark Side The Light Side

The Right Approach

Job Description Cui Bono? How Are You Judged? The Dark Side The Light Side

Categorizing Investments

Cash Flow–Generating Assets Commodities Currencies Collectibles

The Questionable Investments

Gold (and Other Precious Metals) Crypto Investments Trophy Assets

Conclusion

Part V: The Finale

19. The Jedi Way: Vanquishing the Dark Side

Enlightening Propositions

Proposition 1: Be Steadfast on Principles, Open to New Tools, and Flexible on Estimates Proposition 2: Pay Heed to Markets, but Don’t Let Them Determine Your Valuations Proposition 3: Risk Matters Proposition 4: Growth Is Not Free and Is Not Always Value-Adding Proposition 5: All Good Things Come to an End Proposition 6: Watch Out for Truncation Risk Proposition 7: Look at the Past, but Think About the Future Proposition 8: Draw on the Law of Large Numbers Proposition 9: Accept Uncertainty, and Deal with It Proposition 10: Value = Stories + Numbers

Conclusion

Index

← Prev
Back
Next →

← Prev
Back
Next →