Notes from Damodaran's Valuation Class

3 Approaches to Valuation

Intrinsic Value
- Cashflows, discount rate that prices in risk, growth, time horizon, etc.
- Focus is just on the business. Valuation is on its intrinsic characteristics.
- Designed for cashflow-generating assets, as opposed to, e.g., a Picasso painting or gold.
- Discounted cashflows valuation: Expected cashflows over time.
  - Can adjust for risk in the cashflow value or the discount rate.
  - If in the cashflow, use the Certaintiy Equivalent cashflow (CE). E.g. $90 risk-free vs $100 w/risk. In this scenario CE's and risk-free rates are used as inputs.
- Financial balance sheet (not accounting)
  - Assets: In-place assets, growth assets
  - Liabilities: Debt and equity (fund a biz by borrowing or use own money)
Relative Value
- Comps from similar companies -- comparied numerically via a multiple. P/E, P/B, etc.
Option Pricing
- Valuation is determined based on contengencies.
- Debt-laiden, distrressed company.
- Pharmancuetical who's medicine is based on government/patent approval.
- Oil and gas company where outcomes are based on whether or not oil is found in target area.