Damodaran on Valuation

16.11. APPENDIX 16.2: MEASURING COMPLEXITY WITH A SCORE—AN EXAMPLE

Item	Factors	Follow-Up Question	Answer*	Weighting Factor	Complexity Score
Operating income	Multiple business One-time income and expenses Income from unspecified sources Items in income statement that are volatile	Number of businesses (with more than 10% of revenues) = Percent of operating income = Percent of operating income = Percent of operating income =	2 20% 15% 5%	2 10 10 5	4 2 1.5 0.25
Tax rate	Income from multiple locales Different tax and reporting books Headquarters in tax havens Volatile effective tax rate	Percent of revenues from nondomestic locales = Yes or No Yes or No Yes or No	30% Yes Yes Yes	10 Yes = 3 Yes = 3 Yes = 2	3 3 3 2
Capital expenditures	Volatile capital expenditures Frequent and large acquisitions Stock payment for acquisitions and investments	Yes or No Yes or No Yes or No	Yes Yes Yes	Yes = 2 Yes = 4 Yes = 4	2 4 4
Working capital	Unspecified current assets and current liabilities Volatile working capital items	Yes or No Yes or No	Yes Yes	Yes = 3 Yes = 2	3 2
Expected growth rate	Off-balance-sheet assets and liabilities (operating leases and R&D) Substantial stock buybacks Changing return on capital over time Unsustainably high return	Yes or No Yes or No Is your return on capital volatile? Is your firm's ROC much higher than industry average?	Yes Yes Yes Yes	Yes = 3 Yes = 3 Yes = 5 Yes = 5	3 3 5 5
Cost of capital	Multiple businesses Operations in emerging markets Is the debt market traded? Does the company have a rating? Does the company ...