Leveraging Value

In: Other Topics

Submitted By kkkunal88
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Debt and Value: Beyond MillerModigliani
Aswath Damodaran

Stern School of Business

Aswath Damodaran

1

The fundamental question: Does the mix of debt and equity affect the value of a business?

Assets
Existing Investments Generate cashflows today Includes long lived (fixed) and short-lived(working capital) assets Expected Value that will be created by future investments Assets in Place Debt

Liabilities
Fixed Claim on cash flows Little or No role in management Fixed Maturity Tax Deductible

Growth Assets

Equity

Residual Claim on cash flows Significant Role in management Perpetual Lives

Different Value?

Different Financing Mix?

Aswath Damodaran

2

Approaches to Valuation

 



Discounted cashflow valuation, relates the value of an asset to the present value of expected future cashflows on that asset. Relative valuation, estimates the value of an asset by looking at the pricing of 'comparable' assets relative to a common variable like earnings, cashflows, book value or sales. Contingent claim valuation, uses option pricing models to measure the value of assets that share option characteristics.

Aswath Damodaran

3

Valuation Models

Asset Based Valuation

Discounted Cashflow Models

Relative Valuation

Contingent Claim Models

Liquidation Value Stable Replacement Cost Two-stage Three-stage or n-stage Current

Equity Firm

Sector

Option to delay

Option to expand Young firms

Option to liquidate Equity in troubled firm

Market Normalized

Earnings Book Revenues Value

Sector specific

Undeveloped land

Equity Valuation Models Dividends

Firm Valuation Models Patent Undeveloped Reserves

Free Cashflow to Firm

Cost of capital approach

APV approach

Excess Return Models

Aswath Damodaran

4

Discounted Cashflow Valuation: Basis for Approach
CF1 CF2 CF3 CF4 CFn + + +…...

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