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Damodaran on Valuation

Book Description

"Aswath Damodaran is simply the best valuation teacher around. If you are interested in the theory or practice of valuation, you should have Damodaran on Valuation on your bookshelf. You can bet that I do."

-- Michael J. Mauboussin, Chief Investment Strategist, Legg Mason Capital Management and author of More Than You Know: Finding Financial Wisdom in Unconventional Places

In order to be a successful CEO, corporate strategist, or analyst, understanding the valuation process is a necessity. The second edition of Damodaran on Valuation stands out as the most reliable book for answering many of today's critical valuation questions. Completely revised and updated, this edition is the ideal book on valuation for CEOs and corporate strategists. You'll gain an understanding of the vitality of today's valuation models and develop the acumen needed for the most complex and subtle valuation scenarios you will face.

Table of Contents

  1. Copyright
  2. Dedication
  3. Preface
  4. Introduction to Valuation
    1. A PHILOSOPHICAL BASIS FOR VALUATION
    2. INSIDE THE VALUATION PROCESS
    3. APPROACHES TO VALUATION
    4. ROLE OF VALUATION
    5. CONCLUSION
  5. Discounted Cash Flow Valuation
    1. Estimating Discount Rates
      1. WHAT IS RISK?
      2. COST OF EQUITY
      3. FROM COST OF EQUITY TO COST OF CAPITAL
      4. CONCLUSION
    2. Measuring Cash Flows
      1. CATEGORIZING CASH FLOWS
      2. EARNINGS
      3. TAX EFFECT
      4. REINVESTMENT NEEDS
      5. FROM FIRM TO EQUITY CASH FLOWS
      6. CONCLUSION
    3. Forecasting Cash Flows
      1. STRUCTURE OF DISCOUNTED CASH FLOW VALUATION
      2. LENGTH OF EXTRAORDINARY GROWTH PERIOD
      3. DETAILED CASH FLOW FORECASTS
      4. TERMINAL VALUE
      5. ESTIMATION APPROACHES
      6. CONCLUSION
    4. Equity Discounted Cash Flow Models
      1. DIVIDEND DISCOUNT MODELS
      2. FCFE (POTENTIAL DIVIDEND) DISCOUNT MODELS
      3. FCFE VERSUS DIVIDEND DISCOUNT MODEL VALUATION
      4. PER SHARE VERSUS AGGREGATE VALUATION
      5. CONCLUSION
    5. Firm Valuation Models
      1. COST OF CAPITAL APPROACH
      2. ADJUSTED PRESENT VALUE APPROACH
      3. EXCESS RETURN MODELS
      4. CAPITAL STRUCTURE AND FIRM VALUE
      5. CONCLUSION
  6. Relative Valuation
    1. Relative Valuation: First Principles
      1. WHAT IS RELATIVE VALUATION?
      2. UBIQUITY OF RELATIVE VALUATION
      3. REASONS FOR POPULARITY AND POTENTIAL PITFALLS
      4. STANDARDIZED VALUES AND MULTIPLES
      5. FOUR BASIC STEPS TO USING MULTIPLES
      6. RECONCILING RELATIVE AND DISCOUNTED CASH FLOW VALUATIONS
      7. CONCLUSION
    2. Equity Multiples
      1. DEFINITIONS OF EQUITY MULTIPLES
      2. DISTRIBUTIONAL CHARACTERISTICS OF EQUITY MULTIPLES
      3. ANALYSIS OF EQUITY MULTIPLES
      4. APPLICATIONS OF EQUITY MULTIPLES
      5. CONCLUSION
    3. Value Multiples
      1. DEFINITION OF VALUE MULTIPLES
      2. DISTRIBUTIONAL CHARACTERISTICS OF VALUE MULTIPLES
      3. ANALYSIS OF VALUE MULTIPLES
      4. APPLICATIONS OF VALUE MULTIPLES
      5. CONCLUSION
  7. Loose Ends in Valuation
    1. Cash, Cross Holdings, and Other Assets
      1. CASH AND NEAR-CASH INVESTMENTS
      2. FINANCIAL INVESTMENTS
      3. HOLDINGS IN OTHER FIRMS
      4. OTHER NONOPERATING ASSETS
      5. CONCLUSION
      6. APPENDIX 10.1: INDUSTRY AVERAGES: CASH RATIOS—JANUARY 2005
    2. Employee Equity Options and Compensation
      1. EQUITY-BASED COMPENSATION
      2. EMPLOYEE OPTIONS
      3. RESTRICTED STOCK
      4. CONCLUSION
    3. The Value of Intangibles
      1. IMPORTANCE OF INTANGIBLE ASSETS
      2. INDEPENDENT AND CASH-FLOW-GENERATING INTANGIBLE ASSETS
      3. FIRMWIDE CASH-FLOW-GENERATING INTANGIBLE ASSETS
      4. INTANGIBLE ASSETS WITH POTENTIAL FUTURE CASH FLOWS
      5. CONCLUSION
      6. APPENDIX 12.1: OPTION PRICING MODELS
    4. The Value of Control
      1. MEASURING THE EXPECTED VALUE OF CONTROL
      2. MANIFESTATIONS OF THE VALUE OF CONTROL
      3. CONCLUSION
    5. The Value of Liquidity
      1. MEASURING ILLIQUIDITY
      2. COST OF ILLIQUIDITY: THEORY
      3. COST OF ILLIQUIDITY: EMPIRICAL EVIDENCE
      4. DEALING WITH ILLIQUIDITY IN VALUATION
      5. CONSEQUENCES OF ILLIQUIDITY
      6. CONCLUSION
    6. The Value of Synergy
      1. WHAT IS SYNERGY?
      2. VALUING SYNERGY
      3. DUBIOUS SYNERGIES
      4. EVIDENCE ON SYNERGY—VALUE CREATED AND ADDED
      5. COMMON ERRORS IN VALUING SYNERGY
      6. CONCLUSION
    7. The Value of Transparency
      1. AN EXPERIMENT
      2. DEFINING COMPLEXITY
      3. SOURCES OF COMPLEXITY
      4. REASONS FOR COMPLEXITY
      5. MEASURING COMPLEXITY
      6. CONSEQUENCES OF COMPLEXITY
      7. DEALING WITH COMPLEXITY
      8. CURES FOR COMPLEXITY
      9. CONCLUSION
      10. APPENDIX 16.1: STANDARD & POOR'S TRANSPARENCY AND DISCLOSURE INDEX: KEY QUESTIONS
      11. APPENDIX 16.2: MEASURING COMPLEXITY WITH A SCORE—AN EXAMPLE
    8. The Cost of Distress
      1. POSSIBILITY AND CONSEQUENCES OF FINANCIAL DISTRESS
      2. DISCOUNTED CASH FLOW VALUATION
      3. RELATIVE VALUATION
      4. FROM FIRM TO EQUITY VALUE IN DISTRESSED FIRMS
      5. CONCLUSION
    9. Closing Thoughts
      1. CHOICES IN VALUATION MODELS
      2. WHICH APPROACH SHOULD WE USE?
      3. CHOOSING THE RIGHT DISCOUNTED CASH FLOW MODEL
      4. CHOOSING THE RIGHT RELATIVE VALUATION MODEL
      5. WHEN SHOULD WE USE THE OPTION PRICING MODELS?
      6. TEN STEPS TO BETTER VALUATIONS
      7. CONCLUSION
  8. Index