Focus on the estimate process in valuation, warns Damodaran

BVWireIssue #93-3
June 23, 2010

Aswath Damodaran (NYU Stern School of Business) shared one of his valuation pet peeves in his blog Musings on Markets: when a consultant, academic or appraiser takes a standard valuation equation, “does some algebra, moves terms around and then claims to have discovered a new and ‘better’ valuation model.”  Damodaran explains:

“…the challenges we face are not in valuation theory but in estimation practice. Put another way, we know exactly how to value companies. What we do not have a handle on is how best to estimate growth, risk and cash flows.”

Damodaran urges appraisers to stop developing new models and start focusing on the best ways to “estimate cash flows for a cyclical firm, risk for a regulated company and growth for young start-up firm.”

Read the full blog post here.

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