owner dies, and for divorce proceedings when couples break
up. While the principles of valuation may not be different
when valuing a business for legal proceedings, the objective
often becomes providing a valuation that the court will accept
rather than the “right” valuation. After all, legal precedents
and the language of the law often trump common sense in the
courtroom.
CONCLUSION
Valuation plays a key role in many areas of finance—in
corporate finance, in mergers and acquisitions, and in
portfolio management. The models presented in this book
provide a range of tools that analysts in each of these areas
will find of use, but the cautionary note sounded in this
chapter bears repeating. Valuation is not an objective
exercise, and any preconceptions and biases that an analyst
brings to the process will find their way into the value.
1 There are approximately five times as many buy
recommendations issued by analysts on Wall Street as there
Copyright © 2006. John Wiley & Sons, Incorporated. All rights reserved.
are sell recommendations.
2 The income from cash is riskless and should be discounted
back at a riskless rate. Instead, analysts use risk-adjusted
discount rates (costs of equity or capital) to discount the cash
income, thus resulting in a discount on face value. When
analysts use multiples, they often use the average
price-earnings (P/E) ratio of peer group companies as the
multiple for cash income.
3 When book value weights are used, the costs of capital tend
to be much lower for many U.S. firms, since book equity is
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Damodaran, A. (2006). Damodaran on valuation : Security analysis for investment and corporate finance. John Wiley & Sons, Incorporated.
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lower than market equity. This then pushes up the value for
these firms. While this may make the asking price attractive
to the sellers of these firms, very few buyers would be willing
to pay this price for the firm, since it would require that the
debt that they use in their financing would have to be based
on the book value, often requiring tripling or quadrupling the
dollar debt in the firm.
4 F. Black and M. Scholes, “The Valuation of Option
Contracts and a Test of Market Efficiency,” Journal of
Finance 27 (1972): 399–417.
5 On a chart, the support line usually refers to a lower bound
below which prices are unlikely to move and the resistance
line refers to the upper bound above which prices are unlikely
to venture. While these levels are usually estimated using past
prices, the range of values obtained from a valuation model
can be used to determine these levels (i.e., the maximum
value will become the resistance level and the minimum value
will become the support line).
Copyright © 2006. John Wiley & Sons, Incorporated. All rights reserved.
6 Most corporate financial theory is constructed on this
premise.
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Damodaran, A. (2006). Damodaran on valuation : Security analysis for investment and corporate finance. John Wiley & Sons, Incorporated.
Created from bibliotecaie-ebooks on 2023-12-04 03:05:57.
