Valuation Approaches (Continued) and First Steps on Intrinsic Value

We started class by completing the discussion of approaches to valuation, talking about pricing and real options, at least in a big picture sense. We then began our intrinsic value discussion by talking about the weapons of mass distraction. If you want to read the blog post I have on the topic, try this link:

We then spent some time setting up the process of discounted cash flow valuation, arguing for consistency in discounting. If the cash flows that you are discounting are cash flows to equity, estimated either as dividends or as potential dividends, the discount rate should be the cost of equity. If the cash flows that you are discounting are pre-debt cash flows, i.e,, cash flows to the firm, the discount rate has to be the cost of capital. Done right, the value of equity should be equivalent with both approaches. We also introduced “The IT propositon’ arguing that for it (control, synergy, AI or ESG) to affect value, it has to affect either the cash flows or the discount rate.

Start of the class test: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/kennecott.pdf

Slides: https://nyu.box.com/s/7p11ugta057amfnko6er4uaehmimi7x9