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

(Hop HipldF0AV) #1

  • Useexpectedvalues.Thefuturerevenuesorearnings
    usedinthevaluationshouldbeexpectedvaluesand
    not best-case estimates. With both distressed and
    young companies, we have to consider the
    probabilities thatthe firms willnot make itto the
    futureyearandwemustreducetheexpectedvalues
    accordingly.

  • Don’tdoublecountgrowth. Thisapproach isoften
    used with high-growth companies to obtain future
    values.However,analystsoftenuseinflatedmultiples
    ofearningsorrevenuestoobtainthefuturevalueand
    usethehigh growthpotentialof thecompanyasa
    justification. Since the future revenue or earnings
    valuealreadyreflectsabigchunkofthehighgrowth,
    this leads to double counting of the growth.

  • Convert into today’s value. Applying a forward
    multipletoearningsyieldsafuturevalue,whichhas
    to be discounted back to today to allow for
    comparisonstotoday’smarketvalues.IntheSirius
    valuation,weusedthe11.44percentcostofcapital,
    whichreflectsthehighriskwefaceingettingtoyear
    5, to discount back the future value.


Venturecapitalistsuseavariantofthisapproach,wherethey
estimateearningsinafutureyearforayoungfirm,andthen
applyanexitmultiple(reflectingtheexpectationofapublic
offeringor saleatthat point)to estimatethefuture value.
Theythendiscountthisvaluebackatahigh targetrate of
return(often 25 to 35 percent)toestimatethevaluetoday,
andjustifythehightarget rateofreturnbypointingto the
high likelihood of failure.


CONCLUSION

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