Global Value Investing

HOME     INVEST   |   VALUE   |   SAFETY   |   FADS   |   NEW   |   FAQ


A multifaceted approach to value investing with stock valuation based on intrinsic value estimated from cash returns, appraised value of assets, and other facets of value.





Valuation Models   |   Spreadsheet Programs   |   DCF Valuator




Valuation Models

Damodaran on Valuation:
Security Analysis for Investment and Corporate Finance,
Aswath Damodaran
New York: John Wiley & Sons.

These excerpts and quotes are considered to be "fair use" as interpreted by The Chicago Manual of Style: The Essential Guide for Writers, Editors, and Publisher, 14th edition, 1993. Chicago: The University of Chicago Press.


-- Outline of the Book
>> Note: Chapter 1 of this book examines the general basis for valuation models and the role that valuation plays in different investment philosophies. Chapter 2 provides an overview of the three basic approaches to valuation: discounted cash-flow valuation, relative valuation, and contingent-claim (option pricing) valuation. The rest of the book delves into the details of using these models.
Chapter 1: Introduction to Valuation
Chapter 2: Approaches to Valuation
Chapter 3: Estimation of Discount Rates
Chapter 4: Estimation of Cash Flows
Chapter 5: Estimation of Growth Rates
Chapter 6: Dividend-Discount Models
Chapter 7: Free-Cash-Flow-to-Equity Discount Models
Chapter 8: Valuing a Firm--The Free-Cash-Flow-to-Firm Approach
Chapter 9: Special Cases in Valuation
1 Cyclical Firms
2 Firms in Financial Distress
3 Firms with Product Options
4 Private Firms
5 Conclusion
Chapter 10: Price/Earnings Ratios
1 The Use and Misuse of P/E Ratios
2 Estimating P/E Ratios from Fundamentals
3 Comparisons of P/E Ratios
4 Problems with P/E Ratios
5 Variants of the P/E Ratio (accounting earnings, cash flows, pretax, after-tax)
6 Price/Dividend Ratios and Dividend Yields
7 P/E Ratios and Stock Returns
8 Conclusion
Chapter 11: Price/Book Value Ratios
Chapter 12: Price/Sales Ratios
Chapter 13: Management Decisions, Corporate Strategy, and Firm Value
Chapter 14: Valuation for Acquisitions and Takeovers
Chapter 15: Option-Pricing Theory
Chapter 16: Application of Option-Pricing Theory to Valuation
Chapter 17: Overview and Conclusion
-- Choices in Valuation Models
-- Determinants of Choice--DCF Models
-- Determinants of Choice--Relative-Value Models
-- Conclusion
>> Note: The analyst faced with the task of valuing a firm or its equity has to choose between three different approaches: DCF valuation, relative valuation, and option-pricing models; and within each approach, between different models. This choice will be driven largely by the characteristics of the firm being valued: the level of its earnings (positive or negative, normal or abnormal), its growth potential (relative to the economy in which it operates, e.g., stable, moderate-growth, or high-growth), the sources of earnings growth (specific or general), the stability of its leverage (stable or unstable, either increasing or decreasing toward its optimum), and its dividend policy. Matching the valuation model to the asset or firm being valued is as important a part of valuation as understanding the models and having the right inputs.
Appendix 1: The Capital Asset Pricing Model
Appendix 2: Historical Returns on Stocks, T.Bills, and T.Bonds
Appendix 3: Valuation Models
-- Notation Used in Valuation Models
-- 1. The Gordon Growth Model
-- 2. The Two-Stage Dividend-Discount Model
-- 2a. The Value of Growth
-- 3. The H Model for Valuing Growth
-- 4. The Three-Stage Dividend-Discount Model
-- 5. The Stable-Growth FCFE Model (Free Cash-Flow to the Equity)
-- 6. The Two-Stage FCFE Model
-- 7. The E Model--A Three-Stage FCFE Model
-- 8. The FCFF Stable-Growth Model (Free Cash-Flow to the Firm)
-- 9. The General Version of the FCFF Model
-- 10. Price/Earnings Ratios--Fundamentals
-- 11. Price/Book Value Ratios--Fundamentals
-- 12. Price/Sales Ratios--Fundamentals
-- 13. Option-Pricing Model--Valuing Equity
-- 14. Option-Pricing Model--Valuing Natural Resources
-- 15. Option-Pricing Model--Valuing Product Patents as Options

Disk Documentation


Spreadsheet Programs

Corporate Finance: Theory and Practice, 1997
Aswath Damodaran, Stern School of Business, New York University
New York: John Wiley & Sons


Part I. An Introduction to Corporate Finance
Part II. Investment Analysis
Part III. The Financing Decision
Part IV. The Dividend Decision
Part V. Valuation
>> Note: The fifth section of the book links the investment, financing and dividend decisions to the value of the firm. Chapter 23 provides an introduction to discounted cash flow models for value and relative valuation models (such as multiples) and the reasons for the differences between the two approaches. Chapter 24 extends this discussion to look at corporate restructuring effects on value, and value enhancement strategies being adopted by many firms. Chapter 25 discusses the special issues relating to valuing mergers, including the value of control and synergy.
Chapter 23. Basics of Valuation
Chapter 24. Management Decisions, Corporate Strategy, and Firm Value
Chapter 25. Acquisitions and Takeover
Part VI. Other Tools and Techniques

>> Note: It is my hope that the extended examples in this book will induce readers to try out the theory on other companies. By doing so, they will not only understand the limitations of the theory better, but also learn how to adapt it for use in the real world. To make this process easier, there is a accompanying diskette containing spreadsheets that were used to generate the applications in this book. Readers should be able to use these spreadsheets to analyze a project, examine the optimal debt ratio for a firm, estimate how much cash it has available to pay out to stockholders and value the firm.

Link to
Wiley College: Damodaran Corporate Finance


Note: These lists do NOT contain active hyperlinks. Click on the above link to Wiley College to reach the list of active hyperlinks to models.

Corporate Finance Spreadsheets

1. capbudg.xls: This program allows you to do a basic capital budgeting analysis for a project, and compute NPV, IRR and ROI. (For Macintosh version)
2. risk.xls: This program allows you to use past returns on a stock and a market index to analyse its price performance (Jensen's Alpha), its sensitivity to market movements (Beta) and the proportion of its risk that can be attributed to the market.(For Macintosh version)
3. capstru.xls: This program allows you to estimate an "Optimal" Capital structure for a company using the cost of capital approach , the differential return approach and the APV approach. (For Macintosh version)
4. capstruo.xls: This is a variant that allows you to estimate an "Optimal" capital structure for a company whose operating income might vary with its debt rating - for instance, financial service firms. (For Macintosh version)
5. dividends.xls: This program compares the dividends paid to what a firm could have paid, by estimating the free cash flow to equity (the cash flow left over after net debt payments, net capital expenditures and working capital investments.(For Macintosh version)
6. dcfval.xls: This program computes the value of equity in a firm using a two-stage dividend discount and FCFE model. (For more extensive choices on valuation, look at the programs under the valuation section below.) (For Macintosh version)
7. lboval.xls: This program analyzes the value of equity and the firm in a leveraged buyout. (For Macintosh version) 8.synergy.xls: This program estimates the value of synergy in a merger. (For Macintosh version)

Equity Valuation Spreadsheets

1. readme1s.xls: This file describes the programs in this section and provides some insights into their usage. (For Macintosh version)
2. model.xls: This program provides a rough guide to which discounted cash flow model may be best suited to your firm. (For Macintosh version)
3. ddmst.xls: Stable growth, dividend discount model; best suited for firms growing at the same rate as the economy and paying residual cash as dividends. (For Macintosh version)
4. ddm2st.xls: Two-stage DDM; best suited for firms paying residual cash in dividends while having moderate growth. (For Macintosh version)
5. implprem.xls: This spreadsheet calculates the implied risk premium in a market. This can be used in discounted cashflow valuation to do market neutral valuation.
6. ddm3st.xls: Three-stage DDM; best suited for firms paying residual cash in dividends, while having high growth. (For Macintosh version)
7. fcfest.xls: Stable growth, FCFE discount model; best suited for firms in stable leverage and growing at the same rate as the economy. (For Macintosh version)
8. fcfe2st.xls: Two-stage FCFE discount model; best suited for firms with stable leverage and having moderate growth. (For Macintosh version)
9. fcfe3st.xls: Three-stage FCFE discount model; best suited for firms with stable leverage and having high growth. (For Macintosh version)
10. fcffst.xls: Stable growth FCFF discount model; best suited for firms growing at the same rate as the economy. (For Macintosh version)
11. fcff2st.xls: Two-stage FCFF discount model; best suited for firms with shifting leverage and growing at a moderate rate. (For Macintosh version)
12. fcff3st.xls: Three-stage FCFF discount model; best suited for firms with shifting leverage with high growth. (For Macintosh version)
13. fcffgen.xls: A generalised FCFF model, where the operating margins are allowed to change each year; best suited for firms in trouble or transition. (For Macintosh version)
14. equity.xls: A model that uses option pricing to value the equity in a firm; best suited for highly levered firms in trouble. (For Macintosh version)
15. natres.xls: A model that uses option pricing to value a natural resource company; useful for valuing oil or mining companies. (For Macintosh version)
16. project.xls: A model that uses option pricing to value a product patent or option; useful for valuing the patents that a company might hold. (For Macintosh version)



DCF Valuator

The Damodaran valuation models are spreadsheet models and are presented with market beta and thus are market-based pricing models and not market-independent valuation models. They can be valuation models if used without the market beta factor to adjust for so-called market risk. The DCF Valuator online interactive graphical investment valuation models are dynamic decision-tree models, not static spreadsheet models, and they use Monte Carlo simulation scenarios for uncertainty.

Copyright 1996-2003. All rights reserved.