Investment Valuation, University Edition E-Book

Aswath Damodaran

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 2586

Veröffentlichungsjahr: 2025

Beschreibung

Updated edition of the definitive guide to investment valuation tools and techniques

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset delves into valuation techniques for a variety of different asset classes, including real options, start-up firms, unconventional assets, distressed companies and private equity, real estate, and many more, and explains how to choose the right model for any given asset valuation scenario. The models are presented with real-world examples so as to capture some of the problems inherent in applying these models, with discussion of differences and common elements between the models to provide readers with a holistic understanding of the subject matter.

Written by a professor of finance who is widely regarded as one of the best educators and thinkers on the topic of investment valuation, this newly revised and updated Fourth Edition explores topics including:

• Understanding financial statements, the basics of risk, and tests and evidence for market efficiency
• Estimating risk parameters and costs of financing, terminal value, and equity value per share
• Using scenario analysis, decision trees, and simulations for probabilistic approaches in valuation

Investment Valuation: Tools and Techniques for Determining the Value of Any Asset is an essential resource for all investors and students of financial markets seeking an all-in-one guide to expand their valuation knowledge and make better investment decisions.

Leseprobe

Table of Contents

Cover

Table of Contents

Title Page

Copyright

Dedication

Preface to the Fourth Edition

Chapter 1 Introduction to Valuation

A Philosophical Basis for Valuation

Pricing Versus Valuation

The Bermuda Triangle of Valuation

Market Efficiency

The Role of Valuation

Conclusion

Questions and Short Problems

Notes

Chapter 2 Approaches to Valuation

Intrinsic Valuation

Pricing or Relative Valuation

Contingent Claim Valuation

Conclusion

Questions and Short Problems

Notes

Chapter 3 Understanding Financial Statements

The Basic Accounting Statements

Asset Measurement and Valuation

Measuring Financing Mix

Measuring Earnings and Profitability

Measuring Risk

Other Issues in Analyzing Financial Statements

Conclusion

Questions and Short Problems

Notes

Chapter 4 The Basics of Risk

What Is Risk?

Equity Risk and Expected Return

Alternative Models for Equity Risk

A Comparative Analysis of Equity Risk Models

Models of Default Risk

Conclusion

Questions and Short Problems

Notes

Chapter 5 Option Pricing Theory and Models

Basics of Option Pricing

Option Pricing Models

Extensions of Option Pricing

Conclusion

Questions and Short Problems

Notes

Chapter 6 Market Efficiency—Definition, Tests, and Evidence

Market Efficiency and Investment Valuation

What Is an Efficient Market?

Testing Market Efficiency

Cardinal Sins in Testing Market Efficiency

Some Lesser Sins That Can Be a Problem

Evidence on Market Efficiency

Time Series Properties of Price Changes

Market Reaction to Information Events

Market Anomalies

Evidence on Insiders and Investment Professionals

Conclusion

Questions and Short Problems

Notes

Chapter 7 Riskless Rates and Risk Premiums

The Risk-Free Rate

Equity Risk Premium

Default Spreads on Bonds

Conclusion

Questions and Short Problems

Notes

Chapter 8 Estimating Risk Parameters and Costs of Financing

The Cost of Equity and Capital

Cost of Equity

From Cost of Equity to Cost of Capital

Best Practices at Firms

Conclusion

Questions and Short Problems

Notes

Chapter 9 Measuring Earnings

The Lead-in: From Accounting Data to Financial Information

Adjusting Earnings

Measuring Earnings Power: Clean Up and Time Differences

Conclusion

Questions and Short Problems

Notes

Chapter 10 From Earnings To Cash Flows

The Tax Effect

Reinvestment Needs

Conclusion

Questions and Short Problems

Notes

Chapter 11 Estimating Growth

The Importance of Growth

Historical Growth

Outsourcing Growth

Fundamental Determinants of Growth

Top-Down Growth: From Revenue Growth to Free Cash Flows

Qualitative Aspects of Growth

Conclusion

Questions and Short Problems

Notes

Chapter 12 Closure in Valuation: Estimating Terminal Value

Closure in Valuation

The Survival Issue

Closing Thoughts on Terminal Value

Conclusion

Questions and Short Problems

Notes

Chapter 13 Narrative and Numbers – Story to Value

Valuation as a Bridge

The Importance of Storytelling

The Dangers in Storytelling

From Story to Numbers: The Process

Narrative and Numbers Across the Life Cycle

Story Resets, Changes, and Breaks

Conclusion

Questions and Short Problems

Notes

Chapter 14 Equity Intrinsic Value Models

Equity Valuation

The Dividend Discount Model

The Augmented Dividend Discount Model

Potential Dividend or FCFE Models

FCFE Valuation Versus Dividend Discount Model Valuation

Conclusion

Questions and Short Problems

Notes

Chapter 15 Firm Valuation: Cost of Capital and Adjusted Present Value Approaches

Free Cash Flow to the Firm

Firm Valuation: The Cost of Capital Approach

Firm Valuation: The Adjusted Present Value Approach

Firm Valuation: Sum of the Parts

Effect of Leverage on Firm Value

Conclusion

Questions and Short Problems

Notes

Chapter 16 Estimating Equity Value per Share

Value of Nonoperating Assets

Firm Value and Equity Value

Stock-Based Compensation

Value per Share When Voting Rights Vary

Conclusion

Questions and Short Problems

Notes

Chapter 17 Fundamental Principles of Relative Valuation

Use of Relative Valuation

Standardized Values and Multiples

Four Basic Steps to Using Multiples

Reconciling Relative and Discounted Cash Flow Valuations

Conclusion

Questions and Short Problems

Notes

Chapter 18 Earnings Multiples

Price-Earnings Ratio

The PEG Ratio

Other Variants on the PE Ratio

Enterprise Value to EBITDA Multiple

Conclusion

Questions and Short Problems

Notes

Chapter 19 Book Value Multiples

Price-to-Book Equity

Value-to-Book Ratios

Tobin’S Q: Market Value/Replacement Cost

Conclusion

Questions and Short Problems

Notes

Chapter 20 Revenue Multiples and Sector-Specific Multiples

Revenue Multiples

Sector-Specific Multiples

Conclusion

Questions and Short Problems

Notes

Chapter 21 Valuing Financial Service Firms

Categories of Financial Service Firms

What Is Unique About Financial Service Firms?

General Framework for Valuation

Discounted Cash Flow Valuation

Relative Valuation

The Crisis Effect

Nonbank Financial Service Firms

Conclusion

Questions and Short Problems

Notes

Chapter 22 Valuing Money-Losing Firms

Negative Earnings: Consequences and Causes

Valuing Money-Losing Firms

Conclusion

Questions and Short Problems

Notes

Chapter 23 Valuing Young or Start-Up Firms

Information Constraints

General Framework for Analysis

Value Drivers

Estimation Noise

The Expectations Game

Conclusion

Questions and Short Problems

Notes

Chapter 24 Valuing Private Firms

What Makes Private Firms Different?

Estimating Valuation Inputs at Private Firms

Valuation Motives and Value Estimates

Valuing Venture Capital and Private Equity Stakes

Pricing Private Businesses

Conclusion

Questions and Short Problems

Notes

Chapter 25 Acquisitions and Takeovers

Background on Acquisitions

Steps in an Acquisition

Takeover Valuation: Biases and Common Errors

Structuring the Acquisition

Improving the Odds

Analyzing Management and Leveraged Buyouts

Conclusion

Questions and Short Problems

Notes

Chapter 26 Valuing Real Estate

Real Versus Financial Assets

Real Estate: The Underfollowed Investment Class

Intrinsic Valuation of Real Estate

Comparable/Relative Valuation

Valuing Real Estate Businesses

Conclusion

Questions and Short Problems

Notes

Chapter 27 Valuing Other Assets

Investment classification

Cash-Flow–Producing Assets

Collectibles

Trophy Assets

Conclusion

Questions and Short Problems

Notes

Chapter 28 The Option to Delay and Valuation Implications

Real Options: Promise and Pitfalls

The Option to Delay a Project

Valuing a Patent

Natural Resource Options

Other Applications

Conclusion

Questions and Short Problems

Notes

Chapter 29 The Options to Expand and to Abandon: Valuation Implications

The Option to Expand

When Are Expansion Options Valuable?

Valuing a Firm with the Option to Expand

Valuing the Optionality in Users and Data

Value of Financial Flexibility

The Option to Abandon

Reconciling Net Present Value and Real Option Valuations

Conclusion

Questions and Short Problems

Notes

Chapter 30 Valuing Equity in Distressed Firms

Equity in Highly Levered Distressed Firms

Optionality in Valuation: A Corporate Life Cycle Perspective

Implications of Viewing Equity as an Option

Estimating the Value of Equity as an Option

Distressed Equity as an Option: Consequences for Decision-Making

Conclusion

Questions and Short Problems

Notes

Chapter 31 Value Enhancement: A Discounted Cash Flow Valuation Framework

Value-Creating and Value-Neutral Actions

Ways of Increasing Value

Value Enhancement Chain

Closing Thoughts on Value Enhancement

Conclusion

Questions and Short Problems

Notes

Chapter 32 Value Enhancement: Economic Value Added, Cash Flow Return on Investment, and Other Tools

Economic Value Added

Cash Flow Return on Investment

A Postscript on Value Enhancement

Conclusion

Questions and Short Problems

Notes

Chapter 33 Probabilistic Approaches in Valuation: Scenario Analysis, Decision Trees, and Simulations

Scenario Analysis

Decision Trees

Simulations

An Overall Assessment of Probabilistic Risk-Assessment Approaches

Conclusion

Questions and Short Problems

Notes

Chapter 34 Overview and Conclusion

Choices in Valuation Models

Which Approach Should You Use?

Choosing the Right Intrinsic Valuation Model

Choosing the Right Pricing Model

When Should You Use the Option Pricing Models?

Conclusion

References

Index

End User License Agreement

List of Tables

CHAPTER 2

Table 2.1 Cashflows to Equity and Firm

Table 2.2 PE ratios for software firms

CHAPTER 3

Table 3.1 Asset Values for RTX and Home Depot

Table 3.2 Liabilities and Equity—Raytheon and Home Depot

Table 3.3 Measuring Earnings at Raytheon and Home Depot

Table 3.4 Return on Capital for Raytheon and Home Depot

Table 3.5 Return on Equity for Raytheon and Home Depot

Table 3.6 Interest and Fixed Charge Coverage: Raytheon and Home Depot

Table 3.7 Debt ratios for Raytheon and Home Depot

Table 3.8 Differences between IFRS and GAAP (in 2023)

CHAPTER 4

Table 4.1 Alternative Models for Cost of Equity

Table 4.2 Definition of Financial Ratios: S&P

Table 4.3 Financial Ratios and S&P Ratings in 2022

CHAPTER 5

Table 5.1 Summary of Variables Affecting Call and Put Prices

CHAPTER 6

Table 6.1 Excess Returns around Option Listing Announcements

Table 6.2 Average Excess Returns, by PE quintile

Table 6.3 Returns on Filter Rule Strategies

Table 6.4 Market Reactions to Investment Announcements

Table 6.5 Excess Returns on Low PE Ratio Stocks by Country, 1989–1994

Table 6.6 Annual Return to Low Price to Book—Global

Table 6.7 Probabilities of Transition from One Quartile to Another—2016–20...

CHAPTER 7

Table 7.1 Comparing Risk and Return Models

Table 7.2 Standard Errors in Risk Premium Estimates

Table 7.3 Historical Risk Premiums for the United States (with standard errors in italic...

Table 7.4 Historical Equity Risk Premiums: Markets Outside the United States

Table 7.5 Default Spreads by Ratings Class in January 2024

Table 7.6 Default Spreads and Interest Rates—January 2024

CHAPTER 8

Table 8.1 Levered Beta and Debt to Equity Ratios

Table 8.2 Betas and Operating Leverage—Shoe Companies

Table 8.3 Bottom-up Beta for Enka

Table 8.4 Boeing Defense Division Earnings vs. S&P 500 Earnings

Table 8.5 Interest Coverage Ratios and Ratings: Low Market Cap Firms

Table 8.6 Interest Coverage Ratios, Ratings, and Default Spreads: Large Market Cap Firms

Table 8.7 Capitalizing leases at Microsoft in 2000

Table 8.8 Current Practices for Estimating Cost of Capital

CHAPTER 13

Table 13.1 Indian Restaurant Delivery Market in 2021

Table 13.2 Costs of Capital for U.S. and Global Companies in US $—January 2...

Table 13.3 Free Cash Flows to the Firm and Present Value at Zomato in 2021

Table 13.4 Zomato – Alternate Stories and Value per Share

CHAPTER 14

Table 14.1 Expected dividends per share for P&G

Table 14.2 Expected dividends and Present Value in High-Growth—JP Morgan Chase

Table 14.3 Expected Dividends and Present Value in Transition—JP Morgan Chase

Table 14.4 Dividends versus Buybacks—Coca Cola

Table 14.5 Dividends and Buybacks for S&P 500

Table 14.6 Expected Free Cashflows to Equity—Levi Strauss

Table 14.7 FCFE (Approximation) for Levi Strauss

Table 14.8 Nestle—Geographic Revenue Breakdown

Table 14.9 FCFE and Present Value for Nestle

Table 14.10 Expected FCFE for Tsingtao Breweries

Table 14.11 Differences between DDM and FCFE Models

CHAPTER 15

Table 15.1 Free Cash Flows to the Firm: Comparison to Other Measures

Table 15.2 Present Value of Lease Commitments—Target

Table 15.3 Expected FCFF and Present Value—Target

Table 15.4 Valuation of Target—Lease Capitalization Effect

Table 15.5 R&D Capitalization—Amgen

Table 15.6 Expected FCFF for Amgen

Table 15.7 Ratings and Probability of Default

Table 15.8 Present Value of Tax Benefits

Table 15.9 GE Business Mix in 2018

Table 15.10 Value of GE—Sum of its parts

Table 15.11 Cost of Capital and Firm Value, by Debt Ratio

Table 15.12 Cost of Equity for Disney, by Debt Ratio

Table 15.13 Ratings and Default Spreads

Table 15.14 Base Year Operating Metrics for Disney

Table 15.15 Costs of Debt for Disney, by Debt Ratio

Table 15.16 Cost of Capital for Disney, by Debt Ratio

CHAPTER 16

Table 16.1 Microsoft Cash Holdings—1999 and 2000

Table 16.2 Microsoft investments in Riskier Securitiess

Table 16.3 Hyundai Heavy Cross Holdings

Table 16.4 Valuing Hyundai Heavy’s Crossholdings

Table 16.5 Cisco—Options outstanding

CHAPTER 18

Table 18.1 Distribution for PE ratios—U.S. Companies in January 2024

Table 18.2 High growth firm—Fundamentals

Table 18.3 Intrinsic PE ratio inputs for P&G

Table 18.4 PE Ratios and Macroeconomic Factors

Table 18.5 Summary Macroeconomic Statistics

Table 18.6 Market Characteristics—Country comparison

Table 18.7 Actual versus Predicted PE ratios

Table 18.8 Summary Macroeconomic Statistics—Emerging Markets

Table 18.9 Global Telecom Company Pricing in 2000

Table 18.10 Actual versus Predicted PE ratios

Table 18.11 Market Regressions from 1961 to 1965

Table 18.12 Market Regressions from 1987 to 1991

Table 18.13 ERP and Growth Coefficients—2000–2024

Table 18.14 PE Market Regressions—Start of 2024

Table 18.15 Pearson Correlations between Independent Variables

Table 18.16 PEG ratio comparison—Software versus Market

Table 18.17 PEG Market Regressions—Start of 2024

Table 18.18 PEG ratios for Beverage companies

Table 18.19 Relative PE ratios for auto companies in 2011

Table 18.20 EV/EBITDA Multiples for Steel Companies in 2001

CHAPTER 19

Table 19.1 Firm characteristics—High Growth and Stable Growth

Table 19.2 Firm characteristics—Nestle

Table 19.3 PBV and ROE of European Apparel firms

Table 19.4 Predicted PBV of European Apparel Firms

Table 19.5 PBV Market Regressions—1987 to 1991

Table 19.6 PBV Market Regressions—Start of 2024

Table 19.7 PBV Excess Return by Country

Table 19.8 EV-to-IC Market Regressions—Start of 2024

CHAPTER 20

Table 20.1 Price-to-sales and EV/Sales Multiples: Distributional Statistics for U.S. firm...

Table 20.2 Characteristics of a High Growth firm

Table 20.3 Valuation Inputs—High Growth Firm

Table 20.4 Valuation Inputs—Coca Cola

Table 20.5 Pricing Multiples and Companion Variables

Table 20.6 Valuation Inputs for Pricing Strategies

Table 20.7 Valuation Inputs—Coca Cola and Cott

Table 20.8 Coca Cola Brand Name Value—Pricing Power

Table 20.9 Coca Cola Brand Name Value—Pricing Power & Turnover

Table 20.10 Coca Cola Brand Name Value—All Excess Returns

Table 20.11 Market Regressions for Price to Sales—1987–1991

Table 20.12 Market Regressions for EV to Sales—Start of 2024

Table 20.13 Value of Netflix on April 16, 2018

Table 20.14 User Data for Social Media Companies

CHAPTER 21

Table 21.1 Expected Dividends in Years 1 Through 4

Table 21.2 Expected Dividends in Years 1 Through 4

Table 21.3 Expected Potential Dividends (in millions of euros) over Next Five Years...

Table 21.4 Expected Excess Returns—Goldman Sachs

Table 21.5 PE ratios and Fundamentals—U.S. Insurance Companies

Table 21.6 Pricing JP Morgan Chase, by Segment

Table 21.7 Price to Book and Fundamentals—European Banks

Table 21.8 Bank Cheapness Indicators

Table 21.9 Cheapness Screens for Large U.S. Banks

CHAPTER 22

Table 22.1 Expected Earnings and Cash Flows—Dana Corp

Table 22.2 Expected Earnings and Cash Flows—Toyota

Table 22.3 Construction costs and present value

Table 22.4 Expected Earnings on Investment

Table 22.5 Cash Flows and present value

Table 22.6 Expected free cash flows for years 1 through 6

Table 22.7 Debt Ratios and Costs of Capital

Table 22.8 Probability of Default by Bond Ratings Class

Table 22.9 Expected Free Cash Flows

Table 22.10 Costs of Capital and Discount Factors

Table 22.11 FCFF and Present value

CHAPTER 23

Table 23.1 Expected Revenues for Airbnb (in $ millions)

Table 23.2 Expected Operating Income for Airbnb (in $ millions)

Table 23.3 Expected FCFF for Airbnb (in $ millions)

Table 23.4 Reinvestment and Imputed ROIC for Airbnb (in $ millions)

Table 23.5 Present value of FCFF for Airbnb (in $ millions)

Table 23.6 Value per Share, Growth and Margins—Airbnb

CHAPTER 24

Table 24.1 Accounting Earnings—Infosoft versus S&P 500

Table 24.2 Interest Coverage Ratios and Bond Ratings

Table 24.3 Income Statements—Chez Pierre

Table 24.4 Estimation of Inputs for Valuation: Valuation Motives

Table 24.5 Expected Earnings, Cash Flows, and Present Value

Table 24.6 Expected Cash Flows and Present Value

CHAPTER 25

Table 25.1 Target Firm Characteristics Given Acquisition Motive

Table 25.2 Status Quo Valuation of SAB Miller (in $ millions)

Table 25.3 Value of Control at SAB Miller

Table 25.4 Valuing an Acquisition

Table 25.5 Inbev and SAB Miller Consolidated—No synergy

Table 25.6 Value of Synergy

Table 25.7 Company Characteristics (Dalton and Lube & Auto)

Table 25.8 Value of Lube & Auto, Dalton Motors, and Combined Firm

Table 25.9 Tax Benefits from Depreciation—Congoleum

Table 25.10 Value of Debt Capacity—Lube & Auto and Dalton Motors

Table 25.11 Valuing SAB Miller for Inbev

Table 25.12 Forecasted Earnings and Reinvestment

Table 25.13 Expected Free Cashflows to the Firm

CHAPTER 26

Table 26.1 Real Estate Companies and REITs in the Market in 2023

Table 26.2 Returns by Asset Class

Table 26.3 Correlations Across Asset Classes: 1947–1982

Table 26.4 Returns, by Decade, by Asset Class

Table 26.5 Cash Flows to the Firm (Predebt) on Building

Table 26.6 Cash flows to the equity (post-debt) on building

Table 26.7 Property Pricing—Peer Group

CHAPTER 27

Table 27.1 Investment Classes—Value versus Price

Table 27.2 Expected Earnings to Taxi Operator

Table 27.3 Expected Earnings to Cab Driver/Owner

Table 27.4 Star Wars Franchise Value and Add-Ons

Table 27.5 Earnings in most recent year—Lutèce

Table 27.6 Expected After-tax Earnings—Lutèce

Table 27.7 Expected Cash flows from Trademark

Table 27.8 Returns on Fine Art versus Financial Investments 1961–2010

Table 27.9 Correlation between Investments: 1961–2010

Table 27.10 Most Highly Priced NFTs (as of 2023)

Table 27.11 Revenue Sharing, by Sports Franchise

Table 27.12 Operating Metrics, by Sports Franchise

Table 27.13 NBA Team Owners in 2023

Table 27.14 Clippers—Intrinsic Value

Table 27.15 Clippers—The Pricing

CHAPTER 28

Table 28.1 Valuing Continuing R&D at Biogen

Table 28.2 Inputs to Value Other Options to Delay

CHAPTER 29

Table 29.1 Inputs to Option Valuation: Financing Flexibility

Table 29.2 Reinvestment Needs at Home Depot

Table 29.3 Earnings, Value, and Internal Funds

CHAPTER 30

Table 30.1 Debt Breakdown by Duration

Table 30.2 Expected Cash Flows to the Firm

CHAPTER 31

Table 31.1 Trade-Off on Reinvestment Rate

Table 31.2 Competitive Advantages (Moats) at Companies

Table 31.3 The Value Enhancement Chain

Table 31.4 Cost of Capital and Debt Ratios: SAP

Table 31.5 Value Enhancement Actions: Who Is Responsible?

CHAPTER 32

Table 32.1 Expected FCFF and Value

Table 32.2 Valuation Inputs—Lululemon

Table 32.3 Cost of Capital—Lululemon

Table 32.4 EVA and Present Value—Lululemon

Table 32.5 EVA Valuation of Firm: EVA and Assets in Place

Table 32.6 Value Reduction with Higher EVA

Table 32.7 Trading Off Future Growth for Higher EVA

Table 32.8 EVA with High-Risk Strategy

CHAPTER 33

Table 33.1 Key Financial Variables—2001–2008

Table 33.2 Risk Type and Probabilistic Approaches

CHAPTER 34

Table 34.1 Most Widely Used Multiples by Sector

Guide

Cover

Table of Contents

Title Page

Copyright

Dedication

Preface to the Fourth Edition

Begin Reading

References

Index

End User License Agreement

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Investment Valuation

Tools and Techniques for Determining the Value of Any Asset

Fourth Edition

ASWATH DAMODARAN

www.damodaran.com

Copyright © 2025 by Aswath Damodaran. All rights reserved.

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Library of Congress Cataloging-in-Publication Data:

Damodaran, Aswath.

Investment valuation : tools and techniques for determining the value of any asset / Aswath Damodaran.—4th ed.

   p. cm.—(Wiley finance series)

Includes bibliographical references and index.

ISBN 978-1-394-25460-6 (cloth); ISBN 978-1-394-25461-3 (ebk);ISBN 978-1-394-25462-0 (ebk); ISBN 978-1-394-26273-1 (paper);ISBN 978-1-394-26274-8 (ebk); ISBN 978-1-394-26275-5 (ebk)

1. Corporations—Valuation—Mathematical models. I. Title.

HG4028.V3 D353 2025

658.15—dc23                         2024034300

I would like to dedicate this book to Michele, whose patience and support made it possible, to my four children— Ryan, Brendan, Kendra, and Kiran—who provided the inspiration, and to my two grandchildren—Noah and Lily—who provided the joy.

Preface to the Fourth Edition

This is a book about valuation—the valuation of stocks, bonds, options, futures and real assets. It is a fundamental precept of this book that any asset can be valued, albeit imprecisely in some cases. I have attempted to provide a sense of not only the differences between the models used to value different types of assets, but also the common elements in these models.

The past two decades have been eventful ones for those interested in valuation for several reasons. First, the growth of Asian and Latin American markets brought emerging market companies into the forefront, and you will see the increased focus on these companies in this edition. Second, we saw the havoc wreaked by macroeconomic factors on company valuations during the bank crisis of 2008 and the pandemic in 2020, both which shook faith in markets and created new questions in valuation. The lessons I learned about financial fundamentals during these crises about risk-free rates, risk premiums, and cash flow estimation are incorporated into the text. Third, the past decade has seen the surge in platform companies, where the most impressive numbers about these companies are not in their operating metrics, but in the users and subscribers on their platforms. In this edition, we directly confront the question of how to value a subscriber, user, or customer, and use the answer to value these companies. Fourth, I have spent more time in the last decade talking about how valuations are bridges between stories and numbers, and in this edition, I have added a chapter explaining how to build these bridges. Finally, as meme stocks and crypto investments capture the imagination of some in the market, we look at pricing and valuing them.

With each shift, the perennial question arises: “Is valuation still relevant in this market?” and my answer remains unchanged, “Absolutely and more than ever.” As technology increasingly makes the printed page an anachronism, I have tried to adapt in many ways. First, this book will be available in e-book format, and hopefully will be just as useful as the print edition (if not more so). Second, every valuation in this book will be put on the website that will accompany this book (www.damodaran.com), as will a significant number of datasets and spreadsheets. In fact, the valuations in the book will be updated online, allowing the book to have a much closer link to real-time valuations.

In the process of presenting and discussing the various aspects of valuation, I have tried to adhere to four basic principles. First, I have attempted to be as comprehensive as possible in covering the range of valuation models that are available to an analyst doing a valuation, while presenting the common elements in these models and providing a framework that can be used to pick the right model for any valuation scenario. Second, the models are presented with real-world examples, warts and all, to capture some of the problems inherent in applying these models. There is the obvious danger that some of these valuations will appear to be hopelessly wrong in hindsight, but this cost is well worth the benefit. Third, in keeping with my belief that valuation models are universal and not market-specific, illustrations from markets outside the United States are interspersed throughout the book. Finally, I have tried to make the book as modular as possible, enabling a reader to pick and choose sections of the book to read, without a significant loss of continuity.

Chapter 1Introduction to Valuation

Every asset, financial as well as real, that is expected to generate cash flows in the future, has a value. The key to successfully investing in and managing these assets lies in understanding not only what the value is, but the sources of the value. It is undeniable that some assets are easier to value than others, and the details of valuation will vary from case to case. Thus, valuing of a real estate property will require different information and follow a different format than valuing a publicly traded stock. What is surprising, however, is not the differences in techniques across assets, but the degree of similarity in the basic principles of valuation.

This chapter lays out a philosophical basis for valuation, together with a discussion of how valuation is or can be used in a variety of frameworks, from portfolio management to corporate finance.

A Philosophical Basis for Valuation

It was Oscar Wilde who described a cynic as one who “knows the price of everything, but the value of nothing”. He could very well have been describing some analysts and many investors, a surprising number of whom subscribe to the “bigger fool” theory of investing, which argues that the value of an asset is irrelevant as long as there is a “bigger fool” around willing to buy the asset from them. While this may provide a basis for some profits, it is a dangerous game to play, since there is no guarantee that such an investor will still be around when the time to sell comes.

A postulate of sound investing is that an investor does not pay more for an asset than it’s worth. This statement may seem logical and obvious, but it is forgotten and rediscovered at some time in every generation and in every market. There are many who argue that value is in the eye of the beholder, and that any price can be justified if there are other investors willing to pay that price. That is dangerous, at least as an investment starting point. Perceptions may be all that matter when the investment is a painting or sculpture, but investors do not (and should not) buy most assets for aesthetic or emotional reasons; financial assets are acquired for the cash flows expected on them. Consequently, perceptions of value have to be backed up by reality, which implies that the price paid for any asset should reflect the cash flows it is expected to generate. The models of valuation described in this book attempt to relate value to the level and expected growth of these cash flows.

Pricing Versus Valuation

Financial academics and practitioners use the words “price” and “value” interchangeably, with the former perhaps swayed by their early beliefs in efficient markets, where the two are expected to converge, and the latter by an assumption that these words measure the same things. In Figure 1.1, we draw a distinction between valuation and pricing, and argue that value and price are not only determined by different factors but require different tools. As the book’s title indicates, we will examine the details of how to value assets, and we will also look at how best to price those assets in later chapters.

Figure 1.1 Value versus Price—The Difference

It is true that large numbers of market participants, perhaps even most, are not investors, but instead choose to play the “pricing” game. In that game, winning is defined as buying at a low price and selling at a higher one, taking advantage of shifts in market mood and momentum, with value playing little or no role. Throughout this book, we will classify these participants as traders, and we will hope that they, too, will be able to find use for the pricing portions of this book.

As a final note, we will argue that no matter which side of the investing/pricing divide you fall on, you will benefit by understanding how the other side works. Thus, if you are a true believer in intrinsic value, you will find yourself become better at valuation, if you understand how traders price assets. Conversely, if you are a trader, focused on the pricing process, you will become a better trader, if you learn more about how investors think and value companies.

The Bermuda Triangle of Valuation

Like all analytical disciplines, valuation has developed its own set of myths over time. This section examines and debunks some of those myths and argues that the biggest challenges to valuation are not technical or mechanical, but come from the way we, as human beings, bring bias into out analyses and deal with uncertainty about the future and from the complexity that has been a by-product of access to data and powerful tools.

Bias: The Power of Your Priors

Valuation is neither the science that some of its proponents make it out to be nor the objective search for true value that idealists would like it to become. The models that we use in valuation may be quantitative, but the inputs leave plenty of room for subjective judgments. Thus, the final value that we obtain from these models is colored by the bias that we bring into the process. In fact, in many valuations, the price gets set first and the valuation follows.

The obvious solution is to eliminate all bias before starting on a valuation, but this is easier said than done. Given the exposure we have to external information, analyses, and opinions about a firm, it is unlikely that we embark on most valuations without some bias. In fact, a great deal of bias is subconscious. An investor who picks a company to value almost never does so with a blank slate, since that pick was probably triggered by something he or she heard about the company or read about it. In some cases, the bias can come from what you think about a company’s products or its managers. If, like me, you have been an Apple products user for four decades, you will be biased to finding Apple undervalued and Microsoft overvalued before you even look at either company’s numbers. Similarly, if you are an investor valuing Tesla in early 2024, it would be impossible for you to separate your views on Tesla from your views on Elon Musk, a man who evokes strong positive and negative reactions.