Getting from the value of a business to a fair value per share involves three adjustments that are often handled badly or skipped altogether. In this session, Prof Damodaran explains how to deal with distress, dilution and illiquidity.
- Distress: a going-concern DCF assumes the company survives, so the chance of failure needs to be considered explicitly
- Dilution: employee stock options and other equity claims reduce the value left for ordinary shareholders
- Illiquidity: why shares that cannot easily be sold are worth less, and how to think about a discount for lack of marketability (DLOM)
It pairs naturally with the Private Company Valuation session in this section, since illiquidity discounts are a key issue when valuing shareholdings in private companies, startups and family businesses.