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Published by gagan585

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Published by: gagan585 on Aug 07, 2008
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05/24/2012

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Aswath Damodaran1
Valuation
 Aswath Damodaran
 
Aswath Damodaran
First Principles
n
Invest in projects that yield a return greater than the minimumacceptable hurdle rate.
The hurdle rate should be higher for riskier projects and reflect thefinancing mix used - owners’ funds (equity) or borrowed money (debt)Returns on projects should be measured based on cash flows generatedand the timing of these cash flows; they should also consider both positiveand negative side effects of these projects.
n
Choose a financing mix that minimizes the hurdle rate and matches theassets being financed.
n
If there are not enough investments that earn the hurdle rate, return thecash to stockholders.
The form of returns - dividends and stock buybacks - will depend uponthe stockholders’ characteristics.Objective: Maximize the Value of the Firm
 
Aswath Damodaran
Discounted Cashflow Valuation: Basis forApproach
where,n = Life of the assetCF
t
= Cashflow in period tr = Discount rate reflecting the riskiness of the estimated cashflows
Value =CFt(1+r)tt=1t=n

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