Damodaran on Valuation

Part III: Loose Ends in Valuation

The relief we feel once we have valued the operating assets of a firm should be short-lived. It is in this phase that major errors in valuation creep in, largely because we are sloppy about dealing with loose ends.

In Chapter 10, we start by looking at how best to value the cash holdings of a firm. While conventional wisdom suggests that a dollar in cash is worth a dollar, we present evidence that the market may value a dollar in cash at less than a dollar in some companies and more than a dollar in the hands of other companies. We follow by setting up a framework for valuing cross holdings, both minority and majority.

In Chapter 11, we evaluate how best to deal with equity granted to employees in the form of options or restricted stock. These grants have to be valued when they are made and they will affect both earnings and equity value.

In Chapter 12, we examine whether intangible assets require different valuation models and techniques than tangible assets. For intangible assets that stand alone and generate cash flows, we argue that discounted cash flow (DCF) valuation is perfectly adequate. For intangible assets that generate value across a business (such as brand name), we present more complicated ways of estimating value. Finally, for intangible assets that have the potential to create future cash flows, we argue for the use of option pricing models.

In Chapter 13, we deconstruct the control premium, often used to justify large premiums ...