Valuation – Aswath Damodaran

This course can be found in full on YouYube. It consists of 25 videos, each around 15 minutes in length.



Fundamental propositions:

There are three main approaches to valuation:

Intrinsic Valuation

\[\text{value} = \frac{E(C_1)}{1+r} + \frac{E(C_2)}{(1+r)^2} + \ldots + \frac{E(C_n)}{(1+r)^n}\]

The risk-free rate and discounting

Equity risk premia

Relative risk measures

Cost of debt and capital

\[\text{cost of debt} = R_f + k \times (\text{country default spread}) + \text{company default spread}\]

Estimating cash flows

Estimating growth

Terminal values

There needs to be some closure for cash flows beyond a certain time. There are three approaches

  1. Consider liquidation value
  2. Estimate the stable growth rate then sum the infinite series
  3. Use a multiple like P/E. This should not be used.

Most often, the stable growth method is best. The rules for stable growth are as follows:

Value enhancement

  1. Increase cash flows from existing assets
  2. Increase growth rate or enhance the value of growth
  3. Lower discount rate by changing debt/equity mix
  4. Delay the terminal value by building a competitive advantage.

Research has shown that:

The value of equity

There are some additional value factors that should be considered

Synergy, control, and complexity

Distress, dilution, and illiquidity

Relative Valuation

1. Define the multiple

2. Describe the multiple with a distribution

3. Analyse

How do changes in a firm’s fundamentals affect the multiple?

Driving variables for multiples

4. Apply

PE Ratios


Price/book ratio

\[P/B = \frac{\text{ROE} \times \text{payout ratio}}{1-g}\]

Revenue multiples

Option-based valuation

The option to delay

The option to expand and abandon

Distressed equity


Asset-based valuation

Valuation of private companies