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

(Hop HipldF0AV) #1

Boththebookvalueofequityandcapitalareaugmentedby
thevalueoftheresearchasset.Sincemeasuresofreturnon
capitaland equityarebased ontheprioryear’s values,we
computed thevalueoftheresearchasset attheend ofthe
previousfiscalyear,usingthesameapproachthatweusedfor
the current year and obtained a value of $9,878 million.
2


Thebookvalueofcapitalisidentical,sincethefirmhasno
debt outstanding. The returns on equity and capital are
reported with both the unadjusted and adjusted numbers:


While the profitability ratios for Cisco remain impressive
evenaftertheadjustment,theydeclinesignificantlyfromthe
unadjustednumbers.Thisislikelytohappenformostfirms
that earn high returns on equity and capital and have
substantial R&D expenses.
3


Capitalizing Other Operating Expenses


While R&D expenses arethe most prominent example of
capitalexpensesbeingtreatedasoperatingexpenses,thereare

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