Table of Contents

1. The Dark Side of Valuation. Definition of a Technology Firm. The Shift to Technology. Old Tech to New Tech. Extension of the Valuation Metrics. The Implications for Valuation. New Paradigms or Old Principles: A Life Cycle Perspective. Illustrative Examples. Summary. Endnotes. 2. Show Me the Money: The Fundamentals of Discounted Cash Flow Valuation. Discounted Cash Flow Value. Valuing an Asset with Guaranteed Cash Flows. Introducing Uncertainty into Valuation. Valuing an Asset with Default Risk. Valuing an Asset with Equity Risk. Valuing an Asset with Equity Risk and Finite Life. Valuing an Asset with an Infinite Life. Equity and Firm Valuation. Dividends and Equity Valuation. A Broader Measure of Cash Flows to Equity. From Valuing Equity to Valuing the Firm. Valuing Technology Stocks. Estimated Cash Flow to the Firm. Expected Growth. Discount Rate. Asset Life. Bringing It All Together. Summary. Endnotes. 3. The Price of Risk: Estimating Discount Rates. Cost of Equity. Risk and Return Models. Estimation Issues. From Cost of Equity to Cost of Capital. Calculating the Cost of Debt. Calculating the Cost of Hybrid Securities. Calculating the Weights of Debt and Equity Components. Estimating the Cost of Capital. Summary. Endnotes. 4. Cash is King: Estimating Cash Flows. Defining the Cash Flow to the Firm. Operating Earnings (EBIT). Updated Earnings. Adjustments to Operating Earnings. The Tax Effect. Effective versus Marginal Tax Rate. The Effect of Net Operating Losses. The Tax Benefits of R&D Expensing. Reinvestment Needs. Net Capital Expenditures. Noncash Working Capital Investments. Summary. Endnotes. 5. Looking Forward: Estimating Growth. The Importance of Growth. Growth Assets and Assets in Place. Growth Assets at Technology Firms. Historical Growth. Estimating Historical Growth. The Usefulness of Historical Growth. Historical Growth at Technology Firms. Analyst Estimates of Growth. Number of Analysts Following Technology Firms. The Quality of Earnings Forecasts. The Fundamental Determinants of Growth. Scenario: Stable Return on Capital. Scenario: Positive and Changing Return on Capital. Scenario: Negative Return on Capital. The Qualitative Aspects of Growth. The Question of Detail. Summary. Endnotes. 6. Estimating Firm Value. Closure in Valuation. Multiple Approach. Liquidation Value. Stable Growth Model. Valuing Operating Assets. The Survival Issue. Life Cycle and Firm Survival. Likelihood of Failure and Valuation. Cash and Nonoperating Assets. Cash and Marketable Securities. Holdings in Other Firms. Other Nonoperating Assets. Firm Value and Equity Value. Summary. Endnotes. 7. Management Options, Control, and Liquidity. Management and Employee Options. The Magnitude of the Option Overhang. Options in Existence. Future Option Grants. Value of Control. Voting Shares versus Nonvoting Shares. Valuing Control. Control in Private Businesses. Value of Liquidity. Determinants of Illiquidity Discount. Quantifying the Liquidity Discount. Liquidity Discounts at Publicly Traded Firms. Summary. Endnotes. 8. Relative Valuation. Use of Relative Valuation. Reasons for Popularity. Potential Pitfalls. Standardized Values and Multiples. Earnings Multiples. Book Value or Replacement Value Multiples. Revenue Multiples. Sector-Specific Multiples. The Four Basic Steps to Using Multiples. Definitional Tests. Descriptional Tests. Analytical Tests. Application Tests. Reconciling Relative and Discounted Cash Flow Valuations. Summary. Endnotes. 9. Earnings Multiples. Price-Earnings Ratio (PE). Definitions of PE Ratio. Cross-Sectional Distribution of PE Ratios. Determinants of the PE Ratio. Using the PE Ratio for Comparisons. The PEG Ratio. Definition of the PEG Ratio. Cross-Sectional Distribution of the PEG Ratio. Determinants of the PEG Ratio. Using the PEG Ratio for Comparisons. Other Earnings Multiples. Price to Future Earnings. Price to Earnings Before R&D Expenses. Enterprise Value to EBITDA. Summary. Endnotes. 10. Other Multiples. Revenue Multiples. Definition of Revenue Multiple. Cross-Sectional Distribution. Analysis of Revenue Multiples. Using Revenue Multiples in Analysis. Multiples of Future Revenues. Sector-Specific Multiples. Definitions of Sector-Specific Multiples. Determinants of Value. Analysis with Sector-Specific Multiples. Summary. Endnotes. 11. Real Options in Valuation. Basics of Option Pricing. Call Options: Description and Payoff Diagrams. Put Options: Description and Payoff Diagrams. Determinants of Option Value. American versus European Options: Variables Relating to Early Exercise. Option Pricing Models. A Few Caveats on Applying Option Pricing Models. Barrier, Compound, and Rainbow Options. The Option to Delay. The Payoff Diagram on the Option to Delay. Valuing the Option to Delay. Practical Considerations. Implications for Project Analysis and Valuation. Valuing a Patent. From Patent Value to Firm Value. The Option to Expand. Practical Considerations. Implications for Valuation. When Are Real Options Valuable? Some Key Tests. Quantitative Estimation. Key Tests. Summary. Endnotes. 12. Value Enhancement. Value Creation: A Discounted Cash Flow (DCF) Perspective. Value-Creating and Value-Neutral Actions. Ways of Increasing Value. The Value Enhancement Chain. Alternatives to the Traditional Valuation Model. Economic Value Added. Cash Flow Return on Investment. Summary. Endnotes. 13. A PostScript. Fundamentals Don't Change. Cash Flow, Growth, and Risk. Lessons for Investors. Lessons for Managers. Grow, Grow, Grow? Growth and Value. Lessons for Investors. Lessons for Managers. The Expectations Game. Expectations, Information, and Value. Lessons for Investors. Lessons for Managers. Live with Noise. Noise in the Valuation of Technology firms. Implications for Investors. Implications for Managers. Summary. Endnotes. References. Index.

Promotional Information

Suddenly, technology companies represent nearly 30% of the S&P 500, more than triple their representation just six years before. Investors and analysts concerned with valuing them face unprecedented challenges: many firms have limited histories, a shifting business mix, a highly volatile stock price, and massive uncertainty over the ultimate size of their markets. In this book, one of the world's leading experts in valuation reviews every approach, demonstrating exactly how to adapt traditional techniques to minimize technology company valuation risks -- and maximize returns. Aswath Damodaran reviews how investors and analysts have responded to the massive market shift towards technology stocks, then identifies key valuation principles and techniques through five representative case studies: Motorola, Cisco, Amazon, Ariba, and a new IPO-ready startup. He shows how to adapt traditional valuation techniques to technology stocks with limited histories, shifting business mixes, and volatile stock prices. He identifies key limitations of the accounting definitions in measuring tech company cash flows; then develops superior processes for estimating future revenues, earnings, and cash flows. And, finally, Damodaran carefully evaluates the extraordinary claims that have been made for technology companies, and considers how valuation impacts the way technology companies are managed.

About the Author

Aswath Damodaran is Professor of Finance at the Stern School of Business at New York University, where he teaches corporate finance and equity valuation. Damodaran has written two books on equity valuation (Damodaran on Valuation and Investment Valuation), as well as two books on corporate finance (Corporate Finance: Theory and Practice and Applied Corporate Finance: A User's Manual). He also published widely in leading journals of finance, including The Journal of Financial and Quantitative Analysis, The Journal of Finance, The Journal of Financial Economics, and the Review of Financial Studies. Damodaran received the Stern School of Business Excellence in Teaching Award in 1988, 1991, 1992, and 1999. In 1194, he was profiled in Business Week as one of the top 12 U.S. business school professors. Damodaran holds M.B.A. and Ph.D. degrees from the University of California at Los Angeles. Prior to joining NYU, he served as visiting lecturer at the University of California, Berkley from 1984 to 1986, where he received the Earl Cheit Outstanding Teaching Award in 1985.