VALUATION:PROJECTS

AswathDamodaran

1.OVERALLVALUATIONPROJECTRunstheEntireSemesterDueinTwoParts

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ProjectDescription

¨ Thisprojectisdesignedtoapplythevaluationtechniqueswelearninclassoncompaniesintherealworld.

¨ Itisagroupproject,witheachpersoninthegrouppickingonecompanytovalue.

¨ Theprojectanalysisisdueintwoparts:¤ ThediscountedcashflowvaluationsareduemidwaythroughthesemesteronMarch24at5pm.Theywillnotbegraded,butwillbereviewedandreturnedwithcomments.

¤ Theentireprojectreportisdueby5pmonthelastdayofclass(May8).

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Step1:Pickthecompanies

¨ Pickagroupofcompanies(oneforeachpersoninthegroup),makingsureyouhaveatleast1. onecompanywhichhasnegativeearningsinthemostrecentfinancialperiod

(year-to-date,ifavailableormostrecentfinancialyear(ifnot)).2. onecompanywhichhashigh-growthpotential(Lookforcompanieswhose

revenuesareexpectedtogrow>25%overthenearfuture;thecouldbelosingmoney,inwhichcaseyoucouldkilltwobirdswithonestone.)

3. onenon-U.S.company,preferablyinthelocalcurrencyandthelocallisting.4. oneservicecompany(itcanbearetailfirm,financialservicefirmetc.)

¨ Forhighgrowthfirms:¨ http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqass.htm¨ Fornegativeearningsfirms:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqass.htm

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Step2:IntrinsicValuation

¨ Developyournarrativeforthiscompany.(Givemeyourstoryofhowyouseeyourcompanyevolvingovertime,givenwhatyouknowaboutit,itsmarketandthecompetition)

¨ Tieyournarrativetokeynumbersthatyouwillbeusinginyourvaluation.

¨ Valuethestockineachcompanyusingadiscountedcashflowmodel.

¨ Evaluatehowsensitiveyourvalueestimatesaretochangesinyournarrative.Parts1&2areduemidwaythroughthesemesteron

March24

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Step3:Valuerelativetocomparables

¨ Preparealistof“comparable” companies,usingcriteriathatyouthinkareappropriate

¨ Chooseamultiplethatyouwilluseincomparingfirmsacrossthegroup.(Youmighthavetotryanumberofmultiplesoutbeforemakingthischoice)

¨ Evaluateyourcompanyagainstthecomparablefirmsusingthemultiplethatyouhavechosenforyourvaluation.¤ usingsimpletechniques(doaqualitativeanalysisadjustingtheaverageforcomparablefirms)

¤ usingasectorregression(aregressionacrossfirminyoursector).Youcandownloadthedataoncomparablefirmsbygoingto

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Step4:Valuerelativetothemarket

¨ Usingthelatestregressionpostedforthemarketonmywebsite,andthemultipleyouchoseinstep3,evaluatewhetheryourfirmisunderorovervalued.¤ Ifyouhaveanon-U.S.companywhichhasanADRlistedonit,youcanusetheU.S.regression

¤ WhileIwillnotrequireit,Iwillbeveryimpressedifyourunaregressionofthemultipleinyourforeignmarket(usethe50largestfirms,ifyouwanttoreduceyourworkload)againstthevariablesthatdeterminethatmultiple.

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Step5:UsingOptionPricingModels

¨ Ifyournegativeearningsfirmhashighfinancialleverage(debttocapitalratiothatexceeds50%,inmarketvalueterms),valueitusingtheoptionpricingmodel.

¨ Ifitdoesnot,donotusetheoptionpricingmodel.

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Step6:FinalValueEstimateandRecommendation

¨ Beforeyoumakeyourrecommendation,checkwhetheranythingthathashappenedduringtheperiodofyouranalysishaschangedyournarrativeandyourvaluation.

¨ Considerthevaluesyouhaveobtainedfromthediscountedcashflow,relativeandoptionvaluationmodels.¤ Howwouldyoureconcilethedifferentestimatesofvalue?¤ Makeafinalrecommendationonthestocksinyourgroup.

2.MYSTERYPROJECTTopic:TBADue:SessionTBA(sometimebetweenthe10thand12thweeksoftheclass)