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Dark Side of Valuation, The: Valuing Young, Distressed, and Complex Businesses, Third edition

Name: Dark Side of Valuation, The: Valuing Young, Distressed, and Complex Businesses, Third edition
Author: Aswath Damodaran
ISBN: 9780134854267

by Aswath Damodaran

April 2018

Intermediate to advanced

800 pages

26h 27m

English

Pearson FT Press

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Cover Page
Title Page
Copyright Page
Dedication Page
Contents at a Glance
Contents
Acknowledgments
About the Author
Preface to the Third Edition
1. The Dark Side of Valuation
Foundations of ValueIntrinsic ValuationDeterminants of ValueValuation Across TimeInterest RatesMarket Risk PremiumsThe Macro EnvironmentValuation Across the Life CycleThe Business Life CycleEarly in the Life Cycle: Young CompaniesThe Growth Phase: Growth CompaniesMaturity (A Mixed Blessing): Mature FirmsWinding Down: Dealing with DeclineValuation Across the Business SpectrumFinancial Services FirmsCyclical and Commodity CompaniesBusinesses with Intangible AssetsEmerging-Market CompaniesMultibusiness and Global CompaniesUser-, Subscriber-, and Customer-Based BusinessesThe Dark Side of Valuation BeckonsInput PhaseValuation PhasePost-Valuation PhaseConclusion

Part I: Enlightenment: The Tools
2. Intrinsic Valuation
Discounted Cash Flow ValuationThe Essence of DCF ValuationEquity Versus Firm ValuationInputs to a DCF ValuationVariations on DCF ValuationCertainty-Adjusted Cash Flow ModelsAdjusted Present-Value ModelsExcess-Return ModelsWhat Do Intrinsic Valuation Models Tell Us?Conclusion
3. Probabilistic Valuation: Scenario Analysis, Decision Trees, and Simulations
Scenario AnalysisBest Case/Worst CaseMultiple Scenario AnalysisDecision TreesSteps in Decision Tree AnalysisEstimation IssuesRisk-Adjusted Value and Decision TreesSimulationsSteps in SimulationUse in Decision MakingSimulations with ConstraintsIssues with Using SimulationsRisk-Adjusted Value and SimulationsAn Overall View of Probabilistic Risk Assessment ApproachesComparing the ApproachesA Complement to or Replacement for Risk-Adjusted ValueConclusion
4. Relative Valuation/Pricing
What Is Relative Valuation?The Ubiquity of Relative ValuationReasons for Popularity and Potential PitfallsStandardized Values and MultiplesEarnings MultiplesBook Value or Replacement Value MultiplesRevenue MultiplesSector-Specific MultiplesThe Four Basic Steps of Using MultiplesDefinitional TestsDescriptive TestsAnalytical TestsApplication TestsReconciling Relative and Intrinsic ValuationsConclusion
5. Real Options Valuation
The Essence of Real OptionsReal Options, Risk-Adjusted Value, and Probabilistic AssessmentsReal Options ExamplesThe Option to Delay an InvestmentThe Option to Expand an InvestmentThe Option to Abandon an InvestmentCaveats for Real OptionsConclusionAppendix: Basics of Options and Option PricingOption PayoffsDeterminants of Option ValueOption Pricing Models
Part II: The Dark Side of Macro Inputs
6. A Shaky Base: A “Risky” Risk-Free Rate
What Is a Risk-Free Asset?Why Do Risk-Free Rates Matter?Estimating a Risk-Free RateRequirements for an Investment to Be Risk-FreeThe Purist SolutionA Practical CompromiseThe Currency EffectReal Versus Nominal Risk-Free RatesIssues in Estimating Risk-Free RatesThere Are No Long-Term Traded Government BondsThe Government Is Not Default-FreeThe Risk-Free Rate Might Change Over TimeClosing Thoughts on Risk-Free RatesConclusionAppendix 6.1
7. Risky Ventures: Assessing the Price of Risk
Why Do Risk Premiums Matter?What Are the Determinants of Risk Premiums?Equity Risk PremiumsDefault SpreadsStandard Approaches for Estimating Risk PremiumsEquity Risk PremiumsDefault SpreadsProblem ScenariosThe Dark SideThe Light SideThe Dark SideThe Light SideThe Dark SideThe Light SideConclusionAppendix 7.1
8. Macro Matters: The Real Economy
Growth in the Real EconomyWhy Does Real Economic Growth Matter?Looking at HistoryThe Dark SideThe Light SideExpected InflationWhy Does Expected Inflation Matter?Looking at HistoryU.S. Inflation Rate Across TimeThe Dark SideThe Light SideExchange RatesWhy Do Exchange Rates Matter?Looking at HistoryThe Dark SideThe Light SideConclusion
Part III: The Dark Side across the Life Cycle
9. Baby Steps: Young and Start-Up Companies
Young Companies in the EconomyA Life Cycle View of Young CompaniesCharacteristics of Young CompaniesValuation IssuesIntrinsic (DCF) ValuationRelative ValuationThe Dark SideThe Light SideDiscounted Cash Flow ValuationRelative ValuationReal OptionsConclusion
10. Shooting Stars: Valuing Growth Companies
Growth CompaniesA Life Cycle View of Growth CompaniesCharacteristics of Growth CompaniesValuation IssuesIntrinsic ValueThe Dark Side of ValuationDiscounted Cash Flow ValuationRelative ValuationThe Light Side of ValuationDiscounted Cash Flow ValuationRelative ValuationConclusion
11. The Grown-Ups: Mature Companies
Mature Companies in the EconomyA Life Cycle View of Mature CompaniesCharacteristics of Mature CompaniesValuation IssuesIntrinsic (DCF) ValuationRelative ValuationThe Dark Side of ValuationGrowth in Mature CompaniesAcquisition InconsistenciesUnreal RestructuringDebt and ValueRelative ValuationThe Light Side of ValuationGrowth and AcquisitionsChanging ManagementThe Expected Value of ControlConclusion
12. Winding Down: Declining Companies
Declining Companies in the EconomyA Life Cycle View of Declining CompaniesCharacteristics of Declining CompaniesValuation IssuesIntrinsic (DCF) ValuationFrom Operating Assets to Equity Value per ShareRelative ValuationThe Dark Side of ValuationAutopilot OptimismDiscount Rate ContortionsDivestiture FolliesBook CapitalDealing with DistressRelative ValuationThe Light Side of ValuationA Framework for Dealing with Decline and DistressIrreversible Decline, Low DistressReversible Decline, Low DistressDistressConclusion
Part IV: The Dark Side Across Company Types
13. Ups and Downs: Cyclical and Commodity Companies
The SettingCyclical CompaniesCommodity CompaniesCharacteristicsThe Dark Side of ValuationBase Year FixationThe Macro Crystal BallMacro Point of View (POV) ValuationsSelective NormalizationFalse StabilityThe Light Side of ValuationDiscounted Cash Flow ValuationRelative ValuationThe Real Options Argument for Undeveloped ReservesConclusion
14. Mark to Market: Valuing Financial Services Companies
Financial Services Firms: The Big PictureCharacteristics of Financial Services FirmsThe Regulatory OverlayDifferences in Accounting RulesDebt and EquityEstimating Cash Flows Is DifficultThe Dark Side of ValuationDebtCash Flow SubstitutesGo with the Flow: DividendsTrusting Book ValueRegulation and RiskThe Light Side of ValuationDiscounted Cash Flow ModelsAsset-Based ValuationRelative ValuationConclusion
15. Invisible Investments: Valuing Firms with Intangible Assets
Firms with Intangible AssetsIntangible Assets in the Overall EconomyCharacteristics of Firms with Intangible AssetsValuation ConsequencesThe Dark Side of ValuationIntrinsic ValuationRelative ValuationThe Light Side of ValuationRegaining Accounting ConsistencyDealing with Equity OptionsDebt and CashThe Compressed Life CycleConclusion
16. Volatility Rules: Emerging-Market Companies
The Role of Emerging-Market CompaniesEmerging-Market Companies in the Global EconomyWhy Do Emerging Economies Matter?Characteristics of Emerging-Market CompaniesThe Dark Side of ValuationCurrency MismatchesMiscounting and Double-Counting Country RiskRisk ParametersIncorporation EffectIgnoring Missing InformationCorporate Governance Mood SwingsPost-Valuation DiscountsThe Light Side of ValuationDiscounted Cash Flow ValuationRelative ValuationConclusion
17. Going to Pieces: Disaggregated Value
Aggregation versus DisaggregationMultinational ConglomeratesRole in the EconomyCharacteristicsValuation IssuesThe Dark Side of ValuationIntrinsic ValuationRelative ValuationThe Light Side of ValuationDiscounted Cash Flow ValuationRelative ValuationUser/Subscriber/Customer CompaniesThe Rise of the UserValuation IssuesThe Dark Side of ValuationThe Light Side of ValuationConclusion
18. The Cynic’s Corner: Value versus Price
Value versus PriceInvesting versus TradingThe Value Game versus the Pricing GameInvesting versus TradingThe Dark SideThe Light SideThe Right ApproachJob DescriptionCui Bono?How Are You Judged?The Dark SideThe Light SideCategorizing InvestmentsCash Flow–Generating AssetsCommoditiesCurrenciesCollectiblesThe Questionable InvestmentsGold (and Other Precious Metals)Crypto InvestmentsTrophy AssetsConclusion
Part V: The Finale
19. The Jedi Way: Vanquishing the Dark Side
Enlightening PropositionsProposition 1: Be Steadfast on Principles, Open to New Tools, and Flexible on EstimatesProposition 2: Pay Heed to Markets, but Don’t Let Them Determine Your ValuationsProposition 3: Risk MattersProposition 4: Growth Is Not Free and Is Not Always Value-AddingProposition 5: All Good Things Come to an EndProposition 6: Watch Out for Truncation RiskProposition 7: Look at the Past, but Think About the FutureProposition 8: Draw on the Law of Large NumbersProposition 9: Accept Uncertainty, and Deal with ItProposition 10: Value = Stories + NumbersConclusion
Index

Content preview from Dark Side of Valuation, The: Valuing Young, Distressed, and Complex Businesses, Third edition

Index

Symbols

3M case study

DCF (discounted cash flow) valuation

bottom-up beta estimate, 43–44

cash flows, 36–38

cost of capital, 45–46

cost of debt, 45–46

cost of equity, 44

growth rates, 53–55

high growth versus terminal value assumptions, 59

valuation summary, 61–62

Monte Carlo simulation, 93–97

pre- and post-market crisis valuation, 225–226

A

abandonment option, 150–151

customer incentives, 152

defined, 135

escape clauses, 151

implications, 151–152

payoff diagram, 150

switching options, 152–153

absolute revenue changes, 346

accounting rules, 525

financial services firms, 529–530

firms with intangible assets, 563–564, 572

Amgen case study, 583–584

Coca-Cola case study, 578–579

consequences for valuation, 581–586

Cyber Health Consulting (CHC) ...

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The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

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Dark Side of Valuation, The: Valuing Young, Distressed, and Complex Businesses, Third edition

by Aswath Damodaran