Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )
actions that increase financial leverage (such as stock buybacks funded with debt) increase firm value, which suggests that valu ...
and is a function ofthe firm’s cash flowsand its cost of capital. If we assume that the cash flows to the firm are unaffectedby ...
Thecostofdebtforafirmisafunctionofthefirm’sdefault risk.Asafirmborrowsmore,itsdefaultriskwillincreaseand sowillthecostofdebt.Ifw ...
Second, the pretax operating income is assumed to be unaffectedbythefirm’sfinancingmixand,byextension,its bondrating.If theopera ...
Debt RatioBetaCost of Equity 70 2.2013.21 80 3.3718.44 90 6.7433.46 The levered betas are estimated using the levered beta equat ...
There aretwopoints to make aboutthis computation. We assume that at every debt level, all existing debt will be refinancedatthen ...
beforeinterestandtaxes.Toillustratethispoint,notethatthe earnings beforeinterest and taxesat Titan Cement is 232 millioneuros.As ...
Thereasonforminimizingthecostofcapitalisthatdoingso maximizesthevalueofthefirm.Valuingtheexpectedcash flows in Illustration 6.2 ...
benefitsandaddingbacktheexpectedbankruptcycostfrom the existing debt. The only components that change as a firm changes its leve ...
Wecomputethevalueoftheleveredfirmatdifferentlevels of debt. The debt level that maximizes the value of the levered firm is the o ...
earningsbeforeinterestandtaxes.Theadjustmenttothetax ratewasdescribed morefullyearlierinthecost of capital approach.Theexpectedt ...
The firmvalue is optimized at about 40% debt,which is consistent with theresults of thecost of capital approach. Theseresultsare ...
assumptions,theAPVandthecostofcapitalconclusionsgive identical answers. However, the APV approach is more practicalwhenfirmsaree ...
2 To compute the cost of debt for Titan, we added an estimateddefaultspreadof0.5percent(basedonthesynthetic ratingofAAforTitan)f ...
bankruptcies,thedirectcostofbankruptcyseemstobeabout 5 percent. 8 A. Shapiro, Modern Corporate Finance (New York: Macmillan,1989 ...
13 F. Modigliani and M. Miller, “The Cost of Capital, Corporation Finance and the Theory of Investment,” American Economic Revie ...
PART TWO Relative Valuation Inrelativevaluation,wevalueassetsbased onhowsimilar assets arepriced. Webegin this section, in Chapt ...
CHAPTER 7 Relative Valuation: First Principles Indiscountedcashflowvaluation,theobjectiveistofindthe value of an asset, given it ...
Inrelativevaluation,wevalueanassetbasedonhowsimilar assetsarepricedin themarket.Aprospective housebuyer decideshowmuchtopayforah ...
differencesinpricingacrossstockscanbeattributedtoallof thefundamentalsthatwetalkedaboutindiscountedcashflow valuation. Higher-gr ...
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