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Damodaran Chapter 1 Introduction To Valuation Winter 2020
Damodaran Chapter 1 Introduction To Valuation Winter 2020
•Introduction to Equity
Valuation (Damodaran
Chapter 1).
•Warmup: Valuation of Hot
New Stocks (Beyond Meat)
Terms You May or May Not (Yet!) Be
Familiar With
• Stocks, equities, price appreciation vs total return
• Fixed income, interest rates, bond price, bond yield, hedge value
• Growth, value, GARP: investing style, types of stocks
• Defensive, early and late cyclical: sectors
• Top-down, bottom-up: valuation approach, investing philosophy
• Equity valuation vs firm valuation
• Investor vs trader: time horizon
• Mania, bubble, panic, crash
• Publicly-traded, privately-held: listed markets, private equity
• Alpha, beta aspects of portfolio performance
• http://people.stern.nyu.edu/adamodar/New_Home_Page/articles/va
lbasics.htm is a good intro, but so is Google!
Some Initial Thoughts
• This approach is designed for assets (firms) that derive their value
from their capacity to generate future cash flows.
• It works best for investors who either
• have a long time horizon, allowing the market time to correct its valuation
mistakes and for price to revert to “true” value, or
• are capable of providing the catalyst needed to move price to value, as would
be the case if you were an activist investor or a potential acquirer
Relative Valuation
• We will not deal much with this valuation method in FINA 410, but it
has many applications for a finance major.
• Options also help conceptually understand certain assets (see slide
20!).
• Options have several features:
• They derive their value from an underlying asset, which has value
• The payoff on a call (put) option occurs only if the value of the underlying
asset is greater (lesser) than an exercise price that is specified at the time the
option is created. If this contingency does not occur, the option is worthless.
• This contingent claim aspect means that the value INCREASES if volatility is
higher, other things equal. Not what we usually assume in finance!
• They have a fixed life
• Any security that shares these features can be valued as an option.
Option Payoff Diagrams
Put Option
Call Option
Direct Examples of Options
• Listed options, which are options on traded assets issued by, listed
on and traded on, an option exchange.
• Warrants, which are call options on traded stocks, that are issued by
the company. The proceeds from the warrant issue go to the
company, and the warrants are often traded on the market.
• Contingent Value Rights, which are put options on traded stocks,
that are also issued by the firm. The proceeds from the CVR issue
also go to the company.
• Scores and LEAPs, are long term call options on traded stocks, which
are traded on the exchanges.
Indirect Examples of Options
1. http://people.stern.nyu.edu/adamodar/New_Home_Page/articles
/valbasics.htm : Equity analysis approaches and styles.
2. Skim Chapter 1 Damodaran and do 3 questions at end of chapter.
3. Read “US Equities: Resilient Force or Case Study in Denial?”, Oct. 1,
2019, http://aswathdamodaran.blogspot.com/2019/10/us-
equities-resilient-force-or-case.html , especially the implied equity
risk premium computation spreadsheet (see next slide).
4. Optional but helpful: Read Bodie, Kane, Perrakis chapter on Macro
and Industry Analysis (on reserve in library). Ch. 15? Ch. 17?
5. Fill out Personal Information Sheet (last page of course outline,
photo optional but appreciated), submit in class or email to:
david.abramson@concordia.ca
For next week’s lecture: Implied equity risk
premium (ERP) à-la-Damodaran!