VALUATION: SPRING 2020

Aswath Damodaran
General Information

¨ Office: Room 9-69

¨ E-mail: [email protected]
¨ Home Page: http://www.damodaran.com
¨ Office Hours
¤ Monday 9.45-10.20, 12-12.30
¤ Wednesday 9.45-10.20, 12-12.30
¤ The “fair game” principle applies

¨ The teaching assistants/fellows for this class are:

1. Courtney Go, [email protected]
2. Samuel Mackey, [email protected]

2
Theme 1: Characterizing Valuation as a
discipline

¨ In a science, if you get the inputs right, you should

get the output right. The laws of physics and
mathematics are universal and there are no
exceptions. Valuation is not a science.
¨ In an art, there are elements that can be taught but
there is also a magic that you either have or you do
not. The essence of an art is that you are either born
a great artist or you are not. Valuation is not an art.
¨ A craft is a skill that you learn by doing. The more
you do it, the better you get at it. Valuation is a
craft.
3
Theme 2: Valuation is simple & universal
Ways of thinking about/estimating value
Intrinsic Value Relative Value/ Pricing Contingent Value
The value of an asset is the The value of an asset is what The value of an asset may be
present value of the expected others are willing to pay for it (or contingent on what happens to
cashflows something like it) other assets

Investors
- Small vs Large
Value Enhacement - Short term vs Long term

Perspectives on value
Changing Value

- Management - Individual vs Instiutional

- Activist Investors - Insider vs Outsider
Every asset has a value. We just have to find it.
Analysts
- Buy Side vs Sell Side
Acquisitions
- Synergy
- Control Accountants

Regulators/ Government

Valuing publicly traded And private Across the life cycle In sickness and in
firms businesses - Young firms health
- Small vs Large - For owners - IPOs - Survival Risk
- Developed vs Emerging - And investors - Mature firms - Distress Risk
- Manufacturing vs (private equity, - Declining firms - Nationalization Risk
Technology venture capital, IPO)

Ways of Applying Value

4
Theme 3: Valuing an asset is not the same as
pricing that asset

Drivers of intrinsic value

- Cashflows from existing assets Drivers of price
- Growth in cash flows - Market moods & momentum
- Quality of Growth - Surface stories about fundamentals

Accounting
Estimates THE GAP
Is there one?
INTRINSIC Price PRICE
Value If so, will it close?
VALUE
If it will close, what will
Valuation cause it to close?
Estimates

5
Theme 4: Good valuation = Story + Numbers

6
Theme 5: If you value something, you should be
willing to act on it..
¨ What valuation theory? There is very little theory in
valuation and I am not sure what an academic valuation
would look like and am not sure that I want to find out.
¨ Pragmatism, not purity: The end game is to estimate a
value for an asset. I plan to get there, even if it means
taking short cuts and making assumptions that would
make purists blanch.
¨ Do you believe? To act on your valuations, you have to
have faith in
¤ In your own valuation judgments.
¤ In markets: that prices will move towards your value estimates.
That faith will have to be earned.

7
Course Outline

8
Pre-season prep!
Getting ready for the class
¨ Accounting: The raw material you need to value a company comes
primarily from accounting statements. Understanding how to read a
financial statement and where to find the information need is critical.
¤ My primer:
http://people.stern.nyu.edu/adamodar/New_Home_Page/AccPrimer/accstate.htm
¨ Statistics: Statistics is designed to help us make sense of data that is large
and contradictory. That is exactly the problem we face in valuation.
¤ My primer:
http://people.stern.nyu.edu/adamodar/New_Home_Page/StatFile/statistics.htm
¨ Finance: There are tools that we draw on in valuation extensively.
¤ Risk and return models:
http://www.stern.nyu.edu/~adamodar/pdfiles/acf3E/ch3.pdf
¤ Present value:
http://people.stern.nyu.edu/adamodar/New_Home_Page/PVPrimer/pvprimer.htm
¤ Corporate finance:
http://people.stern.nyu.edu/adamodar/New_Home_Page/triumdesc.html

9
Class structure

Wednesday Sunday
Tuesday Thursday Friday Saturday
Monday - Class - Weekly
- Valuation of - Project Topical - Weekly
- Class the week - Weekly challenge due
email challenge sent update email webcast Newsletter & solution
out posted

10
For each class, please try to..

¨ Be here and please be on time: Each class will start with a pre-class
test (which will lay the basis for the class but will not be graded) in
the first 5 minutes.
¨ Bring your lecture note packet with you: These are available in
three parts. They can be bought at the book store or downloaded
from my web site by going to:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqlect.htm
¨ If you do miss a class, catch up: All classes will be web cast. The
web casts will be online (usually) within a couple of hours of the
class. The webcasts are available in four formats:
¤ as a stream (with a high-speed internet connection)
¤ as a YouTube video (if you have a lower-speed connection or small screen
device)
¤ as a downloadable video file (for a computer, a tablet or a smart phone)
¤ as a downloadable audio file.

11
Nice to have, but you can live without them…

¨ Books: I have a few books on valuation and they tend to say much the same things,
albeit in different formats. You don’t need any of them but if you can get one, it won’t
hurt.
¤ Investment Valuation (3rd edition): is the book that is most suited for a classroom text book. It
follows the standard script of valuation, looking at different valuation models with twists. It
also follows text book format (with problems at the end of each chapter)
¤ Damodaran on Valuation (2nd edition): provides a quicker review of the basic valuation but the
second half of the book is built around dealing with what I call the loose ends of valuation and
is really meant for practitioners who deal with the loose ends on a constant basis.
¤ The Dark Side of Valuation (2nd edition): covers companies that are difficult to value – young
companies, money losing companies, financial service companies, emerging market
companies.
¤ The Little Book of Valuation (1st Edition): If you truly, truly hate to read and are budget
constrained, think of this as the Cliff notes version of my longer books.
¤ Narrative and Numbers (1st Edition): This is for story tellers who want to develop some
discipline and number crunchers who want to be imaginative.
¨ Apps: I have a valuation app (co-developed with Anant Sundaram at Dartmouth) for
the iPad and iPhones called uValue. Check it out!
iPad version: https://apps.apple.com/us/app/uvalue/id440046276
iPhone version: https://apps.apple.com/us/app/uvalue-mobile/id492586911

12
Stay connected!
Information Central
¨ Website for the class: Everything associated with this class (and I mean
everything) will be available on the website for the class:
n http://www.stern.nyu.edu/~adamodar/New_Home_Page/equityUG.html
I will try to also keep the material on NYU Classes, but I don’t like closed systems.
Enough said!
¨ Apple iTunes U: The class will also be carried on Apple iTunes U.
¤ If you have an Apple device (an iPhone or iPad), download the iTunes U app
from the iTunes store and then use the enroll code (ENT-ZXA-JYL)
¤ If you don’t, what’s wrong with you? But I will find a way that your poor souls
can be saved a well.
¤ YouTube Channel: There is a final option, if your broadband connection is
not that great and you are watching on a Tablet/smartphone. There is a
YouTube playlist for this class, where all class sessions will be loaded.
https://www.youtube.com/playlist?list=PLUkh9m2BorqkuWvvYH30HoAG8WwZfN6pK
When you get a chance, check it out.

13
More… Yes, there is more…

¨ Google calendar: There is a Google calendar for the site that you
can access by going to:
https://calendar.google.com/calendar?cid=c3Rlcm4ubnl1LmVkdV9i
amlvMzU0ODE0NTFkdHFjOW92bW1oazhmc0Bncm91cC5jYWxlbm
Rhci5nb29nbGUuY29t
¨ My blog: My not-so-brilliant and not-very-insightful thoughts on
valuation, corporate finance and portfolio management will be
posted on my blog, Musings on Markets.
http://aswathdamodaran.blogspot.com/
¨ Twitter feed: Just in case you don’t get enough of me in class,
online and from my blog, please help me approach Lady Gaga
status by joining my Twitter follower list (@AswathDamodaran).
¨ Other readings: The other readings for each topic are available on
my web site, and can be downloaded at
¤ http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqread.htm

14
Grading Distribution…

D to F (Value
nothing)
5%
C+ to C- (Value
something)
10%

A to A- (Value anything)
30%

B+ to B- (Value most things)

55%

15
Grading Basis

¨ Group Work: Students should work in groups of four

(minimum) to seven (maximum). Each group will be required
to work on a group project
¤ Valuation Project Due in two parts 40%
n Part 1: DCF Valuation due by April 3 at 5 pm (Just for feedback)
n Part 2: Entire project due on May 11 at 5 p.m. (for final grading)
¨ Individual Work:
¤ Quizzes: There will be three quizzes worth 10% apiece.
Quiz 1: DCF Estimation Issues: Session 10 (March 2)
Quiz 2: More DCF: Session 16 (March 30)
Quiz 3: Relative & Private Co valuation: Session 22 (April 20)
¤ Final Exam: This will also be an open-book and open-notes cumulative
exam worth 30% on a date TBA.

16
Recapping Quiz/Exam Ground Rules
1. Quizzes will be on the designated days in the first 30 minutes of the class.
2. Exams will be open book, open notes. You can bring in as much supporting material as you can
carry.
3. Each quiz is worth 10%.
4. If you have to miss a quiz for good reason, you will have to let me know (by email) at least 15
minutes before the quiz that you will be missing the quiz.
5. If you miss a quiz for good reason, the 10% weight on that quiz will be reallocated across your
remaining exams (quizzes and final). You cannot weight prior quizzes more.
6. If you take all three quizzes, the score on your worst quiz will be pushed up to the average score
across all of your other exams (the other two quizzes and the final exam) (Note: It will not be
thrown out). If you miss a quiz, you will not have this option, even if you miss the quiz for good
reason.
7. You can never be worse off from taking all three quizzes. At worst, your total score will be
unaffected, but at best, it will improve.
8. I grade all of your quizzes and I give partial credit. So, please show all work. If you have a beef
with the grading (and I do make mistakes), please come to me
9. You cannot use your laptops on the quiz.
10. You can use your iPads for reviewing lecture notes but not as connected devices.

17
Rules of Engagement

¨ Rules of group work:

¤ Pick your own groups. (If you have trouble getting picked, I will help)
¤ All group work will be self policed, except in extreme circumstances.
¤ There will be one grade per group, no matter how the work load is
distributed among the group members
¨ Rules on individual work
¤ All exams and quizzes are strictly individual work.
¤ There will be no make-up quizzes. If you miss a quiz for a good reason, the
grade will be redistributed over the remaining part of the course. If you
take all three quizzes, the score on your worst quiz will be raised to the
average score across all of your other exams (two quizzes and the final).
¤ I will be the grader, and I do make mistakes. If I screw up, bring it to my
attention and I will fix it.
¨ Rules on Participation
¤ All participation is welcome.

18