1. "There seems to be some perverse human characteristic that likes to make easy things difficult.“
– Warren Buffett

2. Main Ideas Separate Out the Operating Engine
Convert to Steady-State Economic (R&D, Leases, 1x, etc.)
Asset Values – Liquidation and Reproduction
Earnings Power Value (zero growth and no investment)
Perpetual Growth (constant growth and investment)
Discount Rates vs. Cost of Capital
Explicit DCF and Terminal / Continuing Value
Scenarios for Rule-Out and Big Changes
Theme for Today is “increasing global transactions” and the “business strategies that drive them”.
If you have a good grasp of the business strategies, then easy to understand. That’s the foundation.
1) Quickly go through some strategy.
2) Then break into teams and each team is going to have to come up with a Yes / No decision on doing a deal.

3. The Process According to Damadaran
In many cases, the biggest errors in valuation occur after you think you are done, where you are tempted and even encouraged to start adding or detracting arbitrary amounts from your carefully estimated value for thinks that sound good or ominous - control, synergy and illiquidity are common examples.
We need to fight this tendency since it undercuts the integrity of the process…. Liquidity, control and synergy might have value but we should try to assess the value rather than assume it is always 20% or some other arbitrary proportion of estimated value.
Chart by A Damodaran 2

4. Separate Out the Operating Engine
Financial Assets and Stuff
THE OPERATING ENGINE
Excess cash and marketable securities
Cross-holdings
Financial assets
Unused operating assets
Excess pension funding
Contingent liabilities (lawsuits)
Underfunded pensions?
Other?
Operating Assets and Operating Liabilities
Net Operating Cash Flow After Taxes
Remove interest (and its tax shield)
Remove taxes on non-operating income
Equity and equity equivalents
Debt and debt equivalents
Interest bearing liabilities
Leases? View them as loans

5. Explicit DCF Projection
Valuation Like Warren Buffett X
Rule Out?
Intrinsic Value (Economic Value)
Explicit DCF Projection
Scenario 1
Scenario 2 PG
EPV
Scenario 3
Time
Minimum Scenario? RV X ? LV
Rule Out? ?

6. Corrected Income Statement
Operating Engine: Valuation Ranges & Probabilities
Year 0
Year 1
Baseline (Birds in Hand)
Min
Max
Prob
Non-Operating & Financial Assets
Steady-State
Corrections
Liquidation Value
-1x charges
Reproduction Value
-Key person
Min
Max
EPV
-Cyclical
-Op leases
Discount Rate?
Excess Cash
-Exclude non- operating
-Cap R&D
Perpetual Growth Value
Investments
Unused op assets
Growth?
Revenue
Investment?
Excess pension
Discount Rate?
Other
Explicit DCF + Terminal
Cost of Rev
Big Changes Scenarios (Birds in Bush)
Debt & Debt Equivalents
Growth Lever (5 yr compound growth rate)
Profitability Lever (EBIT in yrs 5 10)
Interest-Bearing CL & Debt
Growth Efficiency Lever (Sales/Capital)
Gross Profit
One Time Event or Change
Op Expenses
Interest Expense
Rule Out Scenarios: Minimum vs. Max
Minimum Rev and EBIT in yrs 5 10
Coverage Ratio
Terminal Value
EBITA, EBITDA, EBITAR
Investment & Discount Rate
Liquidation Value
Depreciation
Corrected Operating Assets and Operating Liabilities
Amortization
Working Capital
Tangible Assets
Intangible Assets
Year 0
Year 1
Year 0
Year 1
Year 0
Year 1
Steady-State
Steady-State
Steady-State
EBIT
Cash
PP&E net AR
Land
Taxes (on Op income)
Inventory
Other AP
EBIT(1-tax) AE
Other NIBCL
NOPLAT
Capex for Maintenance
Capex for Growth
M&A
ROIC without Goodwill
Invested Capital by Operations
ROIC with Goodwill
Invested Capital by Financing

7. For Each Case, Tell Me
Your valuation range or ranges (with 95% confidence)
What is the bird in the hand?
What are the birds in the bush? And when they will arrive?
Theme for Today is “increasing global transactions” and the “business strategies that drive them”.
If you have a good grasp of the business strategies, then easy to understand. That’s the foundation.
1) Quickly go through some strategy.
2) Then break into teams and each team is going to have to come up with a Yes / No decision on doing a deal.