1999
Aswath Damodaran
ABSTRACT
In recent years, firms have turned to their attention increasingly to ways in which they can increase their value.
A number of competing measures, each with claims to being the "best" approach to value creation, have
been developed and marketed by investment banking firms and consulting firms. In this paper, we begin with a generic
discounted cash flow model, and consider the ways in which value can be created or destroyed in a firm. We then
look at two of the most widely used value enhancement measures, Economic Value Added and Cash Flow Return on Investment,
and consider where these approaches yield similar
results to those obtained from traditional valuation models, and where (and why) there might be differences. In
conclusion, we show that there is little that is new or unique in these competing measures, and while they might
be simpler than traditional discounted cash flow valuation, the simplicity comes at a cost that is substantial
for high growth firms with shifting risk profiles.
Damodaran: (212) 998-0349 adamodar@stern.nyu.edu
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