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Home > Asset Management Finance Library > Damodaran on Valuation: Security Analysis for Investment and Corporate Finance

Asset Management Finance Library
Damodaran on Valuation: Security Analysis for Investment and Corporate Finance

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Damodaran on Valuation: Security Analysis for Investment and Corporate Finance

Aswath Damodaran (2nd ed 2006, originally 1994)


Why Read It?

  • Combining analysis of both the theory and practice of business valuation, this is a highly regarded text on how to best measure the value of a particular asset.

  • Damodaran has a great reputation as a teacher and authority, and he here critically evaluates the leading valuation models to help pick the right model for any scenario.

  • Provides practical frameworks for addressing the key issues of company valuation.

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Getting Started

Damodaran on Valuation provides focused guidance on asset valuation for practitioners involved in securities analysis, portfolio management, M&A, and corporate finance. It offers a systematic examination of the three basic approaches to valuation—discounted cash flow valuation, relative valuation, and contingent claim valuation—and explains the concepts and techniques of valuation in an understandable manner.

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Author

Aswath Damodaran is professor of finance at the Stern School of Business, and has also taught at the University of California, Berkeley. He was the youngest winner of the University-wide Distinguished Teaching Award, and profiled in Business Week as one of the top 12 business school professors.

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Context

  • Examines a variety of real-life firms where the direct application of valuation models has failed, identifies the problems, and offers solutions.

  • Explains the value and limitations of models in order to illustrate key techniques.

  • Assists the development of the skills needed to select the right model for any valuation scenario.

  • Presents how to implement the right model, and the kinds of firms to which it is best applied.

  • Discusses many of the common myths of valuation, regarding objectivity, supposed timelessness, precision, quantitativeness, and process.

  • Focuses throughout on application, including how to develop an understanding of stock fundamentals.

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Impact

  • Emphasizes the usefulness and benefits of the variety of valuation models available to businesses.

  • Presents tools designed for a variety of demands, such as estimating the cost of equity, estimating growth rates, measuring free cash flow to equity, valuing firms, estimating the value of assets by looking at the pricing of comparable assets, and measuring the value of assets that share option characteristics.

  • Provides spreadsheets that have been prepared to allow readers to apply what they are learning immediately.

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Quotations

Reasonable estimates of value can be made for most assets and that the same fundamental principles determine the value of all types of assets, real as well as financial.

Valuation is not an objective exercise, and any preconceptions and biases that an analyst brings to the process will find its way into the value.

Matching the valuation model to the asset or firm being valued is as important a part of valuation as understanding the models and having the right inputs.

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Further reading

Books:

  • Damodaran, Aswath. Study Guide for Damodaran on Valuation: Security Analysis for Investment and Corporate Finance. New York: Wiley, 1994. A supporting learning resource for the main book.
  • Damodaran, Aswath. The Dark Side of Valuation: Valuing Old Tech, New Tech, and New Economy Companies. Upper Saddle River, NJ: FT Prentice Hall, 2001. Details various ways to adapt conventional valuation methods for companies.

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