Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

incomplete)tolistthesefactors.Thecontributionsmadeby
each of thefactors to complexity vary, with some factors
(suchasvolatileeffectivetaxrates)beinglessimportantthan
others(substantialcrossholdingsinprivatecompanies).With
the former, we always have the alternative of using the
marginaltaxrate asa substitute, whereas thereis noeasy
alternativemeasureforthelatter.Theweightattachedtoeach
factorwilldependonhowmuchofthevalueisattributableto
it, and whether it makes estimation more difficult or
impossible.Toillustrate,operatingleasesandR&Dexpenses
undoubtedlyskewfinancialstatements,resultinginmisstated
earningsand meaninglessbook values,butthere usuallyis
enough information available in financial statements for
analyststocorrecttheproblems.Incontrast,wecannoteasily
adjustforextraordinaryearningsthatarenotclearlyidentified
as nonoperating or one-time earnings.

TABLE 16.4Complexity Factors and Valuation Inputs

Valuation

Input

Complexity Factors Reasons

Operating

income

Multiple businesses

One-time income and

expenses

Income from

unspecified sources

Items in income

statement that are

volatile

Makes it difficult to

trace source of

operating income

Makes forecasting of

future income difficult

Makes forecasting of

future income difficult

Makes forecasting of

future income difficult

Tax rate

Income from multiple

locales

Different tax rates in

different locales