Valuation Class by Aswath Damodaran

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Questions and Answers

Which of the following best describes the primary goal of a valuation class?

To compress the core concepts of valuation into easily digestible segments. (correct)
To become proficient in using complex financial models without understanding their underlying assumptions.
To learn how to manipulate financial statements to show higher profits.
To identify overvalued stocks to short sell for quick profits.

When estimating the cost of capital, which of the following components needs to be adjusted to reflect the tax benefits of debt financing?

Weighted average cost of capital
Cost of preferred stock
Cost of equity
Cost of debt (correct)

Which of the following factors would most likely increase the equity risk premium used in valuation?

A rise in long-term government bond yields.
An increase in the perceived risk and uncertainty in the economy. (correct)
An increase in investor confidence and market stability.
A decrease in the volatility of the stock market.

In the context of valuation, what is the significance of the 'terminal value'?

It is the estimated value of a company's cash flows beyond the explicit forecast period. (C) Signup and view all the answers

When valuing a private company, which of the following adjustments is most likely needed compared to valuing a public company?

Applying a discount for lack of marketability or liquidity. (C) Signup and view all the answers

Which of the following is the most appropriate approach to use when valuing a company with significant real options, such as the option to expand into new markets?

Option pricing models, such as the Black-Scholes model, applied to the real option. (C) Signup and view all the answers

A company's beta is primarily a measure of:

Its systematic risk relative to the market. (C) Signup and view all the answers

In valuation, the risk-free rate is a key component. What factor most influences the selection of an appropriate risk-free rate?

The maturity of the government bond should match the duration of the cash flows being valued. (B) Signup and view all the answers

Which of the following describes 'Value Enhancement' in the context of corporate finance?

Strategies implemented by management to increase shareholder wealth and the intrinsic value of the firm. (B) Signup and view all the answers

When performing relative valuation, why is it important to use comparable companies within the same industry?

Companies in the same industry are subject to similar economic and market factors, making comparisons more meaningful. (A) Signup and view all the answers

Flashcards

Valuation

The perceived or calculated worth of an asset, security, or company.

Intrinsic Value

The underlying or true value of an asset based on its fundamentals, without regard to market sentiment or external factors.

Risk-Free Rate

The theoretical rate of return of an investment with zero risk of financial loss, usually the yield on a government bond.

Equity Risk Premium

The extra return an investor expects above the risk-free rate to compensate for investing in a stock market.