THE LITTLE BOOK

OF VALUATION

HOW TO VALUE A COMPANY,

PICK A STOCK, AND PROFIT,
UPDATED EDITION

BY ASWATH DAMODARAN
 Contents
Annual Cash Flow Equation 4
Perpetual Growth Model Equation 5
Figure 2.1 6
Figure 2.2 7
Figure 2.3 8
Figure 2.4 9
Table 2.1 10
Figure 2.5 11
Figure 2.6 12
Table 3.1 13
Table 3.2 14
Table 3.3 15
FCFF Equation 16
Table 3.4 17
Table 3.5 18
Table 3.6 19
KHC Equity Equations 20
Marginal Tax Rate Equation 21
Cost of Capital Equation 22
Table 3.7 23
Reinvestment Equation 24
Table 3.8 25
Reinvestment Rate in Stable Growth Equation 26
Table 3.9 27
Value of KHC Equity Equation 28
Table 3.10 29
Figure 4.1 30
Table 4.1 31
Figure 4.2 32
Table 4.2 33
Table 4.3 34
Table 4.4 35
Table 4.5 36
PEG Ratio Equations 37
PE Equations 38
Figure 5.1 39
Table 5.1 40
Figure 5.2 41
Figure 5.3 42
Table 5.2 43
Figure 5.4 44
Figure 5.5 45
Table 5.3 46
Table 5.4 47
Terminal Value Equation 48
Table 5.5 49
Figure 6.1 50
Table 6.1 51
Table 6.2 52
Airbnb Sample Equation 53
Table 6.3 54
Airbnb’s Failure-Adjusted Value Equation 55
Value Per Share Equation 56
Figure 6.2 57
Table 7.1 58
Table 7.2 59
Table 7.3 60
Alphabet Equation 61
Table 7.4 62
Share Equation 63
Table 8.1 64
Table 9.1 65
Terminal Value After-Tax Equation 66
Value/Share Equation 67
Table 9.2 68
Distress Equation 69
Relative Valuation Equation 70
Table 10.1 71
Payout Ratio Equations 72
Net Income Equations 73
Table 10.2 74
Table 10.3 75
Normalized Operating Income Equation 76
Yen Per Share Equation 77
Figure 11.1 78
Revenue Equation 79
Table 11.1 80
Figure 11.2 82
Table 11.2 83
Table C.1 84
 Annual Cash Flow Equations

1
1 Number of periods
1 Discount rate
Annual cash flow
Discount rate

1
1 5
1.12
$3, 000 $10, 814
.12

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 Perpetual Growth Model Equation

Expected dividends next year $2 1.02

$34.00
Required Return Expected growth h rate .08 .02

5
 Figure 2.1 Accounting Balance Sheet

Assets Liabilities

Non-Cash Current
Recorded at cost Assets Current Liabilities Recorded at cost
Cash & Marketable
Recorded at current value
Securities (ST)
Interest-bearing
Recorded at original cost, Property, Plant & Recorded as original proceeds
Debt
net of depreciation Equipment
Recorded at original cost, Accounting
Financial Recorded at estimated value
updated cost or priced at Liabilities
Investments
current market levels
Summation of accounting
Mostly a plug Shareholder
Intangible Assets history, book value + retained
variable (Goodwill) Equity
earnings

Damodaran244409_c02.indd 29 1/23/2024 6:41:10 PM

 Figure 2.2 Accounting Income Statement

Item Explanation
Accountant’s estimate of the revenues/sales generated by any
Start with Revenues
transactions made by the business during the period

Estimated costs that are directly associated with producing the

Net out Cost of Goods Sold
product/service sold by the company

Unit profitability, before covering other indirect costs and financial

To get Gross Profit
expenses

Include all expenses associated with operations this year, with no

Net out Operating Expenses
benefits spilling over into future years
To get Operating Profit Profitability of business/operations
Net out Financial Expenses Expenses associated with non-equity financing (debt, for instance)
Income earned on cash balance and on financial investments (in
Add in Financial Income
companies and securties)
To get Pretax Profit Income to equity investors, prior to taxes
Taxes, based upon taxable income (may not equate to cash
Net out Taxes
taxes paid)
To get Net Profit Income to equity investors, after taxes

Damodaran244409_c02.indd 30 1/23/2024 6:41:10 PM

 Figure 2.3 Accounting Statement of Cash Flows

Cash Flow Effect Item Why?

Start with Net income Equity lncome
Plus Depreciation and amortization Add back non-cash
Plus Other non-cash expenses items
Change in accounts receivables
Change in inventory
Get to cash to equity
Plus or Minus Change in other current assets from operations
Change in accounts payable
Change in taxes due
Equals Cash flow from operations

Cash Flow Effect Item Why?

Minus Capital expenditures
Investment in operating
Plus Divestitures of assets assets
Minus Cash acquisitions
Minus Investments in financial assets
Minus Investments in non-operating assets Investment in non-
Divestitures of securities operating assets
Plus
& non-operating assets
Equals Cash flow from investing

Action Item Why?

Plus
Minus Debt raised
repaid
Net cash from/to debt
Minus
Plus Debt repaid
Minus
Plus Dividends
New equitypaid
Issuances
Net cash from/to equity
Minus Stock buybacks
Dividends paid
investors
Minus Stock buybacks
Equals Cash flow from financing

Damodaran244409_c02.indd 32 1/23/2024 6:41:11 PM

 Figure 2.4 Profitability Scaled to Revenue (Margins)

Profit Margin Variations

Revenues
EBITDA Margin =
EBITDA/Sales – Cost of Goods Sold
Gross Margin =
= Gross Profit
Gross Profit/Sales
Add back depreciation – SG&A
= Operating Profit Operating Margin =
– Interest Expenses Operating Income/
Net out taxes (1 – t) Sales
= Taxable Income
After-tax Operating = Taxes
Margin = Operating Net Margin = Net
= Net Income Income/Sales
lncome(1 – t)/Sales

Damodaran244409_c02.indd 33 1/23/2024 6:41:12 PM

 Table 2.1 A Financial Balance Sheet

Measure Explanation

Assets in place Value of investments already made, updated to reflect

their current cash flow potential
+ Growth assets Value of investments the company is expected to
make in the future (this rests on perceptions of growth
opportunities)
= Value of business The value of a business is the sum of assets in place and
growth assets.
− Debt Lenders get first claim on cash flows, during ­operations,
and cash proceeds, in liquidation.
= Value of equity Equity investors get whatever is left over after
debt payments.

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 Figure 2.5 Normal and Skewed Distributions

Symmetric normal
distribution

Positively skewed Negatively skewed

distribution: More distribution: More
extreme positive extreme negative
values than values than positive
negative values value

Returns

11

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 Figure 2.6 Scatterplot of Interest Rates against Inflation

Slope

Best fit line: Minimizes

the squared distance
Interest Rates

from the points.

Each point is
a year of data.

Intercept

Inflation

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 Table 3.1 Valuation Choices

Measure Explanation

Assets in place
+ Growth assets
= Value of business To value the entire business, discount the cash
flows before debt payments (cash flow to the
firm) by overall cost of financing, including both
debt and equity (cost of capital).
− Debt From the value of the business, subtract out debt
to get to equity.
= Value of equity To value equity directly, discount the cash flows
left over after debt payments (cash flows to
equity) at the cost of equity.

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 Measure Explanation

Net income Earnings to equity investors, after taxes and

interest expenses
+ Depreciation Accounting expense (reduces earnings) but not
a cash expense
− Capital expenditures Not an accounting expense but still a
cash outflow
− Change in non-­cash Increases in inventory and accounts receivable
working capital reduce cash flows and increases in accounts
payable increase cash flows. If working capital
increases, cash flow decreases.
− (Principal repaid – New Principal repayments are cash outflows, but
debt issues) new debt generates cash inflows. The net
change affects cash flows to equity.
= Potential divi- This is the cash left over after all needs are
dend, or FCFE met. If it is positive, it represents a potential
dividend. If it is negative, it is a cash short-
fall, which must be covered with new equity
infusions.

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 Table 3.3 FCFE at Kraft Heinz from 2020 to 2022

2022 2021 2020

Net Income $2,368.00 $1,024.00 $361.00

+ Depreciation & amortization $933.00 $910.00 $969.00
+ Goodwill impairment $913.00 $1,634.00 $3,399.00
− Capital expenditures $1,309.00 −$4,035.00 $596.00
− Change in non-­cash WC $1,761.00 $636.00 −$115.00
FCFE before Debt cash flows $1,144.00 $6,967.00 $4,248.00
+ Debt raised $228.00 $0.00 $7,500.00
− Debt repaid $1,683.00 $8,161.00 $10,655.00
FCFE −$311.00 −$1,194.00 $1,093.00

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 FCFF Equation

FCFF After-tax operating income (Cap Ex Depreciation)

Change in non-cash working capital

16

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 Table 3.4 FCFF at Kraft Heinz from 2020 to 2022
2022 2021 2020

Operating income $3,634.00 $3,460.00 $2,128.00

Effective tax rate (t) 20.20% 40.10% 65.00%
Operating income × (1 − t) $2,899.93 $2,072.54 $744.80
+ Depreciation & amortization $933.00 $910.00 $969.00
+ Goodwill impairment $913.00 $1,634.00 $3,399.00
− Capital expenditures $1,309.00 −$4,035.00 $596.00
− Change in non-­cash WC $1,761.00 $636.00 −$115.00
Free cash flow to firm $1,675.93 $8,015.54 $4,631.80

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 Table 3.5 Reinvestment at Kraft Heinz from 2020 to 2022
2022 2021 2020 2020–2022

EBIT × (1 − t) $2,899.93 $2,072.54 $744.80 $5,717.27

FCFF $1,675.93 $8,015.54 $4,631.80 $14,323.27
Reinvestment $1,224.00 −$5,943.00 −$3,887.00 −$8,606.00
Reinvestment rate 42.21% −286.75% −521.89% −150.53%

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 Table 3.6 Estimating a Beta for KHC

Business Estimated value Proportion of firm Sector beta

Food processing $30,146 100.00% 0.69

KHC as a firm $30,146 100.00% 0.69

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 KHC Equity Equations

Levered beta Unlevered beta (1 (1 Tax rate)

(Debt/Market equitty))
0.69 (1 (1 0.25) (19,759 / 44, 756)) 0.92

Cost of equity Risk-free rate Beta ERP

3.80% 0.92 5.67% 9.00%0

20
 Marginal Tax Rate Equation

After-tax cost of debt (Risk-free rate Default spread)

(1 Marginal tax rate)
(3.80% 1.89%) (1 0.25) 4.27%

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 Cost of Capital Equation

Cost of capital 9.00% (44.8 /(44.8 19.5))

4.27% (19.5/(44.8 19.5))
7.56%

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 Table 3.7 Estimating Sustainable Growth

Growth How much are How well are you

in earnings you reinvesting? reinvesting?

Operating income = Reinvestment rate × Return on capital (ROIC)

Net income = Retention ratio × Return on equity (ROE)

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 Reinvestment Equation

Reinvestment in year 1 (Revenue 2 Revenue 1) /Sales to capital

($27, 555 $27,015)/1.49 $363 million

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 Table 3.8 Expected Free Cash Flow to Firm for KHC

Revenue Operating Tax EBIT ×

Growth Revenues Margin EBIT Rate (1 − t) Reinvestment

Base $26,485
year
1 2.00% $27,015 13.72% $3,707 20.20% $2,958 $363
2 2.00% $27,555 14.23% $3,922 20.20% $3,130 $370
3 2.00% $28,106 14.49% $4,072 20.20% $3,250 $377
4 2.00% $28,668 14.74% $4,227 20.20% $3,373 $385
5 2.00% $29,242 15.00% $4,386 20.20% $3,500 $393
6 1.80% $29,768 15.00% $4,474 21.16% $3,527 $400
7 1.60% $30,244 15.00% $4,563 22.12% $3,554 $408
8 1.40% $30,668 15.00% $4,655 23.08% $3,580 $417
9 1.20% $31,036 15.00% $4,748 24.04% $3,606 $425
  10 1.00% $31,346 15.00% $4,843 25.00% $3,632 $433
Terminal 1.00% $31,659 15.00% $4,940 25.00% $3,705 $741
year

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 Reinvestment Rate in Stable Growth Equation

1%
Reinvestment rate in stable growth 10%.
10%

(After-tax operating income in year 6) (1 Reinvestment rate)

Cost of capital Expected growth rate
3526 (1.01)(1 0.10)
$49, 316 million.
0.0075 0.01

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 Table 3.9 Value of Operating Assets at KHC
Terminal Cost of Discounting Discount
Year FCFF value capital computation factor PV

1 $2,595 7.56% 1/1.0756 0.9297 $2,413

2 $2,760 7.56% 1/1.07562 0.8643 $2,385
3 $2,872 7.56% 1/1.0756 3
0.8035 $2,308
4 $2,988 7.56% 1/1.07564 0.7470 $2,232
5 $3,108 7.56% 1/1.07565 0.6945 $2,186
7.55% 1/(1.0756 × 1.0755)
5
6 $3,127 0.6457 $1,067
7 $3,146 7.54% 1/(1.07565 × 1.0755 × 0.6005 $1,951
1.0754)
8 $3,164 7.53% 1/(1.07565 × 1.0755 × 0.5584 $1,838
1.0754 × 1.0753)
9 $3,182 7.51% 1/(1.07565 × 1.0755 × 0.5194 $1,729
1.0754 × 1.0753 ×
1.0751)
10 $3,199 $49,316 7.50% 1/(1.07565 × 1.0755 × 0.4832 $25,530
1.0754 × 1.0753 ×
1.0751 × 1.075)

Value of Operating Assets = $44,538

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 Value of KHC Equity Equation

Value of KHC equity Value of operating assets Cash Debt

Management options
$44,538 + $1,040 $20,070 $63 = $25,445 million

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 Table 3.10 Revenue Growth, Margins, and Value per Share for KHC
Target Operating Margin (in year 5)

12% 14% 16% 18% 20%

Revenue Growth Rate 0% $12.15 $16.06 $19.96 $23.87 $27.77
(Years 1–5) 2% $13.97 $18.39 $22.82 $27.24 $31.66
4% $15.95 $20.96 $25.96 $30.97 $35.97
6% $18.12 $23.78 $29.43 $35.09 $40.74
8% $20.51 $26.88 $33.26 $39.64 $46.01
10% $23.11 $30.30 $37.48 $44.66 $51.84

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 Figure 4.1 The Pricing Process

Market value for the firm Market value of operating assets of firm
Market value of equity
= Market value of equity Enterprise value (EV) = Market value of equity
+ Market value of debt

Damodaran244409_c04.indd 82
+ Market value of debt
– Cash

Step 1a: Scale

market pricing Numerator = What you are paying for the asset
to a common Multiple =
Denominator = What you are getting in return
variable

Revenues Earnings Cash Flow Book Value

a. Accounting revenues a. To equity
a. To equity investors a. BV of equity
b. Revenue drivers - Net income + depreciation
- Net income b. BV of firm
# Customers - Free CF to equity
- Earnings per share = BV of debt + BV of equity
# Subscribers b. To firm
b. To firm c. Invested capital
# Units

30
- Operating income (EBIT) - EBIT + DA (EBITDA) = BV of equity + BV of debt
- Free CF to firm – Cash
Step 1b: Make
a timing Most recent annual Last four quarters A year in the future
Next four quarters
choice report/10K (current) (trailing) (forward plus)
(forward)
Step 2: Other criteria,
Choose peer Narrow versus broad Similar market cap Country, region,
subjective and
group/ sector/business or all companies or global
objective
Comparables

Quality of Growth
Growth
Step 3: Tell Risk - Higher barriers to entry (moats) for
- Lower risk for higher value - Higher growth for higher value
a story higher value
- Higher risk for lower value - Lower growth for lower value
- Lower barriers to entry for lower value

1/23/2024 6:32:45 PM
 Table 4.1 Summary Statistics on Multiples—Across US Stocks in
January 2023
Current PE Price to Book Equity EV/EBITDA EV/Sales

Mean 109.25 12.40 323.31 89.04

Standard error 34.10 2.18 82.27 18.91
Median 13.92 1.59 13.30 2.70
Skewness 37.69 26.22 34.25 31.13
Maximum 86,400.00 5423.08 200,504.27 57,792.67

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 Figure 4.2 PE Ratio Distribution: US Stocks in January 2023

Current, Trailing, and Forward PE Ratios: US Stocks in January 2023

600

Damodaran244409_c04.indd 86
500

400

300

32
200

Number of companies
100

0 <4 4−8 8−12 12−16 16−20 20−24 24−28 28−32 32−36 36−40 40−50 50−75 75−100 >100
Current PE 213 393 448 286 203 162 139 94 65 54 88 87 54 130
Trailing PE 209 374 465 284 241 169 124 95 76 46 93 106 35 100
Forward PE 54 381 543 355 291 189 135 81 64 45 77 77 41 84

Current PE Trailing PE Forward PE

1/23/2024 6:32:45 PM
 Table 4.2 PE Ratios across Time: 2004–2023
Year Median PE % with PE Year Median PE % with PE

2004 20.76 58.0% 2014 20.88 43.15%

2005 23.21 56.0% 2015 16.77 41.88%
2006 22.40 57.0% 2016 18.53 44.71%
2007 21.21 58.0% 2017 21.57 41.96%
2008 18.16 56.0% 2018 23.13 40.78%
2009 9.80 54.0% 2019 18.61 41.13%
2010 14.92 49.0% 2020 18.49 41.63%
2011 15.18 51.5% 2021 18.15 36.77%
2012 15.94 58.7% 2022 13.09 35.86%
2013 16.38 42.4% 2023 13.92 43.25%

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 Table 4.3 Fundamentals Determining Multiples
Multiple Fundamental determinants

PE ratio Expected growth( ), payout( ), risk( )

Price-­to-­book-­equity ratio Expected growth( ), payout( ), risk( ), ROE( )
Price-­to-­sales ratio Expected growth( ), payout( ), risk( ),
net margin( )
EV to FCFF Cost of capital( ), growth rate( )
EV to EBITDA Expected growth( ), reinvestment rate( ), risk( ),
ROC( ), tax rate( )
EV-­to-­capital ratio Expected growth( ), reinvestment rate( ),
risk( ), ROC( )
EV to sales Expected growth( ), reinvestment rate( ), risk( ),
operating margin( )

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 Table 4.4 Valuation Mismatches

Compan- Mismatch indicator for underval-

Multiple ion variable ued company

PE ratio Expected growth Low PE ratio with high expected growth rate
in earnings per share
P/BV ratio ROE Low P/BV ratio with high ROE
P/S ratio Net margin Low P/S ratio with high net profit margin
EV/EBITDA Reinvestment rate Low EV/EBITDA ratio with low rein-
vestment needs
EV/Capital Return on capital Low EV/Capital ratio with high return
on capital
EV/Sales After-­tax oper- Low EV/Sales ratio with high after-­tax oper-
ating margin ating margin

35

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 Table 4.5 Beverage Companies in the US in March 2009
Expected Standard deviation
Company name Trailing PE growth in EPS in stock prices

Andres Wines Ltd. “A” 8.96 3.50% 24.70%

Anheuser-­Busch 24.31 11.00% 22.92%
Boston Beer “A” 10.59 17.13% 39.58%
Brown-­Forman ‘B’ 10.07 11.50% 29.43%
Chalone Wine Group Ltd. 21.76 14.00% 24.08%
Coca-­Cola 44.33 19.00% 35.51%
Coca-­Cola Bottling 29.18 9.50% 20.58%
Coca-­Cola Enterprises 37.14 27.00% 51.34%
Coors (Adolph) “B” 23.02 10.00% 29.52%
Corby Distilleries Ltd. 16.24 7.50% 23.66%
Hansen Natural Corp. 9.70 17.00% 62.45%
Molson Inc. Ltd. “A” 43.65 15.50% 21.88%
Mondavi (Robert) “A” 16.47 14.00% 45.84%
PepsiCo, Inc. 33.00 10.50% 31.35%
Todhunter Int’l 8.94 3.00% 25.74%
Whitman Corp. 25.19 11.50% 44.26%
Average 22.66 12.60% 33.30%
Median 22.39 11.50% 29.48%

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 PEG Ratio Equations

PE ratio for Todhunter

PEG ratio for Todhunter
Todhunter ’s growth rate
8.94
2.98,
3
PE ratio for Hansen 9.70
PEG ratio for Hansen 0.57,
Hansen’s growth rate 17
Average PE ratio
PEG ratio for beverage sector
Sector average growth rate
22.66
1.80.
12.60

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 PE Equations

PE 20.80 63.87 Standard deviation 183.23 Expected growth

(3.27) (2.83) (3.93)
R2 51%

PE for Todhunter 20.80 63.87 (0.2574) 183.23(0.03) 9.86

PE for Hansen 20.80 63.87(0.6245) 183.23 (0.17) 12.06

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 Figure 5.1 Valuation as a Bridge

Appeal Appeal
Numbers provide a sense Stories are more easily
of control, a sense of remembered than numbers
precision, and the and connect with human
appearance of objectivity. A Good Valuation emotions.
Story + Numbers
The Number Crunchers The Storytellers

Dangers
Without narratives to back Dangers
them up, numbers can be Stories that are not anchored
easily manipulated, used to or connected with numbers
to hide bias, or used to can veer into fairytales,
intimidate those not in the leading to unreal valuations.
loop.

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 Table 5.1 Restaurant Food Delivery Markets (in US$) in 2020

India China United States EU

General
GDP in 2020 $2.71 $14.70 $20.93 $15.17
(in trillions of US$)
Population (millions) 1360 1430 330 445
Per capita GDP $1,993 $10,280 $63,424 $34,090
Number of 1000 9000 660 890
­restaurants (in 000s)
Food Delivery
Online access (percent) 43% 63% 88% 90%
Online food delivery 50.00 450.00 105.00 150.00
users (millions)
Online food delivery $4,200.00 $90,000.00 $21,000.00 $15,000.00
market ($ million) in 2019
Online food delivery $2,900.00 $110,000.00 $49,000.00 $13,800.00
market ($ million) in 2020

40

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 Figure 5.2 Valuation Stories—­The 3P Test

Damodaran244409_c05.indd 117
Probability of occurrence
Low
Impossible Almost certain

Product “IT” IS PROBABLE

Gauge market “IT” IS PLAUSIBLE success & This is something that
“IT” IS POSSIBLE
potential & test This is something that financial you expect to happen,
This could happen, but
products you can make a reasoned results with some basis or
you are not sure what
argument could happen, evidence for that

41
“this” is, when it will
though you have no expectation. There
happen and what it will
tangible evidence for it can be substantial
look like when it does.
happening (yet). uncertainty in your
expectations.

VALUATION RESPONSE VALUATION RESPONSE

Value as an option, with the value VALUATION RESPONSE
Show as expected growth, adjusting for
increasing with the size of the possible Show in base year numbers and
risk in your expected return. Value will
market and the exclusivity of your firm’s expected cash flows, adjusting for
increase with size of the market and your
access to that market. risk in your expected return.
firm’s competitive advantages.

1/23/2024 1:22:27 PM
 Figure 5.3 The Drivers of Value

Growth/Investment
Revenue Growth
Operating Margins Efficiency
Function of the size of the
Determined by pricing Measure of how much
total accessible market and
power and cost efficiencies investment is needed to
market share
deliver growth

Expected FCFF = Revenues × Operating Margin − Taxes − Reinvestment

Value of
Business
Risk−Adjusted Discount Rate

Failure Probability Cost of Equity Cost of Debt

Chance of grievous Rate of return that equity Cost of borrowing money,
or catastrophic event investors demand net of tax advantages
putting business
model at risk

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 Table 5.2 Costs of Capital for US and Global Companies in US
$, July 2023
Decile/Quartile US Emerging Markets Europe Japan Global

1st decile 6.01% 8.08% 7.26% 7.71% 7.39%

(lowest risk)
First quartile 7.26% 9.56% 8.64% 9.07% 9.08%
Median 9.63% 11.19% 10.41% 10.72% 10.60%
Third quartile 10.88% 12.97% 12.02% 11.50% 12.07%
9th decile 11.63% 15.31% 14.25% 13.10% 14.04%
(highest risk)

43

Damodaran244409_c05.indd 122 1/23/2024 1:22:27 PM

 Figure 5.4 Stories and Valuation Inputs

Big market narratives will lead to a big number

Total Market here.
×

Market Share
Networking and winner-takes-all narratives
=
show up as a dominant market share.
Revenues (Sales)

–
Strong and sustainable competitive
Operating Expenses advantages show up as a combination of high
= market share and high operating margins.

Operating Income
– Tax breaks and benefits show up as lower
Taxes taxes and higher after-tax income.

=
Easy scaling (where companies can grow
After-Tax Operating Income
quickly and at a low cost) narratives will show
– up as low reinvestment, given growth.

Reinvestment
=

After-Tax Cash Flow

Low-risk narratives (business) show up as a
Adjust for time value & risk lower discount rate. High-debt narratives may
raise or lower discount rates.
Adjusted for operating risk
with a discount rate and for
failure with a probability of VALUE OF
failure BUSINESS

44

Damodaran244409_c05.indd 123 1/23/2024 1:22:27 PM

 Figure 5.5 Stories and Valuation Inputs—­Zomato in June 2021

Zomato: Value Drivers to Inputs

The India Growth Story Zomato as Winner Intermediary Margins Tech Reinvestment

Damodaran244409_c05.indd 125
The Indian food delivery Zomato will retain its As an intermediary, and with Reinvestment will be in the
market will grow from ₹ 225 significant market share solid unit economics, Zomato platform & acquistions, with
billion to ₹ 2000 billion over (40%) and revenue slice should have high operating ₹2.5 in revenues per ₹1 invested
the next decade. (22%) of this growing margins (40%) in steady state. in years 1-5, increasing to ₹ 3 in
market. revenues in years 6-10.

Revenue Growth Operating Margins Growth/Investment Efficiency

Function of the size of the total Determined by pricing power and Measure of how much investment
accessible market & market share cost efficiencies is needed to deliver growth

45
Expected FCFF = Revenues * Operating Margin − Taxes − Reinvestment
Value of
Business
Risk−adjusted Discount Rate

Cost of Equity Cost of Debt

Failure Risk
Rate of return that equity Cost of borrowing money, net of
Chance of grevious
investors demand tax advantages
or catastrophic event
putting business
model at risk
Zomato’s fortunes are tied to the restaurant delivery business. We use the risk (beta) of
this business, in conjunction with the fact that Zomato gets almost all of its capital from
It is still a money-losing company, equity (99.7%) and derives much of its revenues from India and the UAE (84.7% India,
facing regulatory challenges, but 10.4% UAE) to estimate a cost of capital of 10.25% in rupee terms.
its size will keep failure rate down
to 10%.

1/23/2024 1:22:27 PM
 Table 5.3 Expected Operating Profits at Zomato

Market Revenue Operating

Total market share share Revenues margin EBIT

1 ₹337,500 41.72% 22.00% ₹30,975 −10.00% −₹3,097

2 ₹438,750 41.29% 22.00% ₹39,853 −1.25% −₹498
3 ₹570,375 40.86% 22.00% ₹51,270 6.88% ₹3,527
4 ₹741,488 40.43% 22.00% ₹65,951 12.50% ₹8,244
5 ₹963,934 40.00% 22.00% ₹84,826 18.13% ₹15,379
6 ₹1,203,471 40.00% 22.00% ₹105,905 20.23% ₹21,425
7 ₹1,440,555 40.00% 22.00% ₹126,769 27.61% ₹35,001
8 ₹1,650,156 40.00% 22.00% ₹145,214 35.00% ₹50,825
9 ₹1,805,271 40.00% 22.00% ₹158,864 35.00% ₹55,602
10 ₹1,881,995 40.00% 22.00% ₹165,616 35.00% ₹57,965

46

Damodaran244409_c05.indd 126 1/23/2024 1:22:27 PM

Damodaran244409_c05.indd 127
Table 5.4 Free Cash Flows to the Firm and Present Value at Zomato in 2021
Year EBIT Tax rate EBIT × (1 − t) Reinvestment FCFF Cost of capital PV

1 −₹3,097 0.00% −₹3,097 ₹4,415 −₹7,512 10.25% −$6,814

2 ₹498 0.00% ₹498 ₹3,551 −₹3,053 10.25% −$2,512
3 ₹3,527 6.63% ₹3,293 ₹4,567 −₹1,273 10.25% −$950
4 25.00% 10.25% $210

47
₹8,244 ₹6,183 ₹5,872 ₹311
5 ₹15,379 25.02% ₹11,531 ₹6,292 ₹5,239 10.25% $3,216
6 ₹21,425 25.02% ₹16,065 ₹7,026 ₹9,039 10.00% $5,044
7 ₹35,001 24.99% ₹26,253 ₹6,954 ₹19,299 9.74% $9,813
8 ₹50,825 25.00% ₹38,119 ₹6,148 ₹31,970 9.48% $14,848
9 ₹55,602 25.00% ₹41,702 ₹4,550 ₹37,152 9.23% $15,797
10 ₹57,965 25.00% ₹43,474 ₹2,251 ₹41,224 8.97% $16,085

1/23/2024 1:22:27 PM
 Terminal Value Equation
Terminal value
Growth rate
After-tax operating income in year 11 1
ROC
Cost of capital Growth rate

0.0425
43, 474 1.0425 1
0.12 ₹620,133 million
0.0897 0.0425

48

Damodaran244409_c05.indd 128 1/23/2024 1:22:27 PM

 Table 5.5 Zomato—­Alternative Stories and Value per Share

Damodaran244409_c05.indd 131
Total market Market Revenue Target Cost Value/
Zomato Story (in millions) share slice margin of capital share

Delivery juggernaut ₹5,000,000 40% 25.00% 45.00% 9.50% ₹150.02

Delivery star ₹5,000,000 40% 22.00% 35.00% 9.50% ₹93.00
Delivery leader + competition ₹5,000,000 40% 15.00% 25.00% 10.99% ₹61.55
Restaurant delivery juggernaut + high growth India ₹3,000,000 40% 25.00% 45.00% 9.50% ₹94.31
Restaurant delivery star + high growth India ₹3,000,000 40% 22.00% 35.00% 9.50% ₹59.02

49
Restaurant delivery + competition + high growth ₹3,000,000 40% 20.00% 25.00% 10.99% ₹35.52
India
Our story, positive ₹2,000,000 40% 25.00% 45.00% 10.25% ₹56.66
Our story ₹2,000,000 40% 22.00% 35.00% 10.25% ₹39.48
Our story, negative ₹2,000,000 40% 20.00% 25.00% 10.25% ₹26.16
Restaurant delivery juggernaut + low growth India ₹1,125,000 40% 25.00% 45.00% 9.50% ₹36.48
Restaurant delivery star + low growth India ₹1,125,000 40% 22.00% 35.00% 9.50% ₹24.02
Restaurant delivery + competition + low growth India ₹1,125,000 40% 20.00% 25.00% 10.99% ₹16.58

1/23/2024 1:22:28 PM
 Figure 6.1 The Early Stages of the Business Life Cycle

Revenues

Idea companies Start-up companies Young companies High-growth companies

No revenues Small revenues Growing revenues Growing revenues
Operating losses Increasing losses Losses stabilize or drop Small but fast-growing profits
Cash burning Cash burn surges Cash burn continues Cash flows lag earnings

Earnings

Free Cash Flows to Firm

50

Damodaran244409_c06.indd 140 1/23/2024 6:34:08 PM

 Table 6.1 Expected Revenues for Airbnb (in $ millions)
Growth rate Gross bookings Airbnb share (%) Revenues

LTM $26,492 $3,626

1 40.00% $37,089 12.65% $4,692
2 25.00% $46,361 12.92% $5,990
3 25.00% $57,951 13.06% $7,565
4 25.00% $72,439 13.19% $9,555
5 25.00% $90,548 13.33% $12,066
6 20.40% $109,020 13.46% $14,674
7 15.80% $126,245 13.60% $17,163
8 11.20% $140,385 13.73% $19,275
9 6.60% $149,650 13.87% $20,749
10 2.00% $152,643 14.00% $21,370
Terminal year 2.00% $155,696 14.00% $21,797

51

Damodaran244409_c06.indd 148 1/23/2024 6:34:08 PM

Damodaran244409_c06.indd 151
Table 6.2 Expected Earnings and Cash Flows (in $ millions) for Airbnb
Revenues Operating margin EBIT Tax rate EBIT × (1 − t) Reinvestment FCFF

LTM $3,626 −22.56% −$818 0.00% −$818

1 $4,692 −10.00% −$469 0.00% −$469 $532.98 $(1,002)
2 $5,990 −3.00% −$180 0.00% −$180 $649.05 $(829)
3 $7,565 0.50% $38 0.00% $38 $787.84 $(750)
4 $9,555 4.00% $382 0.00% $382 $994.58 $(612)

52
5 $12,066 7.50% $905 14.05% $778 $1,255.45 $(478)
6 $14,674 9.52% $1,397 25.00% $1,048 $1,304.27 $(256)
7 $17,163 13.39% $2,298 25.00% $1,724 $1,244.47 $479
8 $19,275 17.26% $3,327 25.00% $2,495 $1,055.89 $1,439
9 $20,749 21.13% $4,384 25.00% $3,288 $737.08 $2,551
10 $21,370 25.00% $5,343 25.00% $4,007 $310.52 $3,696
Terminal year $21,797 25.00% $5,449 25.00% $4,087 $817.40 $3,270

1/23/2024 6:34:09 PM
 Airbnb Sample Equation
EBIT 1 t 1 Reinvestment rateStable growth
Terminal value
Cost of capital Stable growth Stable growth rate
$4, 087 1 0.20
$63, 860 million.
0.0712 0.02

53

Damodaran244409_c06.indd 154 1/23/2024 6:34:10 PM

 Table 6.3 Free Cash Flows (in $ millions) and Value for Airbnb

Cost Cumulated cost Terminal Present

Year of capital of capital FCFF value value

1 8.50% 1.0850 −$1,002 −$924

2 8.50% 1.085 = 1.1772
2
−$829 −$704
3 8.50% 1.0853 = 1.2773 −$750 −$587
4 8.50% 1.0854 = 1.3859 −$612 −$442
5 8.50% 1.0855 = 1.5037 −$478 −$318
6 8.22% 1.085 (1.0822) =
5
−$647 −$397
1.6273
7 7.95% 1.0855 (1.0822) $137 $78
(1.0795) = 1.7567
8 7.67% 1.0855 (1.0822) $1,183 $626
(1.0795)(1.0767) =
1.8914
9 7.40% 1.0855(1.0822) $2,413 $1,188
(1.0795) (1.0767)
(1.074) = 2.0313
10 7.12% 1.0855(1.0822)(1.0795) $3,696 $63,860 $31,047
(1.0767) (1.074)
(1.0712) = 2.1759

Value of operating assets = $29,567

54

Damodaran244409_c06.indd 155 1/23/2024 6:34:10 PM

 Airbnb's Failure-Adjusted Value Equation

Value of operating assets 1 Failure rate Liquidation value

Failure Rate

$29, 567 0.9 $29, 567 0.5 0.1 $28, 088 million.

55

Damodaran244409_c06.indd 156 1/23/2024 6:34:12 PM

 Value Per Share Equation

Value per share

28088 4495 3000 2192 $1, 737
$47.17
671.06

56

Damodaran244409_c06.indd 157 1/23/2024 6:34:13 PM

 Figure 6.2 Pricing Airbnb in November 2020

Peer Groups
Largest US-based Hotel Chains
Market Cap Enterprise Va Revenues EBIT Net Income PE EV/Sales EV/EBIT

Damodaran244409_c06.indd 162
Marriott $ 41,620 $ 52,150 $ 20,972 $ 1,938 $ 1,273 32.69 2.49 26.91
Hilton $ 28,960 $ 37,530 $ 9,452 $ 1,576 $ 881 32.87 3.97 23.81
Intercontinental $ 11,642 $ 13,430 $ 4,627 $ 764 $ 385 30.24 2.90 17.58
Hyatt $ 7,439 $ 9,010 $ 5,020 $ 197 $ 766 9.71 1.79 45.74
Choice Hotels $ 5,682 $ 6,600 $ 1,114 $ 334 $ 222 25.59 5.92 19.76
Wyndham $ 5,402 $ 7,500 $ 2,053 $ 442 $ 157 34.41 3.65 16.97
Aggregate $ 100,745 $ 126,220 $ 43,238 $ 5,251 $ 3,684 27.35 2.92 24.04
Largest US-based Travel Booking Companies

EV/Gross
Market Cap Enterprise Va Gross Billings Revenues EBIT Net Income PE Billing EV/Sales EV/EBIT

57
Booking.com $ 84,067 $ 85,530 $ 96,400 $ 15,066 $ 5,345 $ 4,865 17.28 0.89 5.68 16.00
Expedia $ 17,503 $ 22,480 $ 107,870 $ 12,067 $ 961 $ 565 30.98 0.21 1.86 23.39
Aggregate $ 101,570 $ 108,010 $ 204,270 $ 27,133 $ 6,306 $ 5,430 18.71 0.53 3.98 17.13

Airbnb Pricing In November 2019

Using Hotels as Peers, Scaling to Revenues
Revenues Estimated EV/Sales Estimated EV Airbnb Value Today
Current Year $3,625.00 2.92 $10,585 $10,585
Year 5 $12,066.00 2.92 $35,233 $21,088 Forward values from
Using Booking Companies as Peers, Scaling to Revenues year 5 are discounted
Revenues Estimated EV/Sales Estimated EV Airbnb Value Today back five years at 8.5%
Current Year $3,625.00 3.98 $14,428 $14,428 and adjusted for failure.
Year 5 $12,066.00 3.98 $48,023 $28,744 For example, using
hotels:
Using Booking Companies as Peers, Scaling to Gross Bookings
Value today = (35,233/
Bookings Estimated EV/Bookings Estimated EV Airbnb Value Today
1.085^5) × 0.9 = $21,088
Current Year $26,491.00 0.53 $14,040 $14,040
Year 5 $90,548.00 0.53 $47,990 $28,724

1/23/2024 6:34:13 PM
 Table 7.1 R&D Amortization in $ millions: Google in 2023
Unamortized Amortization
Year R&D expense portion this year

Most recent year $42,596 1.00 $42,596

Year −1 $39,500 0.67 $26,333 $13,167
Year −2 $31,562 0.33 $10,521 $10,521
Year −3 $27,573 0.00 $0 $9,191
$79,450 $32,878

58

Damodaran244409_c07.indd 176 1/23/2024 8:21:47 AM

 Table 7.2 Effects of Capitalizing Research Expenses: Alphabet
Unadjusted Adjusted for R&D

Net margin 59, 972 69, 690

= 21.20% = 24.64%
282, 836 282, 836

Operating margin 74, 842 84, 560

= 26.46% = 29.90%
282, 836 282, 836

Return on equity 59, 972 69, 690 = 20.77%

= 23.41%
256, 144 335, 594

Pretax return on capital 74, 842 84, 560

= 31.64% = 26.76%
236, 533 315, 983

59

Damodaran244409_c07.indd 178 1/23/2024 8:21:52 AM

 Table 7.3 Expected Free Cash Flows to Firm for Alphabet

Damodaran244409_c07.indd 184
Operating
Year Growth rate Revenues margin EBIT Tax rate EBIT × (1 − t) Reinvestment FCFF

Last year $282,836 29.90% $84,560

1 8.00% $305,463 30.00% $91,639 15.92% $77,049 $7,908 $69,141
2 8.00% $329,900 30.80% $101,609 15.92% $85,432 $8,541 $76,891
3 8.00% $356,292 31.20% $111,163 15.92% $93,465 $9,224 $84,241
4 8.00% $384,795 31.60% $121,595 15.92% $102,236 $9,962 $92,274

60
5 8.00% $415,579 32.00% $132,985 15.92% $111,813 $9,683 $102,130
6 7.20% $445,501 32.00% $142,560 17.74% $117,275 $9,227 $108,048
7 6.40% $474,013 32.00% $151,684 19.55% $122,026 $8,591 $113,436
8 5.60% $500,557 32.00% $160,178 21.37% $125,951 $7,776 $118,175
9 4.80% $524,584 32.00% $167,867 23.18% $128,948 $6,791 $122,158
10 4.00% $545,567 32.00% $174,582 25.00% $130,936 $7,062 $123,874
Terminal 4.00% $567,390 32.00% $181,565 25.00% $136,174 $36,313 $99,861
year

1/23/2024 8:21:52 AM
 Alphabet Equation
Cost of equity for Alphabet 4% 1.16 6.31% 11.33%.
Cost of debt after taxes for Alphabet 4% 0.8% 1 0.25
3.660%.
Cost of Capital for Alphabet 11.33% 0.992 3.60% 0.008
11.27%.

61

Damodaran244409_c07.indd 186 1/23/2024 8:21:55 AM

 Table 7.4 Value of Operating Assets for Alphabet
Cost Cumulated cost FCFF Terminal value Present value
Year of capital of capital (in $ mil) (in $ mil) (in $ mil)

1 11.27% 1.1127 $69,141 $62,138

2 11.27% 1.2381 $76,891 $62,104
3 11.27% 1.3776 $84,241 $61,149
4 11.27% 1.5329 $92,274 $60,196
5 11.27% 1.7057 $102,130 $59,877
6 10.72% 1.8885 $108,048 $57,213
7 10.36% 2.0841 $113,436 $54,428
8 9.91% 2.2907 $118,175 $51,589
9 9.45% 2.5072 $122,158 $48,724
10 9.00% 2.7328 $123,874 $1,997,213 $776,159
$1,293,577

62

Damodaran244409_c07.indd 189 1/23/2024 8:21:59 AM

 Share Equation
$1,293,577+$113,762+$30,492-$14,701
Value per share =
12,610
=$$112.79.

63

Damodaran244409_c07.indd 190 1/23/2024 8:22:00 AM

 Table 8.1 Cost of Capital and Debt Ratios for Unilever

Debt ratio Beta Cost of equity Cost of debt (after tax) WACC

0% 0.90 10.13% 4.11% 10.13%

10% 0.98 10.64% 4.11% 9.99%
16.84% 1.05 11.06% 4.20% 9.91%
20% 1.07 11.28% 4.43% 9.91%
30% 1.19 12.10% 4.71% 9.88%
40% 1.35 13.20% 10.62% 12.17%
50% 1.63 15.08% 14.15% 14.61%
60% 2.05 17.94% 15.90% 16.72%
70% 2.74 22.59% 16.31% 18.19%
80% 4.11 31.89% 16.61% 19.67%
90% 8.21 59.77% 16.85% 21.14%

64

Damodaran244409_c08.indd 207 1/23/2024 11:02:03 AM

 Table 9.1 Value of Operating Assets for Bed Bath & Beyond
Operating EBIT × Cost
Revenues margin EBIT (1 − t) Reinvestment FCFF of capital

1 $7,081 −1.00% −$70.81 −$71 $0 −$71 8.79%

2 $6,727 1.62% $108.72 $109 −$177 $286 8.79%
3 $6,391 2.92% $186.89 $187 −$168 $355 8.79%
4 $6,071 4.23% $256.96 $257 −$160 $417 8.79%
5 $5,768 5.54% $319.56 $244 −$152 $396 8.79%
6 $5,572 5.54% $308.69 $232 −$98 $330 8.53%
7 $5,471 5.54% $303.14 $227 −$50 $277 8.27%
8 $5,460 5.54% $302.53 $227 −$5 $232 8.01%
9 $5,537 5.54% $306.77 $230 $38 $192 7.76%
10 $5,703 5.54% $315.97 $237 $83 $154 7.50%
Terminal $5,874 5.54% $325.45 $244 $73 $171 7.50%
year

65

Damodaran244409_c09.indd 228 1/23/2024 8:09:47 AM

 Terminal Value After-Tax Equation

Terminal value
After-tax operating income Terminal year (1 Reinvestment rate)
(Cost of capital stable g stable )

$244 1 0.40
$3,253 million.
0.075 0.03

66
 Value/Share Equation
Operating assets Cash Debt
Value/share
Number of shares
30977 440 3085
92.50
$4.89 /share.

67

Damodaran244409_c09.indd 229 1/23/2024 8:09:48 AM

Table 9.2 Bond Rating and Probability of Default: 1920–2022
Moody’s Rating Within 5 years Within 10 years

Aaa 0.10% 0.70%

Aa 0.60% 1.80%
A 1.00% 2.70%
Baa 2.30% 5.20%
Ba 8.30% 16.40%
B 19.30% 31.90%
Caa-C 31.50% 46.00%

68
 Distress Equation
Distress adjusted value per share $4.89 (1 0.319)
$0.00 (0.319)
$3.33

69

Damodaran244409_c09.indd 232 1/23/2024 8:09:49 AM

 Relative Valuation Equation

PBV (ROE g) / (Cost of equity g),

1. 04 (0.12 0.033) / (Cost of equity 0.033), so
Cost of equity 0.1167,or 11.67%.

70

Damodaran244409_c10.indd 249 1/23/2024 6:36:02 PM

 Table 10.1 Expected Earnings and Dividends for Citigroup
in May 2023
Base year 1 2 3 4 5

Earnings growth rate 6.22% 6.22% 6.22% 6.22% 6.22%

Return on equity 8.78% 8.78% 8.78% 8.78% 8.78% 8.78%
Net income ($ millions) $14,845 $15,769 $16,750 $17,792 $18,898 $20,074
Payout ratio 29.14% 29.11% 29.11% 29.11% 29.11% 29.11%
Dividends ($ millions) $4,326 $4,591 $4,877 $5,180 $5,502 $5,845

71

Damodaran244409_c10.indd 252 1/23/2024 6:36:04 PM

 Payout Ratio Equations

Expected growth rate

Payout ratio in stable growth 1 .
Stable period ROE

3.00%
Payout ratio in stable growth 1 65.82%.
8.78%

Net Income in year 6 Stable payout

Terminal value
Cost of equiity Expected growth rate
20074 1.03 0.6582
$1156, 964.
0.1167 0.03

72

Damodaran244409_c10.indd 253 1/23/2024 6:36:06 PM

 Net Income Equations
Terminal value of equity
Growth rate
(Net income in year 6) 1
ROE
Cost of equity Growth rate

0.03
19, 522 1.03 1
0.095
0.1167 0.03
$158, 972 million..

73

Damodaran244409_c10.indd 256 1/23/2024 6:36:11 PM

 Table 10.2 Expected Free Cashflow to Equity (in $ millions) for Citigroup in May 2023
Current 1 2 3 4 5 Terminal year

Damodaran244409_c10.indd 257
Risk-­adjusted assets $1,142,985 $1,177,275 $1,212,593 $1,248,971 $1,286,440 $1,325,033 $1,364,784
Tier 1 Capital ratio 14.80% 14.84% 14.88% 14.92% 14.96% 15.00% 15.00%
Tier 1 Capital $169,145 $174,694 $180,423 $186,339 $192,448 $198,755 $204,718
Change in regulatory capital (Tier 1) $5,549 $5,729 $5,916 $6,109 $6,307 $5,963
Book equity $182,194 $187,743 $193,472 $199,388 $205,497 $211,804 $218,158

ROE 8.78% 8.92% 9.07% 9.21% 9.36% 9.50% 9.50%

74
Net income $14,845 $16,254 $17,021 $17,820 $18,653 $19,522 $20,121
− Investment in regulatory $5,549 $5,729 $5,916 $6,109 $6,307 $6,354
capital
= FCFE $10,705 $11,291 $11,904 $12,545 $13,215 $13,767
Terminal value of equity $158,792
Present value $9,586 $9,055 $8,548 $8,067 $99,052
Cost of equity 11.67% 11.67% 11.67% 11.67% 11.67% 11.67% 11.67%
Value of equity today = $134,308
Number of shares outstanding = 1958.30
Value per share = $68.58

1/23/2024 6:36:11 PM
 Table 10.3 Pricing Citigroup in April 2023
Citigroup JP Morgan 25 largest banks (median)

Growth rate in deposits 3.74% 9.69% 10.66%

Tier 1 Capital ratio 14.80% 14.85% 11.12%
Return on equity 8.78% 14.53% 10.66%
Price-­to-­book 0.50 1.53 1.04

75

Damodaran244409_c10.indd 263 1/23/2024 6:36:13 PM

 Normalized Operating Income Equation

Normalized operating income = 22,661 × 0.0733

= 1,660.7 billion yen.

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 Yen Per Share Equation
19, 640 2, 288 6, 845 11, 862 583
4735 yen per share.
3.448

77

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 Figure 11.1 Royal Dutch Shell—Revenues, Earnings, and Oil Prices

Royal Dutch: Operating History

$500,000 $120.00
Revenues and operating income (in $ milions)

Average oil price in $/barrel during year

$400,000 $100.00

$300,000 $80.00

$200,000 $60.00

$100,000 $40.00

$0 $20.00

RD Revenues ($ mil) = $27,797 mil + ($4,172 × Average oil price) R squared = 92%

–$100,000 $–
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Revenues Operating income Average oil price

78

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 Revenue Equation

Terminal value
Growth rate
(After-tax Operating income in year 6) 1
ROC
(Cost of capital Growth rate)

0.02
28, 309 1.02 1
0.10
$324, 901 million.
0.0911 0.02

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 Table 11.1 Expected Cash Flows ($ millions) and Value
per Share—Royal Dutch
Base
year 1 2 3 4 5

Revenues $366,295 $373,621 $381,093 $388,715 $396,489 $404,419

Operating 17.58% 13.79% 11.90% 10.95% 10.47% 10.00%
margin
Operating $64,403 $51,527 $45,333 $42,556 $41,528 $40,442
income
Effective tax 30.00% 30.00% 30.00% 30.00% 30.00% 30.00%
rate
AT Operating $45,082 $36,069 $31,733 $29,789 $29,070 $28,309
income
+ Depreciation $19,410 $19,798 $20,194 $20,598 $21,010 $21,430
− Cap Ex $22,600 $23,052 $23,513 $23,983 $24,463 $24,952
− Chg in WC $366 $374 $381 $389 $396
= FCFF $32,449 $28,041 $26,023 $25,228 $24,391
Terminal value $324,901
Return on capital
Cost of capital 9.11% 9.11% 9.11% 9.11% 9.11%
Cumulated 1.0911 1.1905 1.2990 1.4173 1.5464
discount factor
Present value $29,739 $23,554 $20,034 $17,800 $225,873
Value of $317,000
operating assets
+ Cash $40,246
+ Cross- $23,864
holdings
− Debt $83,795
− Minority $2,125
interests

80

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 Table 11.1 (Continued)
Base
year 1 2 3 4 5

Value of equity $295,190

Number of 3957
shares
Value per share $74.60

81

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Figure 11.2 Royal Dutch Shell—Value per Share and Oil Prices

Royal Dutch Shell: Value per share vs Oil price

$140.00

$120.00

$100.00
Shell value per share

$80.00

$60.00

$40.00

$20.00

$0.00
$30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150
Oil price per barrel

82
 Table 11.2 Ratios for Large Integrated Oil Companies
in August 2023
EV/Barrel
EV/Invested of proven
Company Name PE PBV EV/Sales EV/EBITDA capital reserves

Saudi Arabian 16.70 5.10 4.16 7.95 5.41 11.11

Oil Company
Exxon Mobil 8.23 2.10 1.20 5.29 2.02 44.57
Corporation
Chevron Corporation 9.82 1.85 1.42 5.92 1.80 61.17
Shell plc 6.93 1.04 0.68 3.54 1.04 52.24
PetroChina Company 8.28 0.83 0.47 3.11 0.85 32.91
TotalEnergies SE 7.60 1.30 0.71 3.20 1.25 29.45
BP p.l.c. 5.53 1.24 0.52 2.30 1.21 33.30
China Petroleum & 10.12 0.69 0.26 4.93 0.75 63.22
Chemical Corporation
Equinor ASA 3.76 1.68 0.60 1.17 1.90 34.36
Petróleo Brasileiro 2.70 1.27 1.08 2.15 1.17 14.56
S.A. (Petrobras)
Occidental Petroleum 8.14 1.84 2.38 4.61 1.51 39.27
Corporation
Eni S.p.A. 5.00 0.85 0.51 3.14 0.88 20.43
Median 7.87 1.28 0.69 3.37 1.23 33.83

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 Table C.1 Value Drivers across the Life Cycle and Sectors
Category Value drivers

Young growth companies Revenue growth, target margin, survival probability

Growth companies Scaling growth, margin sustainability
Mature companies Operating slack, financial slack, probability of
management change
Declining companies Going-concern value, default probability, default
consequences
Financial service firms Equity risk, quality of growth (return on equity),
regulatory capital
Commodity and Normalized earnings, excess returns,
­cyclical companies long-­term growth
Intangible asset companies Nature of intangible assets, efficiency of
­investments in intangible assets

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