Dark Side of Valuation, The: Valuing Young, Distressed, and Complex Businesses, 3rd Edition

About

Features

Learn how to

• Deal with “abnormally low” and negative risk-free rates in valuation
• Adapt to dynamic and changing risk premiums
• Value young companies that are disrupting existing businesses
• Analyze commodity and cyclical companies across cycles
• Value a company as the sum of its parts or as an aggregation of its users/subscribers and customers
• Determine the difference between pricing and valuation, and why some investments can only be priced

Description

The Definitive Guide to Valuing Hard-to-Value Companies: Fully Revised for Today’s Financial Markets

Valuing money-making companies that have long histories and established business models is straightforward. It is when you encounter difficult-to-value companies that you feel the urge to go over to the dark side of valuation—where you abandon first principles and create new metrics. Aswath Damodaran looks at a range of these companies, from start-ups in new businesses to distressed companies, from banks facing regulatory turmoil to commodity firms, and from emerging market upstarts to multinationals that spread across geographies and businesses. With each grouping, he helps you examine the call of the dark side and its practices and frameworks to value these firms.

To answer these questions, Aswath looks at companies across the life cycle and in different markets, from Uber and Shake Shack at one end of the spectrum to Vale, Royal Dutch, and United Technologies at the other end.

In the process, you learn how to

• Deal with “abnormally low” and negative risk-free rates in valuation
• Adapt to dynamic and changing risk premiums
• Value young companies that are disrupting existing businesses
• Analyze commodity and cyclical companies across cycles
• Value a company as the sum of its parts or as an aggregation of its users/subscribers and customers
• Determine the difference between pricing and valuation, and why some investments can only be priced

Sample Content

Online Sample Chapter

How to Value Growth Companies

Table of Contents

Preface to the Third Edition     xx
Chapter 1  The Dark Side of Valuation     1
Foundations of Value     1
Valuation Across Time     7
Valuation Across the Life Cycle     9
Valuation Across the Business Spectrum     15
The Dark Side of Valuation Beckons     23
Conclusion     26
PART I:  ENLIGHTENMENT: THE TOOLS
Chapter 2  Intrinsic Valuation     29
Discounted Cash Flow Valuation     29
Variations on DCF Valuation     63
What Do Intrinsic Valuation Models Tell Us?     73
Conclusion     74
Chapter 3  Probabilistic Valuation: Scenario Analysis, Decision Trees, and Simulations     75
Scenario Analysis     75
Decision Trees     79
Simulations     88
An Overall View of Probabilistic Risk Assessment Approaches     101
Conclusion     104
Chapter 4  Relative Valuation/Pricing     105
What Is Relative Valuation?     105
The Ubiquity of Relative Valuation     107
Reasons for Popularity and Potential Pitfalls     107
Standardized Values and Multiples     109
The Four Basic Steps of Using Multiples     111
Reconciling Relative and Intrinsic Valuations     131
Conclusion     132
Chapter 5  Real Options Valuation     133
The Essence of Real Options     133
Real Options, Risk-Adjusted Value, and Probabilistic Assessments     135
Real Options Examples     137
Caveats for Real Options     153
Conclusion     155
Appendix: Basics of Options and Option Pricing     156
PART II:  THE DARK SIDE OF MACRO INPUTS
Chapter 6  A Shaky Base: A “Risky” Risk-Free Rate     169
What Is a Risk-Free Asset?     169
Why Do Risk-Free Rates Matter?     170
Estimating a Risk-Free Rate     171
Issues in Estimating Risk-Free Rates     180
Closing Thoughts on Risk-Free Rates     194
Conclusion     196
Appendix 6.1     196
Chapter 7  Risky Ventures: Assessing the Price of Risk     199
Why Do Risk Premiums Matter?     199
What Are the Determinants of Risk Premiums?     202
Standard Approaches for Estimating Risk Premiums     204
Equity Risk Premiums     205
Default Spreads     207
Problem Scenarios     208
The Dark Side     209
The Light Side     210
Conclusion     226
Appendix 7.1     227
Chapter 8  Macro Matters: The Real Economy     231
Growth in the Real Economy     231
  The Dark Side     237
  The Light Side     238
Expected Inflation     239
  The Dark Side     246
  The Light Side     247
Exchange Rates     248
  The Dark Side     253
  The Light Side     255
Conclusion     256
PART III:  THE DARK SIDE ACROSS THE LIFE CYCLE
Chapter 9  Baby Steps: Young and Start-Up Companies     259
Young Companies in the Economy     259
Valuation Issues     263
The Dark Side     268
The Light Side     275
Conclusion     321
Chapter 10  Shooting Stars: Valuing Growth Companies     323
Growth Companies     323
Characteristics of Growth Companies     326
Valuation Issues     328
The Dark Side of Valuation     333
The Light Side of Valuation     343
Conclusion     375
Chapter 11  The Grown-Ups: Mature Companies     377
Mature Companies in the Economy     377
Valuation Issues     380
The Dark Side of Valuation     384
Relative Valuation     391
The Light Side of Valuation     392
Conclusion     430
Chapter 12  Winding Down: Declining Companies     431
Declining Companies in the Economy     431
Valuation Issues     433
The Dark Side of Valuation     438
The Light Side of Valuation     446
Conclusion     491
PART IV:  THE DARK SIDE ACROSS COMPANY TYPES
Chapter 13  Ups and Downs: Cyclical and Commodity Companies     493
The Setting     493
The Dark Side of Valuation     496
The Light Side of Valuation     502
Conclusion     524
Chapter 14  Mark to Market: Valuing Financial Services Companies     525
Financial Services Firms: The Big Picture     525
Characteristics of Financial Services Firms     528
The Dark Side of Valuation     532
The Light Side of Valuation     536
Conclusion     560
Chapter 15  Invisible Investments: Valuing Firms with Intangible Assets     561
Firms with Intangible Assets     561
The Dark Side of Valuation     567
The Light Side of Valuation     572
Conclusion     604
Chapter 16  Volatility Rules: Emerging-Market Companies     607
The Role of Emerging-Market Companies     607
The Dark Side of Valuation     610
The Light Side of Valuation     614
Conclusion     639
Chapter 17  Going to Pieces: Disaggregated Value     641
Aggregation versus Disaggregation     641
Multinational Conglomerates     642
The Dark Side of Valuation     648
The Light Side of Valuation     651
User/Subscriber/Customer Companies     677
Conclusion     694
Chapter 18  The Cynic’s Corner: Value versus Price     695
Value versus Price     695
Investing versus Trading     696
The Right Approach     699
Categorizing Investments     702
The Questionable Investments     716
Conclusion     731
PART V:  THE FINALE
Chapter 19  The Jedi Way: Vanquishing the Dark Side     733
Enlightening Propositions     733
Conclusion     742
Index     743

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