Damodaran on Valuation

5.4. PER SHARE VERSUS AGGREGATE VALUATION

Some of the valuations that we have done in this chapter have used per share values for earnings and cash flows and arrived at a per-share estimate of value for equity. Other valuations used aggregate net income and cash flows and arrived at the aggregate value for equity. Why use one approach over the other, and what are the pros and cons?

The per-share approach tends to be a little simpler, and information is usually more accessible. Most data services report earnings per share and analyst estimates of growth in earnings per share. There are two reasons, though, for sticking with aggregate valuation. The first is that it is easier to keep operating assets separate from cash if we begin with net income rather than earnings per share and break it down into net income from operating assets and cash income. The second is that the number of shares to use to compute per-share values can be subject to debate when there are options, warrants, and convertible bonds outstanding. These equity options issued by the firm can be converted into shares, thus altering the number of shares outstanding. Analysts do try to factor in these options by computing the partially diluted (where in-the-money options are counted as shares outstanding) or fully diluted (where all options are counted) per-share values. However, options do not lend themselves easily to this characterization. A much more robust way of dealing with options is to value them as options ...