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Valuation Seminar


Description and Syllabus
This is a seminar about valuing assets that will cover the spectrum both in terms of the types of assets and firms that we will value but also in terms of the different approaches to valuation. It is a mix of the fundamentals and advanced topics, intrinsic and relative valuation. A description of the seminar is available here.

The material in this class is designed for a diverse audience, ranging from novices to experts. While that may seem both self-serving and an idle boast, I believe that there are only a few basic pieces to valuation - estimating cash flows, discount rates and growth rates - but that each piece has layers to it that are explored only as you do more valuations. What you take away from these sessions will depend upon what you bring in. If you come into the sessions with valuation experience and knowledge, I hope that the session will lead you to reexamine some of what you do. If you have never taken valuation before, I hope you will be able to walk out of the class with the capacity to value just about any company.

Pre-work/reading/ skills
If you have never done valuations before or if your basics are rusty, there are some things that you can do to make the sessiions a little easier for yourself.
a. Get a big picture view of what valuation is all about.
b. Get your tool kit organized
There are three areas that we draw on, when valuing companies.
i. We get our raw data from accounting statements. While you do not have to go back and pore over debit and credit in an accounting book, being able to read and make sense of a financial statement is often the first step in valuation. I have a short primer on financial statements that you can obtained by clicking here.
ii. All discounted cash flow models are built on a few basic present value propositions. While financial calculators and computers have taken over some of the grunt work involved in computing present value, understanding what goes into those computations is important. If your present value mechanics are shaky, try this quick review.
iii. One of the biggest problems we face in valuation is that we are often faced with huge quantities of data, often pulling in different directions. Statistics as a discipline was made for finance. Recogniizing the difference between a covariance and a correlation and being able to read the output from a regression can be very useful skills for an analys. While I am not a statisticiian, I have put together a top-ten list of statistical concepts that we use in finance.
c. Get ahead of the game
We will spend time during the seminar talking about the key inputs into a valuation. Since we will be covering a lot of material in relatively short time periods, you can either read one or more of these papers before the sessions or wait and read them after.

Topic Why it matters Paper
Rskfreee Rates
The riskfree rate is a fundamental input to most risk and return models. In practice, estimating riskfree rates becomes difficult when there are no default-free securities. In addition, the question of what riskfree rate to use (short term or long term, dollar or foreign currency) is a critical one. This paper examines these issues. I also have a follow-up paper on what to do if nothing is riskfree.

Estimating the Riskfree Rate

What is nothing is risk free?

Equity Risk Premiums
The equity risk premium (ERP) is a central input into discounted cash flow models, and more than any other number, it captures what investors think about stock prices in the aggregate. In this paper, we examiine the determinants of equity risk premiums and the three basic approaches used to estimate the number The Equity Risk Premium (ERP): Determinants, Estimation and Implications: The 2013 Edition
Expected Growth
The expected growth in earnings and cash flows is often the input where analysts get stuck. In this paper, we present different approaches for estimating expected growth. In fact, it is not growth per se that creates value but growth accompanied by excess returns, making the return on invested capital or return on equity key numbers in any valuation.

The Origins of Growth

Measuring accounting returns: ROIC, ROC and ROE

Terminal Value
The biggest number in many business valuations is the terminal value. It is also the place where the biggest errors in valuation reside. In this paper, we examine how best to estimate the terminal value and to keep it from hijacking the valuation. Terminal Value: The Tail that wags the DCF Dog?

d. Get your hands dirty
The best way to lay bare your doubts and insecurities about valuations is by valuing a company. If you do this for a living, you have plenty of experience with this already. However, if you just dabble in valuation, you may want to , even before you come to this class. While some of you may choose to build your own spreadsheet, I have a few of my own to offer to you. Pick your company, get an annual report and try one of these spreadsheets:

If you are valuing this type of firm Try this spreadsheet if you have time And use these resources along the way
Financial service firm (bank, insurance company)
divginzu2014.xls Valuing financial service firms
Non-financial service firm, making money

fcffginzu2014.xls (a more complex version allowing you to change all inputs)

fcffsimpleginzu2014.xls (a simpler version with default inputs built in)

Webcast on using fcffsimpleginzu.xls

Non-financial service firm that is losing money or with rapidly changing margins
higrowth.xls Valuing young growth companies

Reference Reading

You can use any of my books: Investment Valuation (third edition), Damodaran on Valuation (second edition), The Dark Side of Valuation (second edition) or the Little Book on Valuation. The books are backed up by with online data and material. You can get to the websites for these books by clicking here.
The lecture notes will be provided as a packet in class and are also available in pdf format below.

Following up

Valuation is ultimately best learned through practice. Every company we value will teach us something new. Here are a few additions that may help you as you go forward:

  1. There is a short iTunes U class that I have on valuation. It is free and is composed of 25 short webcasts (15 minutes apiece). You can watch it on your computer or an Apple device (or even an Android one, with an app). The link to to get the class is: https://itunes.apple.com/us/course/id780803998
  2. I have webcasts on practical questions in valuation - how to read a 10K, estimate implied equity risk premiums, bottom up betas, costs of debt and capital, trailing 12 month numbers available here.
  3. While I have listed some of my papers here, you can a listing of all my valuation/corporate finance papers by going here.
  4. The complete listing of my spreadsheets is available here.
  5. The data that you will need on industry averages and macro inputs are available here.

If you get stuck, you can email me.