The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses (2nd Edition)
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Renowned valuation expert Aswath Damodaran reviews the core tools of valuation, examines today’s most difficult estimation questions and issues, and then systematically addresses the valuation challenges that arise throughout a firm’s lifecycle in The Dark Side of Valuation: Valuing Young, Distressed and Complex Businesses.
In this thoroughly revised edition, he broadens his perspective to consider all companies that resist easy valuation, highlighting specific types of hard-to-value firms, including commodity firms, cyclical companies, financial services firms, organizations dependent on intangible assets, and global firms operating diverse businesses. He covers the entire corporate lifecycle, from “idea” and “nascent growth” companies to those in decline and distress, and offers specific guidance for valuing technology, human capital, commodity, and cyclical firms. Damodaran places special emphasis on the financial sector, illuminating the implications of today’s radically changed credit markets for valuation and addresses valuation questions that have suddenly gained urgency, ranging from “Are U.S. treasuries risk free?” to “How do you value assets in highly illiquid markets?” Readers will gain insight into:
· Overcoming the temptation to use unrealistic or simplistic valuation methods
· Risk-free rates, risk premiums and other macroeconomic assumptions
· Intelligent analysis for angel and early venture capital investing
· Projecting the impact of regulatory changes
· The stages of the corporate lifecycle
· Valuing financial services and commodities companies
Damodaran’s insights will be indispensable to everyone involved in valuation: financial professionals, investors, M&A specialists, and entrepreneurs alike.
and equity risk premiums may be ramped up as well. Uncertainty about inflation in the future can also make companies more reluctant to invest in long-term projects and thus alter both the level of real economic growth and what sectors it occurs in. Finally, if the expected inflation rate in one currency increases relative to other currencies, we should expect exchange rates to follow, with the higher inflation currency depreciating over time. Looking at History If expected inflation
justify paying the current stock price of $19 a share. Relative Valuation There is no reason why relative valuation cannot be used to arrive at an independent estimate of the value of equity in a growth firm—as long as we keep two key factors in mind. The first is that using multiples and comparables cannot reduce the uncertainty inherent in valuing growth companies. The second is that relative valuation techniques have to be adapted to meet the limitations of growth companies—the
goodwill from capital invested to preserve consistency. However, this can be too generous to acquisitive firms that consistently overpay on acquisitions. Goodwill, after all, includes not only a premium for growth assets but premiums for control and synergy, as well as any overpayment on the acquisition. In a full information world, we would subtract only that portion of goodwill that is due to growth assets and leave behind the portions attributable to synergy, control, and overpayment. The
discount rates we apply have to be consistent with the cash flow definition, with the cost of equity used to discount cash flows to equity and the cost of capital to discount cash flows to the firm. When estimating growth, we noted the limitations of historical growth numbers and outside estimates and the importance of linking growth to fundamentals. Finally, we applied closure to the models by assuming that cash flows will settle into stable growth sometime in the future, but we imposed
firm takes an investment because doing so allows it either to make other investments or to enter other markets in the future. In such cases, it can be argued that the initial investment provides the firm with an option to expand, and the firm should therefore be willing to pay a price for such an option. Consequently, a firm may be willing to lose money on the first investment because it perceives the option to expand as having a large-enough value to compensate for the initial loss. To