The Dark Side of Valuation by Aswath Damodaran

Author:Aswath Damodaran
Language: eng
Format: epub
Publisher: Pearson Education
Published: 2018-04-15T00:00:00+00:00

Operating Restructuring

When we value a company, our forecasts of earnings and cash flows are built on assumptions about how the company will be run. If these numbers are based on existing financial statements, we are, in effect, assuming that the firm will continue to be run the way it is now. In this section, we look at how changes in operations manifest themselves in valuation, using the intrinsic value framework we have already used extensively in this book. In this approach, the value of a firm is a function of five key inputs. The first is the cash flow from assets in place or investments already made. The second is the expected growth rate in the cash flows during what we can call a period of both high growth and excess returns (during which the firm earns more than its cost of capital on its investments). The third is the length of time before the firm becomes a stable-growth firm. The fourth is the discount rate, reflecting both the risk of the investment and the financing mix used to fund it. The final element represents cash, cross-holdings, and other nonoperating assets that the firm might hold that augment the value of operating assets. Figure 11.2 captures how change can be made in all five elements.

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