Damodaran on Valuation: Security Analysis for Investment and Corporate Finance 1st Edition
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From the Back Cover
- Publisher : Wiley; 1st edition (March 31, 1994)
- Language : English
- Hardcover : 464 pages
- ISBN-10 : 0471304654
- ISBN-13 : 978-0471304654
- Item Weight : 1.69 pounds
- Dimensions : 6.22 x 1.38 x 9.51 inches
- Best Sellers Rank: #738,122 in Books (See Top 100 in Books)
- Customer Reviews:
Top reviews from the United States
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The book is heavily weighted to discounted cash flow analysis, though it also discusses relative valuation (like P/E multipliers) and contingent claims.
Clearly written the book presents in detail simple to complex DCF based models (dividend discount model, free cashflow to equity and free cashflow to the firm). This range of models deal with the complex valuation problem of variable growth. After presenting a model, its limitations and best uses are explained.
He then shows how these models can be used to derive P/E, P/S, and P/BV ratios from fundamentals.
Abundant examples are used to make the material clear.
The book also discusses special situations, e.g., cyclical firms, and distressed firms to mention just a few.
At first glance this book might be mistaken for a "cook book". Lots of formulas and detailed examples of how to work them.
But there is more. And this is where the real "meat" of the book is - underpinning the seeming forest of details and examples - is a valuation logic and philosophy.
If you read this book carefully, you will develop an appreciation for the impact certain fundamentals have on valuation and how they interact with one another. This is much more important than memorizing the formulae in the book.
Also there is some very useful and frank discussion of shortcomings in some of the tools used, including the CAPM and a warning about being seduced into believing that the DCF approach results in certainty.
Valuation involves estimates and formulas (or multiples) are simplifications of very complex real world dynamics. In the businss world, valuation is typically a process of estimating ranges of values for each of several methods chosen (e.g., DCF, market comparables, precedent transacions, replacement value, etc). The resulting matrix of values is then compared (in effect cross checked) to come up with a range of possible values. And here the differences between buyer and seller affect the outcome - different assumptions re the DCF or the cashflow and synergies that can be achieved - come into play to create two different matrices of values - from which the two parties then negotiate the actual price.
The book and its author are well regarded. This particular volume is used in AIMR's CFA study program - which is a measure of its worth.
I particularly like the explanation of various models of DCF. The author clearly explains the strengths and weaknesses of each models, possible problems and the solutions to the problems.
However, I found that this book lacks more in-depth analysis of the topics covered. Furthermore, I found that the CAPM model, to some extent, does not truly exist in the real corporate world. I have read many valuation reports from big names in investment banking, many of them do not adopt CAPM (for various reasons that make CAPM unapplicable, which are also inherent weaknesses of CAPM, they just put x% as the discount rate). Only few who still stick to CAPM. There should be a bridge between academic and real world applications. A more detailed discussion on CAPM by the author would resolve this issue.
I gave "Investment Valuation" a 5-star rating. So, for its short version, I give 4-star.