Handbook of Finance: Valuation, Financial Modeling, and Quantitative Tools

Chapter 28. Introduction to Valuation

ASWATH DAMODARAN, PhD

Professor of Finance David Margolis Teaching Fellow, Stern School of Business, New York University

Abstract: Every asset, financial as well as real, has a value. The key to successfully investing in and managing these assets lies in understanding not only what the value is but also the sources of the value. Any asset can be valued, but some assets are easier to value than others and the details of valuation will vary from case to case. Thus, the valuation of a share of a real estate property will require different information and follow a different format than the valuation of a publicly traded stock. What is surprising, however, is not the differences in valuation techniques across assets, but the degree of similarity in basic principles. There is undeniably uncertainty associated with valuation. Often, that uncertainty comes from the asset being valued, though the valuation model may add to that uncertainty.

Keywords: valuation, valuation process, valuation model, cash flows, fundamental analysts, franchise buyers, chartists, information traders, market timers, efficient marketers, acquisition analysts, corporate finance

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, ...