Aswath Damodaran 401
Duration: Comparing Approaches
!P/!r=
Percentage Change
in Value for a
percentage change in
Interest Rates
Traditional Duration
Measures
Regression:
!P = a + b (!r)
Uses:
1. Projected Cash Flows
Assumes:
1. Cash Flows are unaffected by
changes in interest rates
2. Changes in interest rates are
small.
Uses:
1. Historical data on changes in
firm value (market) and interest
rates
Assumes:
1. Past project cash flows are
similar to future project cash
flows.
2. Relationship between cash
flows and interest rates is
stable.
3. Changes in market value
reflect changes in the value of
the firm.
It is very difficult to estimate Macaulay Duration on a project-by-project basis
for all the projects that a firm has.
It is much easier to run the regression, but the results are likely to be noisy and
affected by whether the firm’s business mix has changed over time.
This leaves us with
The intuitive analysis that preceded this section
Industry average duration numbers, which can be used for any firm in
that industy
