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VALUATION:PROJECTS
AswathDamodaran
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1.OVERALLVALUATIONPROJECTRunstheEntireSemesterDueinTwoParts
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ProjectDescription
¨ Thisprojectisdesignedtoapplythevaluationtechniqueswelearninclassoncompaniesintherealworld.
¨ Itisagroupproject,witheachpersoninthegrouppickingonecompanytovalue.
¨ Theprojectanalysisisdueintwoparts:¤ ThediscountedcashflowvaluationsareduemidwaythroughthesemesteronMarch24at5pm.Theywillnotbegraded,butwillbereviewedandreturnedwithcomments.
¤ Theentireprojectreportisdueby5pmonthelastdayofclass(May8).
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Step1:Pickthecompanies
¨ Pickagroupofcompanies(oneforeachpersoninthegroup),makingsureyouhaveatleast1. onecompanywhichhasnegativeearningsinthemostrecentfinancialperiod
(year-to-date,ifavailableormostrecentfinancialyear(ifnot)).2. onecompanywhichhashigh-growthpotential(Lookforcompanieswhose
revenuesareexpectedtogrow>25%overthenearfuture;thecouldbelosingmoney,inwhichcaseyoucouldkilltwobirdswithonestone.)
3. onenon-U.S.company,preferablyinthelocalcurrencyandthelocallisting.4. oneservicecompany(itcanbearetailfirm,financialservicefirmetc.)
¨ Forhighgrowthfirms:¨ http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqass.htm¨ Fornegativeearningsfirms:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqass.htm
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Step2:IntrinsicValuation
¨ Developyournarrativeforthiscompany.(Givemeyourstoryofhowyouseeyourcompanyevolvingovertime,givenwhatyouknowaboutit,itsmarketandthecompetition)
¨ Tieyournarrativetokeynumbersthatyouwillbeusinginyourvaluation.
¨ Valuethestockineachcompanyusingadiscountedcashflowmodel.
¨ Evaluatehowsensitiveyourvalueestimatesaretochangesinyournarrative.Parts1&2areduemidwaythroughthesemesteron
March24
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Step3:Valuerelativetocomparables
¨ Preparealistof“comparable” companies,usingcriteriathatyouthinkareappropriate
¨ Chooseamultiplethatyouwilluseincomparingfirmsacrossthegroup.(Youmighthavetotryanumberofmultiplesoutbeforemakingthischoice)
¨ Evaluateyourcompanyagainstthecomparablefirmsusingthemultiplethatyouhavechosenforyourvaluation.¤ usingsimpletechniques(doaqualitativeanalysisadjustingtheaverageforcomparablefirms)
¤ usingasectorregression(aregressionacrossfirminyoursector).Youcandownloadthedataoncomparablefirmsbygoingto
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Step4:Valuerelativetothemarket
¨ Usingthelatestregressionpostedforthemarketonmywebsite,andthemultipleyouchoseinstep3,evaluatewhetheryourfirmisunderorovervalued.¤ Ifyouhaveanon-U.S.companywhichhasanADRlistedonit,youcanusetheU.S.regression
¤ WhileIwillnotrequireit,Iwillbeveryimpressedifyourunaregressionofthemultipleinyourforeignmarket(usethe50largestfirms,ifyouwanttoreduceyourworkload)againstthevariablesthatdeterminethatmultiple.
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Step5:UsingOptionPricingModels
¨ Ifyournegativeearningsfirmhashighfinancialleverage(debttocapitalratiothatexceeds50%,inmarketvalueterms),valueitusingtheoptionpricingmodel.
¨ Ifitdoesnot,donotusetheoptionpricingmodel.
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Step6:FinalValueEstimateandRecommendation
¨ Beforeyoumakeyourrecommendation,checkwhetheranythingthathashappenedduringtheperiodofyouranalysishaschangedyournarrativeandyourvaluation.
¨ Considerthevaluesyouhaveobtainedfromthediscountedcashflow,relativeandoptionvaluationmodels.¤ Howwouldyoureconcilethedifferentestimatesofvalue?¤ Makeafinalrecommendationonthestocksinyourgroup.
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2.MYSTERYPROJECTTopic:TBADue:SessionTBA(sometimebetweenthe10thand12thweeksoftheclass)