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

(Hop HipldF0AV) #1

Considerafirmthathasexistingassetsinwhichithascapital
investedof$100million.Assumethesefouradditionalfacts
about the firm.


1.Theafter-taxoperating incomeonassetsinplace is$15
million. This return on capital of 15% is expected to be
sustainedinperpetuityandthecompanyhasacostofcapital
of 10%.


2.Atthebeginningofeachofthenextfiveyears,thefirmis
expected to make investments of $10 million each. These
investments are also expectedto earn 15%as a return on
capital and the cost of capital is expected to remain 10%.



  1. After year 5, the company will continue to make
    investmentsandearningswillgrow5%ayear,butthenew
    investmentswillhaveareturnoncapitalofonly10%,which
    is also the cost of capital.


4.All assets andinvestments areexpectedto haveinfinite
lives.
12 Thus,theassetsinplaceandtheinvestmentsmadeinthe
firstfiveyearswillmake15%ayearinperpetuity,withno
growth.


This firm can be valued using an economic value added
approach, as shown in the followingtable (in millions of
dollars).

Free download pdf