TY  - BOOK
AU  - Damodaran, Aswath
TI  - Dark side of valuation : valuing old technology, new technology and new economy companies
SN  - 8131718522
U1  - 657.73 
PY  - 2009///
CY  - Delhi
PB  - Dorling Kindersley (India) Pvt. Ltd.
N1  - CONTENTS PREFACE xv ACKNOWLEDGMENTS xix 1 THE DARK SIDE OF VALUATION  1 DEFINITION OF A TECHNOLOGY FIRM2 THE SHIFT TD TECHNOLOGY3 OLD TECH TO NEW TECH6 EXTENSION OF THE VALUATION METRICS7 THE IMPLICATIONS FOR VALUATION9 NEW PARADIGMS DR OLD PRINCIPLES: A LIFE CYCLE PERSPECTIVE11 ILLUSTRATIVE EXAMPLES 16 SUMMARY 17 ENDNOTES 17 2 SHOW ME THE MONEY: THE FUNDAMENTALS or DISCOUNTED CASH FLOW VALUATION 19 DISCOUNTED CASH FLOW VALUE  20 VALUING AN ASSET WITH GUARANTEED CASH FLOWS21 INTRODUCING UNCERTAINTY INTO VALUATION22 Valuing an Asset with Default Risk  23 Valuing an Asset with Equity Risk  26 Valuing an Asset with Equity Risk and finite Life  28 VALUING AN ASSET WITH AN INFINITE LIFE29 Equity and Firm Valuation  29 Dividends and Equity Valuation  32 A Broader Measure of Cash Elows to Equity  37 From Valuing Equity to Valuing the Firm  40 VALUING TECHNOLOGY STOCKS43 Estimated Cash Flow to the Firm  44 Expected Growth  45 Discount Rate  46 Asset Life  47 Bringing It All Together  48 SUMMARY SO ENDNOTES5O 3 THE PRICE OF RISK: ESTIMATING DISCOUNT RATES53 COST OF EQUITY54 Risk and Return Models  54 Estimation Issues  58 FROM COST OF EQUITY TD COST OF CAPITAL87 Calculating the Cost of Debt  88 Calculating the Cost of Hybrid Securities  92 Calculating the Weights of Debt and Equity Components  94 Estimating the Cost of Capital  99 SUMMARY 100 ENDNOTES101 4 CASH is KING: ESTIMATING CASH FLOWS 105 DEFINING THE CASH FLOW TD THE FIRM IDS OPERATING EARNINGS (EBIT) 106 Updated Earnings  107 Adjustments to Operating Earnings109 THE TAX EFFECT125 Effective versus Marginal Tax Rate125 The Effect of Net Operating Losses127 The Tax Benefits of R&D Expensing  129 REINVESTMENT NEEDS 13O Net Capital Expenditures  130 Noncash Working Capital Investments  133 SUMMARY  134 ENDNOTES  138 5 LOOKING FORWARD: ESTIMATING GROWTH 141 THE IMPORTANCE OF GROWTH 142 Growth Assets and Assets in Place143 Growth Assets at Technology Firms  145 Estimating Historical Growth145 The Usefulness of Historical Growth149 Historical Growth at Technology Firms153 ANALYST ESTIMATES OF GROWTH155 Number of Analysts Following Technology Firms155 The Quality of Earnings Forecasts156 THE FUNDAMENTAL DETERMINANTS OF GROWTH 159 Scenario: Stable Return on Capital159 Scenario: Positive and Changing Return on Capital165 Scenario: Negative Return on Capital167 THE QUALITATIVE ASPECTS OF GROWTH 17S THE QUESTION OF DETAIL180 SUMMARY 181 ENDNOTES 181 6 ESTIMATING FIRM VALUE 183 CLOSURE IN VALUATION 184 Multiple Approach 184 Liquidation Value 185 Stable Growth Model 186 VALUING OPERATING ASSETS 197 THE SURVIVAL ISSUE2DB Life Cycle and Firm Survival208 Likelihood of Failure and Valuation  209 CASH  AND  NONOPERATING  ASSETS  2 ID Cash and Marketable Securities  211 Holdings in Other Firms  213 Other Nonoperating Assets216 FIRM VALUE AND EQUITY VALUE219 SUMMARY221 ENDNOTEB221 7 MANAGEMENT OPTIONS, CONTROL, AND LIQUIDITY225 MANAGEMENT AND EMPLOYEE OPTIONS 226 The Magnitude of the Option Overhang  226 Options in Existence  229 Future Option Grants239 VALUE ar CONTROL243 Voting Shares versus Nonvoting Shares243 Valuing Control244 Control in Private Businesses245 VALUE OF LIQUIDITY245 Determinants of Illiquidity Discount  245 Quantifying the Liquidity Discount  246 Liquidity Discounts at Publicly Traded Firms  247 SUMMARY 24B ENDNOTES 249 8 RELATIVE VALUATION251 USE ar RELATIVE VALUATION252 Reasons for Popularity252 Potential Pitfalls  253 STANDARDIZED VALUES AND MULTIPLES253 Earnings Multiples  253 Book Value or Replacement Value Multiples  254 Revenue Multiples  254 Sector-Specific Multiples  255 THE FOUR BASIC STEPS TO USING MULTIPLES256 Definitional Tests256 Descriptional Tests  259 Analytical Tests  262 Application Tests  265 RECONCILING RELATIVE AND DISCOUNTED CASH FLOW VALUATIONS271 SUMMARY272 ENDNOTES273 9 EARNINGS MULTIPLES275 PRICE-EARNINGS RATIO (PE)275 Definitions of PE Ratio276 Cross-Sectional Distribution of PE Ratios  277 Determinants of the PE Ratio282 Using the PE Ratio for Comparisons  289 THE PEG RATIO297 Definition of the PEG Ratio  297 Cross-Sectional Distribution of the PEG Ratio  299 Determinants of the PEG Ratio  303 Using the PEG Ratio for Comparisons  307 OTHER EARNINGS MULTIPLES313 Price to Future Earnings  313 Price to Earnings Before R&D Expenses  315 Enterprise Value to EBITDA  316 SUMMARY317 ENONOTES3 IB 10 OTHER MULTIPLES319 REVENUE MULTIPLES320 Definition of Revenue Multiple  320 Cross-Sectional Distribution321 Analysis of Revenue Multiples  324 Using Revenue Multiples in Analysis  333 Multiples of Future Revenues  343 SECTOR-SPECIFIC MULTIPLES344 Definitions of Sector-Specific Multiples  345 Determinants of Value  346 Analysis with Sector-Specific Multiples  350 SUMMARY 351 ENDNDTES 352 11 REAL OPTIONS IN VALUATION353 BASICS OF OPTION PRICING354 Call Options: Description ond Payoff Diagrams  354 Put Options: Description ond Payoff Diagrams  356 DETERMINANTS OF OPTION VALUE357 American versus European Options: Variables Relating to Early Exercise  359 Option Pricing Models  359 A Few Caveats on Applying Option Pricing Models  372 Barrier, Compound, ond Rainbow Options  373 THE OPTION TO DELAY376 The Payoff Diagram on the Option to Delay  376 Valuing the Option to Delay  378 Practical Considerations  382 Implications for Project Analysis ond Valuation383 Valuing o Patent  384 From Patent Value to Firm Value  387 THE OPTION TO EXPAND391 Practical Considerations  393 Implications for Valuation394 WHEN ARE REAL OPTIONS VALUABLE? SOME KEY TESTS397 Quantitative Estimation  397 Key Tests  397 SUMMARY400 ENDNOTES401 12 VALUE ENHANCEMENT403 VALUE CREATION: A DISCOUNTED CASH FLOW (DCF) PERSPECTIVE4O4 Value-Creating and Value-Neutral Actions  404 Ways of Increasing Value  406 The Value Enhancement Chain  432 ALTERNATIVES TO THE TRADITIONAL VALUATION MODEL434 Economic Value Added  435 Cash Flow Return on Investment  442 SUMMARY449 ENDNOTES451 13 A POSTSCRIPT  453 FUNDAMENTALS DON'T CHANGE454 Cash Flow, Growth, and Risk454 Lessons for Investors455 Lessons for Managers  455 GROW, GROW, GROW..456 Growth and Value456 Lessons for Investors457 Lessons for Managers458 THE EXPECTATIONS GAME459 Expectations, Information, and Value459 Lessons for Investors460 Lessons for Managers  461 LIVE WITH NOISE462 Noise in the Valuation of Technology firms  462 Implications for Investors463 Implications for Managers464 SUMMARY465 ENDNOTES465 REFERENCES  467 INDEX473
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