Scribd
Upload
61 views5 pages

Corporate Valuation 2

1. Intrinsic valuation estimates the value of a firm based on its expected future cash flows, risk characteristics, and growth potential. 2. Discounted cash flow analysis is a tool used to estimate intrinsic value by forecasting a firm's expected future cash flows and selecting an appropriate discount rate based on risk. 3. There are two approaches to discounted cash flow valuation - explicitly adjusting forecasted cash flows for risk, or using a higher discount rate for riskier cash flow projections.

Uploaded by

Bhumika Krishnani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
61 views5 pages

Corporate Valuation 2

1. Intrinsic valuation estimates the value of a firm based on its expected future cash flows, risk characteristics, and growth potential. 2. Discounted cash flow analysis is a tool used to estimate intrinsic value by forecasting a firm's expected future cash flows and selecting an appropriate discount rate based on risk. 3. There are two approaches to discounted cash flow valuation - explicitly adjusting forecasted cash flows for risk, or using a higher discount rate for riskier cash flow projections.

Uploaded by

Bhumika Krishnani
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 5

6/23/2021 Aswath Damodaran - CV - Evernote

2
Intrinsic Valuation
function of cashflows, risk, and growth

You can either value the equity in the business or you can value the entire business.
Valuing a business based on specific characteristics.

Discounted Cash flow is one tool. DCF valuation is not equivalent to intrinsic valuation, it's a subset.

Intrinsic value is designed for cash flow generating assets.


We cannot use intrinsic valuation to value Picasso or gold. (No cash flows)

Two ways to set up discounted cash flow valuation


1. Expected CFs over time... expected across all scenarios... You have to consider all outcomes, good or
bad... These are not risk adjusted cashflows. Discount rate is where you adjust for risk. Riskier assets
have higher DR than safer assets.

2. You risk adjust the cashflows themselves. Eg., you expect 100 Rs. of cashflow with certain risk and you
are offered 90 Rs. of cashflow instead with certainty. If you are ready to expect this 90 Rs. cashflow as
a replacement to the 100 Rs., this is your certainty equivalent or a risk adjusted cashflow.

https://www.evernote.com/client/web?login=true#?b=40e9ca41-7def-709e-85e5-32674c58a110&n=e38e4fb1-bebb-7757-28a8-179c5af30768& 1/5
6/23/2021 Aswath Damodaran - CV - Evernote

Summary

For an asset to have value, it should offer positive cashflows at some point of time.

So what valuation model should you use for a company that would have -ve cashflows forever?
None

"Some point of time" is the key A company that has negative cashflows upfront need not be a bad business
https://www.evernote.com/client/web?login=true#?b=40e9ca41-7def-709e-85e5-32674c58a110&n=e38e4fb1-bebb-7757-28a8-179c5af30768& 2/5
6/23/2021 Aswath Damodaran - CV - Evernote
Some point of time is the key. A company that has negative cashflows upfront need not be a bad business
(eg. start-ups). The key is that it should have "disproportionately large +ve cashflows" in the future.

Financial Balance sheet over accounting balance sheet

Financial BS is much simpler than Accounting BS at one level and far complex at other end.
Only 2 assets:  Investments (already made and producing CFs), Growth Assets (credit for investments that
you haven't even made)
Only 2 Liabilities : Debt & Equity

When I value the equity, I have blinders on and I care only about the equity investors. CFs leftover after
making interest and principal to Bank. DR is the rate of return would need to make given the risk of equity.
Higher risk, Higher Equity

https://www.evernote.com/client/web?login=true#?b=40e9ca41-7def-709e-85e5-32674c58a110&n=e38e4fb1-bebb-7757-28a8-179c5af30768& 3/5
6/23/2021 Aswath Damodaran - CV - Evernote

Technically, as an investor, the only CF you get is the dividend. The dividend discount model (special case of
equity valuation) is one of the oldest model of equity valuation.

What about those who do not give out dividends?


Potential Dividends rather than actual

For valuing the entire business, you look at the asset side instead of the liabilities side.
The collective CFs serve both equity owners and lenders (Cas flow to the firm). The DR is the weighted
average of DRs of equity and debt, i.e WACC. This is the cost of capital.

Two ways to value equity


1. Directly value CFs to equity
2. Indirectly value overall CFs and subtract debt
You should get same value of equity from both the approaches.

First principle of Valuation


Never mix and match CFs.

https://www.evernote.com/client/web?login=true#?b=40e9ca41-7def-709e-85e5-32674c58a110&n=e38e4fb1-bebb-7757-28a8-179c5af30768& 4/5
6/23/2021 Aswath Damodaran - CV - Evernote

Make sure that you are internally consistent.

Summary
1. Intrinsic valuation is a valuation based on specific characteristics of the firm.
2. Discounted Cashflow is a tool to estimate Intrinsic value.
3. Estimate expected CFs and adjust for risk using either of the 2 methods.
4. Make a choice b/w estimating value of equity or firm as they would govern the future choices such as
DRs.

https://www.evernote.com/client/web?login=true#?b=40e9ca41-7def-709e-85e5-32674c58a110&n=e38e4fb1-bebb-7757-28a8-179c5af30768& 5/5

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy