Valuation Course (Spring 2014) – Aswath Damodaran (New York University)
Valuation is a key component of almost every aspect of business. If you run a business, you need to be able to not only assess its value but determine how your actions affect that value, in positive and negative ways. If you are planning on investing in a business or a publicly traded company, you have to estimate its value.
In this class, we will look at the tools that are available to value a business and different ways of estimate that value. We will begin by describing how all valuation models can be broadly categorized into three approaches. In intrinsic valuation, you value an asset or business based on its fundamentals (cash flows, growth and risk). In relative valuation, or pricing, you value an asset based upon how similar assets are priced. In contingent claim valuation, you attach a premium to some assets because they offer a payoff, if something happens.
We will spend the first 12 sessions of the class on intrinsic valuation (and its most common form, which is discounted cash flow valuation), delving into the mechanics of how to measure cash flows, estimate growth in the future and assess risk. In the process, we will look at (and value) a range of companies (small vs large, emerging vs developed, growth vs mature) and how the estimation process may have to be modified with each, while preserving first principles. At the end of these sessions, you should be able to estimate an intrinsic value for any publicly traded company, no matter how complex it is.
We will them move on to evaluate how to price assets (businesses), based upon how similar assets (businesses) are priced. In the process, we will look at all of the widely used multiples (PE ratio, EV to EBITDA, Book Value multiples, Revenues multiples) and how they can be used most effectively and why they are often misused. We will follow up by expanding our discussion to include both privately owned (often small) businesses and asset-based valuation approaches (liquidation, sum of the parts value).
In the next segment, we will look at the basis for the use of option pricing to value some assets/businesses. We will argue that the “real option” argument should be used selectively (natural resource companies, companies with patents), while providing practical ways in which we can estimate the option premium in these companies.
In the final segment, we look at two applications of valuation. The first is in acquisitions, and in particular, we look at how best to value control and synergy in mergers. The second is in value enhancement, where management or ownership of a business is trying to take the right actions to increase its value.
There is no required book for the class, but if you decide to get one of my books, the one that fits the best is Investment Valuation (3rd edition). You can also try my favorite, The Dark Side of Valuation, or if you are interested in the loose ends of valuation, Damodaran on Valuation. Finally, if you are budget constrained the Little Book on Valuation will do the trick.
It is an ambitious agenda but I promise you three things. One is that I will hold nothing back. I will try to pass on everything that I know about valuation and will not withhold secret sauces or ingredients. The second is that I will inundate you with multiple opportunities to try your hand at valuation, knowing fully well that you are busy and will not have the time to take advantage of all of them. I firmly believe that you learn valuation by doing and want to give you multiple shots at doing so. The third is that I will try to strip valuation of much of the mystique that practitioners and so-called experts have endowed it with, and allow you to look at its simple core.
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