The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit

The Little Book of Valuation: How to Value a Company, Pick a Stock and Profit

Aswath Damodaran

Language: English

Pages: 256

ISBN: 1118004779

Format: PDF / Kindle (mobi) / ePub

An accessible, and intuitive, guide to stock valuation

Valuation is at the heart of any investment decision, whether that decision is to buy, sell, or hold. In The Little Book of Valuation, expert Aswath Damodaran explains the techniques in language that any investors can understand, so you can make better investment decisions when reviewing stock research reports and engaging in independent efforts to value and pick stocks.

Page by page, Damodaran distills the fundamentals of valuation, without glossing over or ignoring key concepts, and develops models that you can easily understand and use. Along the way, he covers various valuation approaches from intrinsic or discounted cash flow valuation and multiples or relative valuation to some elements of real option valuation.

  • Includes case studies and examples that will help build your valuation skills
  • Written by Aswath Damodaran, one of today's most respected valuation experts
  • Includes an accompanying iPhone application (iVal) that makes the lessons of the book immediately useable

Written with the individual investor in mind, this reliable guide will not only help you value a company quickly, but will also help you make sense of valuations done by others or found in comprehensive equity research reports.



















our estimation of cash flows sometime in the future and then computing a terminal value that reflects estimated value at that point. The two legitimate ways of estimating terminal value are to estimate a liquidation value for the assets of the firm, assuming that the assets are sold in the terminal year, or to estimate a going concern value, assuming that the firm’s operations continue. If we assume that the business will be ended in the terminal year and that its assets will be liquidated at

the equity in a company and the number of shares outstanding in the firm. To compare the pricing of “similar” firms in the market, the market value of a company can be standardized relative to how much it earns, its accounting book value, to revenue generated, or to a measure specific to a firm or sector (number of customers, subscribers, units, and so on). When estimating market value, you have three choices: 1. Market value of equity: The price per share or market capitalization. 2.

working out a discount for the declining firm relative to the values being attached to healthy firms. In a sector where many or even all of the firms are in decline, not only do your choices of what multiple to use become more limited, but you have to consider how best to adjust for the degree of decline in a firm. Incorporating distress: Firms that have a higher likelihood of distress will trade at lower values (and hence at lower multiples) than firms that are more likely to make it. That

rate of 3.6 percent, and an equity risk premium of 5 percent. Cost of equity = 3.6% + 1.2(5%) = 9.6% There is one final point that bears emphasizing here. The average beta across banks reflects the regulatory constraints that they operated under during that period. Since this valuation was done 4 weeks into the worst banking crisis of the last 50 years, there is a real chance that regulatory changes in the future can change the riskiness (and the betas) for banks. Value Driver #1:

flows into cash flows in today’s terms. There are five types of cash flows—simple cash flows, annuities, growing annuities, perpetuities, and growing perpetuities. A simple cash flow is a single cash flow in a specified future time period. Discounting a cash flow converts it into today’s dollars (or present value) and enables the user to compare cash flows at different points in time. The present value of a cash flow is calculated thus: Thus, the present value of $1,000 in 10 years, with

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