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Valuation

Prof. Gyöngyi Loranth

Course Contents

This course focuses on methods to value firms and/or individual projects. We will cover three alternative approaches to valuation: discounted cash flow valuation, relative valuation and contingent claim (real options) valuation.

We start with an in-depth analysis of the discounted cash flow method and its practical implementation. More specifically we will discuss various versions of discounted cash flow models, including the discounted free cash flow model, discounted capital cash flow model, and adjusted present value model. We will also discuss how various inputs required by those valuation models can be obtained from historical data. In particular we will discuss how to forecast future cash flows, calculate residual values and derive appropriate discount rates.

The relative valuation approach estimates the value of a firm by looking at the pricing of "comparable" firms relative to a common variable such as earnings, cash flows or book equities. We will discuss pros and cons of this popular valuation method.

The contingent claim valuation approach is a more sophisticated method that tries to quantify the impact of managerial flexibility on firm/project valuation. We will cover applications of the Black-Scholes formula, binomial option pricing model and Monte Carlo simulations to evaluate firms or investment projects that have option characteristics.

Course Requirements

This course emphasizes both theoretical analysis and practical applications Students are required to come to classes, read all cases and actively participate in the discussions. There will be 3 case preparations. Cases must be handed in on time. No credit will be given for late cases.

You are encouraged to meet in groups to discuss and analyze the cases. In the past, students have found that these groups complement the class discussion well. I will accept up to 4-5 people per group.

Reading

  1. Lecture Notes
  2. Investment Valuation, 2nd edition, Aswath Damodaran, 2002 (book, author’s website, lecture note).
  3. Valuation, 4th edition, Chapters 5-12, McKinsey & Company, Tim Koller, Marc Goedhart and David Wessels, 2005.
  4. Valuation: The Art and Science of Corporate Investment Decisions, Sheridan Titman and John Martin, Addison Wesley,2007.

 

Cases

(1) Harvard Business School

Debt Policy at UST Inc.

N.9-200-069

(2) Harvard Business School

American Chemical Corporation

zN. 9-280-102

(3) Harvard Business School

Arundel Partners: The Sequel Project

N. 9-292-140

Grading

The evaluation will be based on the following items: in-class participation (10%); case studies (40%) and exam (50%).

Institut für Finanzwirtschaft
Fakultät für Wirtschaftswissenschaften
Universität Wien

Oskar-Morgenstern-Platz 1
1090 Wien
T: +43-1-4277-38262
F: +43-1-4277-838262
Universität Wien | Universitätsring 1 | 1010 Wien | T +43-1-4277-0