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.

Footnotes: https://pages.stern.nyu.edu/~adamodar/New_Home_Page/webcastvalonline.htm