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Value Creation and Enhancement: Back to the Future

72 Pages Posted: 7 Nov 2008  

Aswath Damodaran

New York University - Stern School of Business

Date Written: 1999


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.

Suggested Citation

Damodaran, Aswath, Value Creation and Enhancement: Back to the Future (1999). NYU Working Paper No. FIN-99-018. Available at SSRN:

Aswath Damodaran (Contact Author)

New York University - Stern School of Business ( email )

Stern School of Business
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New York, NY 10012-1126
United States
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