Investment Valuation

"Aswath Damodaran's work is always worth reading.... For investors and students of the financial markets who want to embark on serious fundamental analysis, it is critical to understand how to go about valuing stocks and other instruments. There is no short cut.... Damodaran's Investment Valuation explains the hard work part." (Seeking Alpha, May 2012)

ASWATH DAMODARAN is Professor of Finance at New York University's Leonard N. Stern School of Business. He has been the recipient of numerous awards for outstanding teaching, including the NYU university-wide Distinguished Teaching Award, and was named one of the nation's top business school teachers by BusinessWeek in 1994. In addition, Damodaran teaches training courses in corporate finance and valuation at many leading investment banks. His publications include Damodaran on Valuation: Security Analysis for Investment and Corporate Finance; Investment Valuation; Corporate Finance; Investment Management; and Applied Corporate Finance, all published by Wiley, and The Dark Side of Valuation.

Chapter 1 Introduction to Valuation 1 A Philosophical Basis for Valuation 1 Generalities about Valuation 2 The Role of Valuation 6 Conclusion 9 Questions and Short Problems 9 Chapter 2 Approaches to Valuation 11 Discounted Cash Flow Valuation 11 Relative Valuation 19 Contingent Claim Valuation 23 Conclusion 25 Questions and Short Problems 25 Chapter 3 Understanding Financial Statements 27 The Basic Accounting Statements 27 Asset Measurement and Valuation 29 Measuring Financing Mix 36 Measuring Earnings and Profitability 42 Measuring Risk 47 Other Issues in Analyzing Financial Statements 53 Conclusion 55 Questions and Short Problems 55 Chapter 4 The Basics of Risk 58 What is Risk? 58 Equity Risk and Expected Return 59 Alternative Models for Equity Risk 71 A Comparative Analysis of Equity Risk Models 76 Models of Default Risk 77 Conclusion 81 Questions and Short Problems 82 Chapter 5 Option Pricing Theory and Models 87 Basics of Option Pricing 87 Determinants of Option Value 89 Option Pricing Models 90 Extensions of Option Pricing 107 Conclusion 109 Questions and Short Problems 109 Chapter 6 Market EfficiencyDefinition, Tests, and Evidence 111 Market Efficiency and Investment Valuation 111 What is an Efficient Market? 112 Implications of Market Efficiency 112 Necessary Conditions for Market Efficiency 114 Propositions about Market Efficiency 114 Testing Market Efficiency 116 Cardinal Sins in Testing Market Efficiency 120 Some Lesser Sins That Can Be a Problem 121 Evidence on Market Efficiency 122 Time Series Properties of Price Changes 122 Market Reaction to Information Events 130 Market Anomalies 134 Evidence on Insiders and Investment Professionals 142 Conclusion 149 Questions and Short Problems 150 Chapter 7 Riskless Rates and Risk Premiums 154 The Risk-Free Rate 154 Equity Risk Premium 159 Default Spreads on Bonds 177 Conclusion 180 Questions and Short Problems 180 Chapter 8 Estimating Risk Parameters and Costs of Financing 182 The Cost of Equity and Capital 182 Cost of Equity 183 From Cost of Equity to Cost of Capital 210 Best Practices at Firms 221 Conclusion 222 Questions and Short Problems 223 Chapter 9 Measuring Earnings 229 Accounting versus Financial Balance Sheets 229 Adjusting Earnings 230 Conclusion 247 Questions and Short Problems 249 Chapter 10 From Earnings to Cash Flows 250 The Tax Effect 250 Reinvestment Needs 258 Conclusion 268 Questions and Short Problems 269 Chapter 11 Estimating Growth 271 The Importance of Growth 272 Historical Growth 272 Analyst Estimates of Growth 282 Fundamental Determinants of Growth 285 Qualitative Aspects of Growth 301 Conclusion 302 Questions and Short Problems 302 Chapter 12 Closure in Valuation: Estimating Terminal Value 304 Closure in Valuation 304 The Survival Issue 318 Closing Thoughts on Terminal Value 320 Conclusion 321 Questions and Short Problems 321 Chapter 13 Dividend Discount Models 323 The General Model 323 Versions of the Model 324 Issues in Using the Dividend Discount Model 344 Tests of the Dividend Discount Model 345 Conclusion 348 Questions and Short Problems 349 Chapter 14 Free Cash Flow to Equity Discount Models 351 Measuring What Firms Can Return to Their Stockholders 351 FCFE Valuation Models 357 FCFE Valuation versus Dividend Discount Model Valuation 372 Conclusion 376 Questions and Short Problems 376 Chapter 15 Firm Valuation: Cost of Capital and Adjusted Present Value Approaches 380 Free Cash flow to the Firm 380 Firm Valuation: The Cost of Capital Approach 383 Firm Valuation: The Adjusted Present Value Approach 398 Effect of Leverage on Firm Value 402 Adjusted Present Value and Financial Leverage 415 Conclusion 419 Questions and Short Problems 419 Chapter 16 Estimating Equity Value per Share 423 Value of Nonoperating Assets 423 Firm V