But since I can buy as many books as I want, it would be more important to tell what this book does not do. First, it's always important to get a second opinion. In this case, it would be something other than DCF. Currently, DCF and relative valuation (such as PE and PV) are the dominent valuation methods used in the U.S. And yes, they are both covered in-depth by this book, in addition to the Economic Value Addded method which is gaining momentum in recent years. But this book essentially dismisses the income statements in favor of cash flows statements for valuing securities, preferring DCF to relative valuation. This is certainly understandable in lights of recent manipulation of GAAP income by offenders like Enron, WorldCom and Tyco. But I believe it's important for investors to hear the voice for income statements valuation method. For that investors should get James English's Applied Equity Analysis - another must-have - as a second valuation reference book. Secondly, this book uses CAPM model for finding the discount rate. Again, it is true that CAPM is the most widely used model in the U.S., but I came to a conclusion, after reading close to a hundred critically acclaimed articles published in the last fifty years as part of my MBA requirements, that factor models provide better tracking of stock prices than CAPM does. Unfortunately, there is no good book available. For institutional investors, they can have models from BARRA and Wilshire, etc, but individual investors would have to construct their own, probably (like me) using the Fama-French three-factor model. Description of their model is available mostly from theirs and other published papers. Data are available from Kenneth French's own website at Dartmouth. Now since you read all the way through my review, here is your reward: go to Damodaran's website and download the manuscript of this book for free if you are really frugal.

74 of 74 found the following review helpful:


The best valuation book I know of, but not perfect.  Oct 18, 2002 By Andrew West
I bought this book to replace an older valuation book also by Damodoran. I'm a professional analyst and am quite familiar with valuations, and this book provides a very thorough and comprehensive guide. I bought it just in time to serve as guidance through a very heavy and comprehensive research project.

Everything I needed for the project was in the book, however one thing surprised and disappointed me: the organization. I simply don't see much of a logical flow in the chapter structure, so I think it would be more difficult to someone who wasn't already familiar with the basic structure of the valuation process. Why is market efficiency jammed between unrelated chapters? Why is the discussion and examples of the pro-forma capitalization of R&D split between distant chapters? Throughout a single project, one would have to keep the book marked in several diffent places, not neccessarily in the order that one would have to deal with the questions if one were doing a valuation. The result is that this book is less easy to use as a practical guidebook than it could be, and will keep one busy in the index looking for where subjects are addressed.

This is nit-picking however. Professor Damodoran is to be congratulated for producing such a high quality and comprehensive text on valuation.

44 of 45 found the following review helpful:


Extremely Valuable Resource!  Mar 28, 2002 By Craig Matteson
This is one of the very best books I have used while working on an MBA. It will occupy a prominent place on my business resources bookshelf. What makes it so special is that it covers the field of investment valuation very broadly, but each topic is handled concisely and with clarity. The author also supplies a healthy amount of context and supporting information as well as the technical matters around valuation.

Another virtue is that it is laid out very well. If you are interested in a specific topic, for example valuing a company with negative earnings or a private company or even contracts for natural resources, it is easy to look up the specific information and study what is relevant to the task at hand.

Plus the author has a wonderful website with supporting spreadsheets and valuable information on companies that can help a great deal in thinking through the topics raised in the book.

If I could only have two or three books of all those I have used during my work at the University of Michigan Business School, this would be one of the keepers.

22 of 22 found the following review helpful:


Positives and Negatives  Feb 21, 2006 By guy on the west coast
This was a worthwhile purchase, but there are definitely some limitations with this book.

Positives - Damodaran has his very excellent web-site to complement this book. He does a very thorough job of breaking down the fundamental determinants of investments from both a DCF and relative valuation viewpoint. After reading this very long and detailed book, the reader should have a solid grasp of the theoretical underpinnings of valuation.

In terms of actual content, I think he does his best work in the chapters on relative valuation, fundamental growth projections, betas, risk, and the whole process of deriving cost of equity, cost of debt, and the WACC.

Negatives - There are quite a few, but it doesn't diminish from my overall recommendation to purchase this book. Among the most glaring issues:

- Calculation errors. This is my biggest gripe with the book. It is so mathematical and technically-oriented, and it is absolutely vital that the numbers are calculated properly. I can't tell you how many times Damodaran miscalculates his own examples. And even the answers to the problem sets that he posts on his web-site have some flagrant errors. This is simply UNACCEPTABLE because of the nature of this book.

- Expository style is meandering at times. I feel that a lot of the chapters could be shortened, and sometimes, it seems like the professor goes on a tangent for the sake of being overly thorough. Very rarely, there are a some key sentences that require re-reading; and after doing so, you think he could have written it a lot more simply. But maybe the topic itself is pretty complex, making his job more difficult. As an example, you have to get through four chapters to see how the Professor advocates translating the financial statements into free cash flows, and the chapters are spaced apart (a complaint some other reviewer here made as well).

- More theoretical than practical in some areas. For simplicity, many examples are primed on complex mathematical formulas and over-simplifying assumptions about growth rates, ROIC, and reinvestment rates. I think a practical valuation requires being more faithful to the actual data. In this area, I think the McKinsey does a better job and it is more detailed (and hence, more useful) about how to deal with specific items on the financial statements.

- Aggressive attempts to unify all valuation scenarios (Chapter 22 - 34) is more theoretical than practically useful. I agree that DCF is the foundation of a lot of valuation analyses, but the Real Estate chapter is a good example of going all the way with theory. Having done real estate valuations, I can't see any practitioner appreciating this chapter for anything more than its conceptual and theoretical arguments. From an actual real valuation standpoint, it's pretty limited and well... academic.

All in all, it's a great book, especially from a concepts and theoretical perspective. But that shouldn't be all surprising given that the professor is an academic himself.

13 of 13 found the following review helpful:


A very good modular and implementable guide  Apr 29, 2004 By Ganesh V Jois
This is a very good book for those who are familiar with valuation but want to delve deeper. The great thing about this book is that it is modular i.e. one can jump between chapters without loss of continuity.

It has a very practical treatment of real options which is to say that it helps you think about certain valuation situations in an Options framework rather than getting bogged down with the mathematics of the situation. It has a lot of worked examples and of particular interest are valuation examples relating to off-beat assets like a NYC Taxi Medallion! A decent treatment of valuation of real estate, professional practices (lawyers, doctors) etc. is also provided.

For those who like to think about conceptual issues, there is a very good treatment of estimation of betas, international cost of capital and other similar matters.

The only thing preventing me from giving this book 5 stars is a not-too-detailed treatment of the Market Approach and particularly adjustment of market multiples to reflect subject company parameters. Otherwise, a great book and definitely a must-have.

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