Valuation – Aswath Damodaran

Valuation

by Aswath Damodaran

This course covers the valuation of equity securities and investment strategies utilizing them. Topics include the mathematics of equity valuation, history of stock returns, varieties of equity instruments, and the many varieties of common stock risk. Reviews professional portfolio strategies and forecasting techniques; the evaluation of mutual funds and pension funds; the role of equity options and futures in stock portfolio strategies; the role of technical analysis; and ethical issues in developing and using information that impacts stock prices.

NYU’s Stern Business School Professor Aswath Damodaran teaches Valuation.
This course was delivered in Fall 2009.

Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University (Kerschner Family Chair in Finance Education), where he teaches corporate finance and equity valuation. He is best known as author of several widely used academic and practitioner texts on Valuation, Corporate Finance, and Investment Management.

Course Details:

Lecture 1 – Introduction to Valuation
Class Introduction

Lecture 2 – Approaches to Valuation
Approaches to Valuation
Introduction to DCF valuation
Firm vs Equity Valuation

Lecture 3 – Valuation Riskfree Rates
The Big Picture of Valuation
Riskfree Rates
– Necessary Ingredients
– What if the government is not default free?

Lecture 4 – Equity Risk Premiums
Equity Risk Premiums
– What are they?
– Historical Risk Premiums
– Country Risk Premiums
– Company Exposure to Country Risk
– Implied Equity Risk Premiums

Lecture 5 – Equity Risk Premia and Bond Default
Equity Risk Premia and Bond default spreads
Equity Risk Premia and Real Estate Cap Rates
Implied premia for emerging markets
Betas
– The problem with regression betas
– Solutions

Lecture 6 – New ERP for September 2009
Updated ERP for September 2009
The Cost of Debt
Why we use market value debt ratios.
Cost of Capital – From one currency to another.

Lecture 7 – Hybrid Securities Measurings Earnings
Hybrid Securities
Measuring Earnings
– Updated values
– Corrrecting for leases
– Correcting for R&D

Lecture 8 – Accounting Fraud
Accounting fraud
– Dealing with money losing companies
– Tax rates
– Cap Ex

Lecture 9 – Working Captial
Working Capital: Definition and Forecasting
Cash flow to Equity: Dividends, Earnings and FCFE
Expected growth
– The problems with historical growth
– Analyst and Management forecasts of growth
– Fundamental Growth

Lecture 10 – Fundamental Growth
Fundamental Growth
– EPS versus Net Income
– Organic vs Efficiency Growth
-Operating Income Growth
-Growth with money losing companies
Terminal Value
-Why multiples don’t work
– Consistency rules (Growth rate, Length of growth, Excess Returns)

Lecture 11 – Terminal Value
Terminal value: Final thoughts
Picking the “right” DCF model
Loose ends in valuation
– The value of cash
– The value of cross holdings

Lecture 12 – Other Missed Assets
Other missed assets?
The value of complexity
Defining debt: Cost of capital versus Debt to net out…
Equity Options

Lecture 13 – Valuation Examples
Valuation examples
– Implied growth rate & Target prices
– Financial service firms: pre and post crisis
– Valuing the S&P 500
– Negative FCFE and dilution effects

Lecture 14 – Valuing Corporate Governance Lambdas
Valuing Corporate Governance
Lambdas and value
The Dark Side of Valuation
– Valuing young companies

Lecture 15 – Valuing Companies with R&D
Valuing companies with R&D
Dealing with uncertainty in valuation
Valuing declining and distressed companies
Macro effects on valuation
Relative Valuation
– Introduction
– Definition and Descriptive Tests

Lecture 16 – Analysis and Application of the PE Ratio
Analysis and Application Tests
The PE Ratio
– Definiton
– Descroption
– Deternimnats

Lecture 17 – PE Ratios continued
More on PE ratios
– Comparing PE ratios across markets
– Comparing PE ratios across companies
– Cross sectional regressions

PEG Ratios
– Definition and Determinants

Lecture 18 – PEG Ratios
PEG Ratios- Applicaitons
Value Multiples
– EV/EBITDA and determinants
Price to Book Ratios

Lecture 19 – Visualizing Cheap Companies
Visualizing cheap companies – PBV versus ROE
EV to Book Capital Ratios
Finding the companion variable
PS and EV/Sales Ratios
Brand Name Value

Lecture 20 – Option Pricing Redux
Option Pricing Redux
The Option to Delay
– Valuing Patents
– Valuing undeveloped natural reserves

Lecture 21 – Valuing Equity as an Option
Final thoughts on valuing equity as an option
Acquirers’ Anonymous: Seven Steps to Sobriety
– Evidence on acquisitions
– Acquisition tests

Lecture 22 – Acquisition Tests, Price v. Value
More acquisition tests
Price versus Value Enhancement
Pathways to Value Enhancement
The value of control

Lecture 23 – Closing Thoughts on Value Enhancement
Closing thoughts on Value Enhancement
Dante meets DCF: Ten Sins in Valuation
Project Findings

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