VALUATION: SETTING THE TABLE - New York...

VALUATION:SETTINGTHETABLE

AswathDamodaran

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GeneralInformation

¨ Office:Room9-69¨ E-mail:adamodar@stern.nyu.edu¨ HomePage:http://www.damodaran.com¨ OfficeHours

¤ Monday 9.45-10.20,12-12.30¤ Wednesday 9.45-10.20,12-12.30¤ The“fairgame”principlestillapplies

¨ Theteachingassistants/fellowsforthisclassare1. JonathanFreed,jonathan.freed@stern.nyu.edu2. DavidKlaber,dk2969@stern.nyu.edu3. MichaelXu,mx343@stern.nyu.edu

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Theme1:CharacterizingValuationasadiscipline

¨ Inascience,ifyougettheinputsright,youshouldgettheoutputright.Thelawsofphysicsandmathematicsareuniversalandtherearenoexceptions.Valuationisnotascience.

¨ Inanart,thereareelementsthatcanbetaughtbutthereisalsoamagicthatyoueitherhaveoryoudonot.Theessenceofanartisthatyouareeitheragreatartistoryouarenot.Valuationisnotanart.

¨ Acraftisaskillthatyoulearnbydoing.Themoreyoudoit,thebetteryougetatit.Valuationisacraft.

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Theme2:Valuationissimple&universal

Value Enhacement- Management- Activist Investors

Acquisitions- Synergy- Control

Every asset has a value. We just have to find it.

Perspectives on value

Chan

ging

Val

ue

Ways of Applying Value

Ways of thinking about/estimating valueIntrinsic ValueThe value of an asset is the present value of the expected cashflows

Relative Value/ PricingThe value of an asset is what others are willing to pay for it (or something like it)

Contingent ValueThe value of an asset may be contingent on what happens to other assets

Valuing publicly traded firms- Small vs Large- Developed vs Emerging- Manufacturing vs Technology

And private businesses- For owners- And investors(private equity, venture capital, IPO)

Across the life cycle- Young firms- IPOs- Mature firms- Declining firms

In sickness and in health

- Survival Risk- Distress Risk

- Nationalization Risk

Investors- Small vs Large- Short term vs Long term- Individual vs Instiutional- Insider vs Outsider

Analysts- Buy Side vs Sell Side

Accountants

Regulators/ Government

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Theme3:Valuinganassetisnotthesameaspricingthatasset

PRICEValue

Price

THE GAPIs there one?

If so, will it close?If it will close, what will

cause it to close?

Drivers of intrinsic value- Cashflows from existing assets- Growth in cash flows- Quality of Growth

Drivers of price- Market moods & momentum- Surface stories about fundamentals

INTRINSIC VALUE

Accounting Estimates

Valuation Estimates

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Theme4:Goodvaluation=Story+Numbers

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Theme5:Ifyouvaluesomething,youshouldbewillingtoactonit..

¨ Whatvaluationtheory?ThereisverylittletheoryinvaluationandIamnotsurewhatanacademicvaluationwouldlikelikeandamnotsurethatIwanttofindout.

¨ Pragmatism,notpurity:Theendgameistoestimateavalueforanasset.Iplantogetthere,evenifitmeanstakingshortcutsandmakingassumptionsthatwouldmakepuristsblanch.

¨ Doyoubelieve?Toactonyourvaluations,youhavetohavefaithin¤ Inyourownvaluationjudgments.¤ Inmarkets:thatpriceswillmovetowardsyourvalueestimates.Thatfaithwillhavetobeearned.

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CourseOutline

The Big Picture

Intrinsic Value: Inputs and Process- Risk Free Rates, Risk Premiums and Discount Rates- Earnings and Cash Flows- Growth and its value- Terminal Value

Sessions 1 -2

Sessions 3-12

Intrinsic Value: Examples- Narrative and Numbers- Valuation Examples- The Dark Side of Valuation- Value and Price

Sessions 12-15

Relative Valuation (Pricing)- The Pricing Process- Standardized Prices (Multiples)- "Comparables"- Doing Pricing Right

Sessions 16-19

Asset-Based Valuation- Liquidation Valuation- Sum-of-the-parts Valuation

Session 20

Real Option Valuation- The Basis- The Option to Delay (Patents, Reserves)- The Option to Expand ("Strategic")- The Option to Abandon (Flexibility)

Session 21-23

Acquisition ValuationValue Enhancement

Session 24

Session 25The Grand FinaleSession 26

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Pre-seasonprep!Gettingreadyfortheclass

¨ Accounting:Therawmaterialyouneedtovalueacompanycomesprimarilyfromaccountingstatements.Understandinghowtoreadafinancialstatementandwheretofindtheinformationneediscritical.¤ Myprimer:

http://people.stern.nyu.edu/adamodar/New_Home_Page/AccPrimer/accstate.htm¨ Statistics:Statisticsisdesignedtohelpusmakesenseofdatathatislarge

andcontradictory.Thatisexactlytheproblemwefaceinvaluation.¤ Myprimer:

http://people.stern.nyu.edu/adamodar/New_Home_Page/StatFile/statistics.htm¨ Finance:Therearetoolsthatwedrawoninvaluationextensively.

¤ Riskandreturnmodels:http://www.stern.nyu.edu/~adamodar/pdfiles/acf3E/ch3.pdf

¤ Presentvalue:http://people.stern.nyu.edu/adamodar/New_Home_Page/PVPrimer/pvprimer.htm

¤ Corporatefinance:http://people.stern.nyu.edu/adamodar/New_Home_Page/triumdesc.html

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Classstructure

Monday- Class

Tuesday- Valuationoftheweekemail

Wednesday- Class- Weeklychallengesentout

Thursday- Projectupdateemail

FridayTopicalwebcast

Saturday- WeeklyNewsletter

Sunday- Weeklychallengedue&solutionposted

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Foreachclass,pleasetryto..

¨ Be here and please be on time: Each class will start with a pre-classtest (which will lay the basis for the class but will not be graded) inthe first 5 minutes.

¨ Bring your lecture note packet with you: These are available inthree parts. They can be bought at the book store or downloadedfrom my web site by going to:http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqlect.html

¨ If you do miss a class, catch up: All classes will be web cast. Theweb casts will be online (usually) within a couple of hours of theclass. The webcasts are available in four formats:¤ asastream(withahigh-speedinternetconnection)¤ asaYouTubevideo(ifyouhavealower-speedconnectionorsmallscreen

device)¤ asadownloadablevideofile(foracomputer,atabletorasmartphone)¤ asadownloadableaudiofile.

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Nicetohave,butyoucanlivewithoutthem…

¨ Books:Ihaveafewbooksonvaluationandtheytendtosaymuchthesamethings,albeitindifferentformats.Youdon’tneedanyofthembutifyoucangetone,itwon’thurt.¤ InvestmentValuation(3rdedition):isthebookthatismostsuitedforaclassroomtextbook.Itfollowsthe

standardscriptofvaluation,lookingatdifferentvaluationmodelswithtwists.Italsofollowstextbookformat(withproblemsattheendofeachchapter)

¤ DamodaranonValuation(2ndedition):providesaquickerreviewofthebasicvaluationbutthesecondhalfofthebookisbuiltarounddealingwithwhatIcallthelooseendsofvaluationandisreallymeantforpractitionerswhodealwiththelooseendsonaconstantbasis.

¤ TheDarkSideofValuation(2ndedition):coverscompaniesthataredifficulttovalue– youngcompanies,moneylosingcompanies,financialservicecompanies,emergingmarketcompanies.

¤ TheLittleBookofValuation:Ifyoutruly,trulyhatetoreadandarebudgetconstrained,thinkofthisastheCliffnotesversionofmylongerbooks.

¤ NarrativeandNumbers(Comingsoon):Thisisforstorytellerswhowanttodevelopsomedisciplineandnumbercruncherswhowanttobeimaginative.

¨ Apps:Ihaveavaluationapp(co-developedwithAnant Sundaram atDartmouth)fortheiPad andiPhonescalleduValue.Checkitout!iPad version:https://itunes.apple.com/us/app/uvalue/id440046276iPhoneversion:https://itunes.apple.com/us/app/uvalue-mobile/id492586911

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Stayconnected!InformationCentral

¨ Websitefortheclass:Everythingassociatedwiththisclass(andImeaneverything)willbeavailableonthewebsitefortheclass:

n http://www.stern.nyu.edu/~adamodar/New_Home_Page/equity.htmlIwilltrytoalsokeepthematerialonNYUClasses,butIdon’tlikeclosedsystems.Enoughsaid!

¨ SocialMediasites(MyNYUClassesalternative):Ihavebeenexperimentingwithnewwaysofofferingthisclass.Thissemester,Iwillfindanewforumtopresentthisclass.Iwouldlovetogetyourfeedbackonhowitworks.Iwillpassiton.

¨ AppleiTunesU:TheclasswillalsobecarriedonAppleiTunesU.¤ IfyouhaveanAppledevice(aniPhoneoriPad),downloadtheiTunesUappfromtheiTunesstore

andthentypeinorclickonthelinkfortheclass.https://itunesu.itunes.apple.com/audit/COHYXVZ1GA0N1TYA

¤ IfyouhaveanAndroid(whatpossessedyoutocommitsuchamortalsin?),youcanwatchiTunesU,ifyouhavetheTunesviewer apponyourAndroid.Youcangetitbygoingto

http://sourceforge.net/projects/tunesviewer/¤ YouTubeChannel:Thereisafinaloption,ifyourbroadbandconnectionisnotthatgreatand

youarewatchingonaTablet/smartphone.ThereisaYouTubeplaylistforthisclass,whereallclasssessionswillbeloaded.https://www.youtube.com/playlist?playnext=1&list=PLUkh9m2BorqmSH1Y8QIYQ-0HnbWpHvBzfWhenyougetachance,checkitout.

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More…Yes,thereismore…

¨ Googlecalendar:ThereisaGooglecalendarforthesitethatyoucanaccessbygoingto:http://bit.ly/2aTViyl

¨ Myblog:Mynot-so-brilliantandnot-very-insightfulthoughtsonvaluation,corporatefinanceandportfoliomanagementwillbepostedonmyblog,MusingsonMarkets.http://aswathdamodaran.blogspot.com/

¨ Twitterfeed:Justincaseyoudon’tgetenoughofmeinclass,onlineandfrommyblog,pleasehelpmeapproachLadyGagastatusbyjoiningmyTwitterfollowerlist(@AswathDamodaran).

¨ Otherreadings:Theotherreadingsforeachtopicareavailableonmywebsite,andcanbedownloadedat¤ http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqread.htm

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GradingDistribution…

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GradingBasis

¨ GroupWork:Studentsshouldworkingroupsoffour(minimum)toseven(maximum).Eachgroupwillberequiredtoworkonagroupproject¤ ValuationProject Dueintwoparts 30%

n Part1:DCFValuationduebyNovember4at5pmn Part2:EntireprojectdueonDecember14at5p.m.

¤ MysteryProject:TBA 10%¨ IndividualWork:

¤ Quizzes:Therewillbethreequizzesworth10%apiece.Quiz1:DCFEstimationIssues:Session9 (October10)Quiz2:MoreDCF:Session17(November9)Quiz3:Relative&PrivateCovaluation:Session22(November30)

¤ FinalExam:Thiswillalsobeanopen-bookandopen-notescumulativeexamworth30%.ItisscheduledforFriday,December16,from1-3pm.

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RecappingQuiz/ExamGroundRules

1. Quizzeswillbeonthedesignateddaysinthefirst30minutesoftheclass.2. Examswillbeopenbook,opennotes.Youcanbringinasmuchsupportingmaterialasyoucan

carry.3. Eachquizisworth10%.4. Ifyouhavetomissaquizforgoodreason,youwillhavetoletmeknow(byemail)atleast15

minutesbeforethequizthatyouwillbemissingthequiz.5. Ifyoumissaquizforgoodreason,the10%weightonthatquizwillbereallocatedacrossyour

remainingexams(quizzesandfinal).Youcannotweightpriorquizzesmore.6. Ifyoutakeallthreequizzes,thescoreonyourworstquizwillbepusheduptotheaveragescore

acrossallofyourotherexams(theothertwoquizzesandthefinalexam)(Note:Itwillnotbethrownout). Ifyoumissaquiz,youwillnothavethisoption,evenifyoumissthequizforgoodreason.

7. Youcanneverbeworseofffromtakingallthreequizzes.Atworst,yourtotalscorewillbeunaffected,butatbest,itwillimprove.

8. IgradeallofyourquizzesandIgivepartialcredit.So,pleaseshowallwork.Ifyouhaveabeefwiththegrading(andIdomakemistakes),pleasecometome

9. Youcannotuseyourlaptops onthequiz.10. YoucanuseyouriPads forreviewinglecturenotesbutnotasconnecteddevices.

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RulesofEngagement

¨ Rulesofgroupwork:¤ Pickyourowngroups.(Ifyouhavetroublegettingpicked,Iwillhelp)¤ Allgroupworkwillbeselfpoliced,exceptinextremecircumstances.¤ Therewillbeonegradepergroup,nomatterhowtheworkloadis

distributedamongthegroupmembers¨ Rulesonindividualwork

¤ Allexamsandquizzesarestrictlyindividualwork.¤ Therewillbenomake-upquizzes.Ifyoumissaquizforagoodreason,the

gradewillberedistributedovertheremainingpartofthecourse.Ifyoutakeallthreequizzes,thescoreonyourworstquizwillberaisedtotheaveragescoreacrossallofyourotherexams(twoquizzesandthefinal).

¤ Iwillbethegrader,andIdomakemistakes.IfIscrewup,bringittomyattentionandIwillfixit.

¨ RulesonParticipation¤ Allparticipationiswelcome.