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Valuation: Projects: Aswath Damodaran

This document outlines a semester-long valuation project. It will be done in groups, with each student valuing one company. There are six steps to complete the valuation: 1) Pick companies from different industries and situations; 2) Intrinsic DCF valuation; 3) Comparable company valuation; 4) Market regression valuation; 5) Option model valuation if high leverage; 6) Final value estimate and recommendation after reconciling different models. Initial DCF valuations are due mid-semester and the full project report is due at the end.

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Laxmi Priya
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124 views

Valuation: Projects: Aswath Damodaran

This document outlines a semester-long valuation project. It will be done in groups, with each student valuing one company. There are six steps to complete the valuation: 1) Pick companies from different industries and situations; 2) Intrinsic DCF valuation; 3) Comparable company valuation; 4) Market regression valuation; 5) Option model valuation if high leverage; 6) Final value estimate and recommendation after reconciling different models. Initial DCF valuations are due mid-semester and the full project report is due at the end.

Uploaded by

Laxmi Priya
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
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VALUATION:

PROJECTS
Aswath Damodaran
1. OVERALL VALUATION PROJECT
Runs the Entire Semester
Due in Two Parts
Project Description

¨ This project is designed to apply the valuation


techniques we learn in class on companies in the real
world.
¨ It is a group project, with each person in the group
picking one company to value.
¨ The project analysis is due in two parts:
¤ The discounted cash flow valuations are due midway through
the semester on October 30 at 5 pm. They will not be graded,
but will be reviewed and returned with comments.
¤ The entire project report is due by 5 pm on the last day of class
(December 14).

3
Step 1: Pick the companies

¨ Pick a group of companies (one for each person in the group),


making sure you have at least
1. one company which has negative earnings in the most recent financial
period (year-to-date, if available or most recent financial year (if not)).
2. one company which has high-growth potential (Look for companies
whose revenues are expected to grow > 25% over the near future; the
could be losing money, in which case you could kill two birds with one
stone.)
3. one non-U.S. company (Value the local listing not the ADR)
4. one service company (retail firm, financial service firm ..)

¨ For high growth firms:


¨ http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqass.htm
¨ For negative earnings firms:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqass.htm

4
Step 2: Intrinsic Valuation

¨ Develop your narrative for this company. (Give me your


story of how you see your company evolving over time,
given what you know about it, its market and the
competition)
¨ Tie your narrative to key numbers that you will be using
in your valuation.
¨ Value the stock in each company using a discounted cash
flow model.
¨ Evaluate how sensitive your value estimates are to
changes in your narrative.
Parts 1 & 2 are due midway through the semester on
November 4

5
Step 3: Value relative to comparables

¨ Prepare a list of “comparable” companies, using criteria


that you think are appropriate
¨ Choose a multiple that you will use in comparing firms
across the group. (You might have to try a number of
multiples out before making this choice)
¨ Evaluate your company against the comparable firms
using the multiple that you have chosen for your
valuation.
¤ using simple techniques (do a qualitative analysis adjusting the
average for comparable firms)
¤ using a sector regression (a regression across firm in your
sector). You can download the data on comparable firms by
going to

6
Step 4: Value relative to the market

¨ Using the latest regression posted for the market on


my web site, and the multiple you chose in step 3,
evaluate whether your firm is under or over valued.
¤ If you have a non-U.S. company which has an ADR listed on
it, you can use the U.S. regression
¤ While I will not require it, I will be very impressed if you
run a regression of the multiple in your foreign market (use
the 50 largest firms, if you want to reduce your work load)
against the variables that determine that multiple.

7
Step 5: Using Option Pricing Models

¨ If your negative earnings firm has high financial


leverage (debt to capital ratio that exceeds 50%, in
market value terms), value it using the option pricing
model.
¨ If it does not, do not use the option pricing model.

8
Step 6: Final Value Estimate and
Recommendation

¨ Before you make your recommendation, check


whether anything that has happened during the
period of your analysis has changed your narrative
and your valuation.
¨ Consider the values you have obtained from the
discounted cash flow, relative and option valuation
models.
¤ How would you reconcile the different estimates of value?
¤ Make a final recommendation on the stocks in your group.

9
2. MYSTERY PROJECT
Topic: TBA
Due: Session TBA (sometime between the 10th and 12th weeks of the class)

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