Applied Corporate Finance: A User's Manual - Third Edition
This web site is designed to support the second edition of "Applied Corporate Finance: A User's Manual". The publisher is John Wiley and Sons. You can navigate the site by either going to individual chapters and getting supporting material by chapter, or by going to the supporting material directly. The supporting material include:

  1. Chapter Outlines and overheads: These are saved as pdf files, and you need Adobe Acrobat to read them. You can download Adobe Acrobat by going to the Adobe site. (www.adobe.com) The overheads are categorized by topic, rather than chapter. To go to overheads, click here.
  2. Answers to Concept Questions : These are the answers to the concept checks in the chapters. The concept checks are categorized by chapter, and specify the concept check number in the chapter.
  3. Derivations and Discussion: These represent interesting questions that often come up in the context of the specified topic, with discussions and analyses.
  4. Readings: These are readings from business and academic publications that supplement the specific topic.
  5. Solutions: This portion of the site is accessible only to instructors, with a password. If you are reading the book on your own, you can email me at adamodar@stern.nyu.edu and I will supply you with the password.
  6. Illustrations: The excel spreadsheets and background numbers backing up every illustration in the book can be downloaded. You can use them to check where the numbers come from but also to change the inputs and examine how the output changes.
  7. Powerpoint Presentations: These are power point presentations that are designed for use by instructors. You will need the password to download these as well.
  8. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel format, and can be used on either a Mac or Windows system.
  9. Datasets: These are useful datasets to supplement each chapter. They generally include industry averages for key variables and represent updates on many of the tables in the book.
  10. Real Companies, Real Time: This is an example of the concepts in this chapter applied to a specific company.

You can read the preface to the book by clicking here. If you have the first edition of the book, go here; if you own the second, go here instead. If you are an instructor using this book, please click here.

You can pick the chapter that you would like to go to, to see illustrations, solutions and other supporting material.
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12

Or you can pick the material that you are interested in.
Spreadsheets Overheads Datasets References
Solutions Derivations and Discussion Live Case Study Powerpoint Presentations

Chapter 1: The Foundations
Overheads
Big Picture
Companies: Background
  1. Disney
  2. Deutsche Bank
  3. Aracruz Celulose
  4. Tata Chemicals
Companies: Annual Reports
  1. Disney
  2. Deutsche Bank
  3. Aracruz Celulose
  4. Tata Chemicals
Companies: Bloomberg Description
  1. Disney
  2. Deutsche Bank
  3. Aracruz Celulose
  4. Tata Chemicals

Chapter 2: The Objective
Overheads Download as pdf file
Illustrations

2.1: Assessing Disney’s Corporate Governance
2.2: Corporate Governance at Aracruz: Voting and Non-voting Shares
2.3: Corporate Governance at Deutsche Bank: Two Boards
2.4: Corporate Governance at Tata Chemicals: Family Group Companies
2.5: Interaction with financial markets – A Case Study with Disney
2.6: Assessing Social Costs: Disney, Aracruz, Deutsche Bank and Tata Chemicals
2.7: Restive Stockholders and Responsive Managers: The Disney Case

Answers to Concept Questions 2.1 - 2.10
Data Sets
  1. CEO Compensation
  2. Inside versus Outside Directors
  3. Corporate Governance Scores
Spreadsheets
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. What is the difference between stock price maximization, firm value maximization and stockholder wealth maximization?
  2. What is the objective function in corporate finance for a private firm?
  3. What is the objective function for a non-profit organization?
  4. Are markets short term?
  5. What is the German/Japanese alternative to stockholder wealth maximization and does it work?
Readings
  1. Stop whining about Wall Street
  2. Bull Market Charges Ahead, lead by Activist Investors
  3. The Civilized Hostile Takeover
    For more readings, click here.
Live Case Study Analyzing a Company's Corporate Governance Structure

Chapter 3: The Basics of Risk
Overheads Download as pdf file
Illustrations 3.1: Calculation of standard deviation using historical returns: Disney
3.2: Variance of a portfolio: Disney and Aracruz
3.3: Identifying the Marginal Investor
Answers to Concept Questions 3.1 - 3.6
Data Sets

Standard deviations of stock prices and firm value - by sector
Interest Coverage Ratios, Ratings and Default Spreads

Spreadsheets
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. A Derivation of the Capital Asset Pricing Model
  2. Variants of the Capital Asset Pricing Model
  3. Testing the CAPM: Issues and Discussion
  4. More on the Arbitrage Pricing Model
  5. Estimating the Macro Economic Factors in a Multi-Factor Model
  6. Building a Regression Model
  7. Why not use bond betas to arrive at the cost of debt?
  8. Credit Scores as Alternatives to Bond Ratings
Readings
  1. Operating Risk as a Measure of Risk
  2. Market Risk and Time Horizon
  3. Investors must recall risk
    For more readings, click here.
Live Case Study Analyzing a Firm's Stockholders

Chapter 4: Risk Measurement and Hurdle Rates
Overheads Download as pdf file
Illustrations

4.1: Estimating Riskfree Rates
4.2: Estimating Equity Risk Premiums
4.3: Estimating CAPM risk parameters for Disney and diagnostics
4.4: Regression Beta Diagnostics for Aracruz, Tata Chemicals and Deutsche Bank
4.5: Measuring Operating Leverage for Disney Corporation
4.6:  Effects of Financial Leverage on betas: Disney
4.7: Bottom Up Beta for Disney
4.8: Bottom-up Beta for Bookscape Books
4.9: Bottom up Beta for Aracruz and Tata Chemicals
4.10: Bottom Up Beta for Deutsche Bank
4.11: Beta of a Firm After an Acquisition: Disney / Capital Cities
4.12: Estimating Accounting Betas –– Bookscape Books
4.13: Estimating the Cost of Equity: Disney, Aracruz, Tata Chemicals, Deutsche Bank, Bookscape
4.14: Estimating the Cost of Debt. and synthetic ratings for Aracruz, Disney, Tata and Bookscape.
4.15: Calculating the Cost Of Preferred Stock: Disney and Deutsche Bank
4.16: Breaking down a convertible bond into debt and equity components: Disney
4.17: Market value and book value debt ratios
4.18: Estimating Cost of Capital: Disney, Aracruz, Tata Chemicals, Deutsche Bank, Bookscape

Answers to Concept Questions 4.1 - 4.11
Data Sets
  1. Historical Returns on Stocks, Bonds and Bills: United States
  2. Country Ratings, Country Spreads and Equity Premiums
  3. Implied Premiums for the United States: 1960 - Present
  4. Unlevered and Levered Betas by Industry Group: United States
  5. Historical Earnings Changes per Year: S&P 500
Spreadsheets
  1. Estimating Implied Equity Premium in a Market
  2. Estimating CAPM parameters for a firm
  3. Unlevering and Levering Betas
  4. Estimating Synthetic rating for a firm
  5. Cost of Capital Estimation
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion Riskfree Rate
  1. Estimating the riskfree rate when the government is not default free
  2. Real versus Nominal Riskfree Rates

Risk Premium

  1. Geometric versus Arithmetic Risk Premiums: Which is better?
  2. The Mechanics of Implied Equity Premiums
  3. Estimating equity risk premium for an emerging market or a market with limited history?

Beta

  1. Setting Regression Parameters for Beta Estimates: How far back? Daily, weekly or monthly data?
  2. Why do beta estimates vary across services?
  3. What is the right market index to use?
  4. Historical Betas versus Expected Betas: Reversion and Financial Fundamentals
  5. Betas and Leverage: Derivation and Extensions
  6. Accounting Betas
  7. Estimating Bottom-up Betas

Cost of Debt

  1. What is debt?
  2. Which is a better estimate of the cost of debt - the rating-based interest rate or the yield to maturity on an issued bond?
  3. Estimating Synthetic Ratings

Weights

  1. Gross Debt or Net Debt
  2. Estimating market value of debt when debt is not traded
  3. Dealing with Operating Leases
  4. Estimating market value of equity
  5. Dealing with Preferred Stock
Readings
  1. Risk Premium in Emerging Markets
  2. Classic Rule of Risk Premium under Attack
  3. Are risk premiums too low? (Greenspan testimony)
    For more readings, click here.
Live Case Study Developing a Firm's Risk Profile

Chapter 5: Measuring Returns on Investments
Overheads Download as pdf file
Illustrations

5.1: Project Descriptions – Disney, Aracruz and Bookscape
5.2: Estimating hurdle rates for individual projects: Bookscape, Rio Disney, Tata acquisition
5.3: Dealing with Allocated Costs
5.4: Estimating Cash Flows for an On-line Book Ordering Service: Bookscape
5.5: Estimating Incremental Cash Flows:  Disney Theme Park
5.6: Estimating Cash Flows to Equity for a New Plant: Aracruz
5.7: Estimating Cash Flows from an Acquisition: Sensient Technologies
5.8: Estimating and Using Return on Capital in Decision Making: Disney and Bookscape
5.9: Estimating Return on Equity - Aracruz Cellulose
5.10: Estimating Payback for the Bookscape Online Service
5.11: NPV From The Firm’s Standpoint - Bookscape On-line
5.12: NPV From The Firm’s Standpoint - Disney’s Theme Park in Rio
5.13: NPV In R$- Disney’s Theme Park in Rio
5.14: NPV from the Equity Investors’ Standpoint- Paper Plant for Aracruz
5.15: Valuing a company for an acquisition: Sensient Technologies
5.16: NPV Calculation With Time-Varying Discount Rates
5.17: Estimating the IRR based on FCFF - Disney Theme Park in Rio
5.18: Estimating IRR Based Upon FCFE - Aracruz Cellulose
5.19: Multiple IRR Projects
5.20: Aracruz Paper Plant: Sensitivity Analysis and Breakeven
5.21: Rio Disney: Simulation

Answers to Concept Questions 5.1 - 5.13
Data Sets
  1. Operating Income and Cash Flows: By Sector
  2. EVA and Equity EVA: By Sector (Also has ROE and ROC by sector)
Spreadsheets
  1. Estimating Cash Flows to Firm and Return Diagnostics on Project
  2. Estimating Cash Flows to Equity and Return Diagnostics on Project
  3. Present Value Calculator
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. Working Capital, Net Working Capital and Non-Cash Working Capital
  2. Operating versus Capital Expenditures
  3. Depreciation, Amortization and Other Non-cash Charges
  4. Capital Expenditures and Depreciation
  5. ROC, Cost of Capital, NPV and EVA
  6. ROE, Cost of Equity and Equity EVA
  7. Equity Analysis versus Firm Analysis
  8. Currency Effects on Investment Analysis
  9. Real versus Nominal Investment Analysis
  10. Net Present Value, IRR or Modified IRR
  11. Corporate Strategy and Project Quality
Readings
  1. Measuring Earnings
  2. The Content of an Annual Report
  3. EVA as elixir
    For more readings, click here
Live Case Study Measuring a Firm's Investment Returns

Chapter 6: Estimating Side Costs and Benefits
Overheads Download as pdf file
Illustrations

6.1: Using the profitability Index to Select Projects
6.2: Project Replication to compare projects with different lives
6.3: Equivalent Annuities To Choose Between Projects With Different Lives
6.4: Using Equivalent Annuities as a General Approach for Multiple Projects
6.5: Analyzing a Replacement Decision
6.6: Estimating the Opportunity Cost for a Resource with a Current Alternative Use
6.7: Cash Flow Synergies with Existing Projects
6.8: Valuing Synergy in a Merger
6.9: Valuing a patent
6.10: Valuing an Option to Expand: Disney Entertainment
6.11: Valuing Disney’s option to abandon: A Real Estate Investment
6.12: Disney's California Adventure: Terminate, Continue or Expand?
6.13: Estimating CFROI for Tata Chemicals
6.14: Evaluating Current Investments
6.15: Excess Returns and Competitive Advantages

Answers to Concept Questions 6.1 - 6.11
Data Sets
  1. Variances in Firm Value: By Sector
Spreadsheets
  1. Valuing the Option to Delay
  2. Valuing the Option to Expand
  3. Valuing the Option to Abandon
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. What is the cost of using excess capacity?
  2. How should we treat product cannibalization in capital budgeting?
  3. When is the option to delay a project a valuable option?
  4. When is the option to expand a project a valuable option?
  5. The Right Option Pricing Model to Use in Valuing Real Options
  6. Are strategic considerations valuable options?
Readings
  1. Synergy in Mergers
  2. Making real options real
  3. Literature on real options in venture capital and R&D
  4. Real Options and Business Strategy
  5. How much is flexibility worth

For more readings, click here.

Live Case Study

Chapter 7: Capital Structure: An Overview of the Financing Decisions
Overheads Download as pdf file
Illustrations 7.1: Financing Choices in 2008 – Disney, Tata Chemicals and Aracruz
7.2: The Initial Public Offering for United Parcel Service
7.3:  Valuing a Rights Offering –– Tech Temp Inc.
7.4: Evaluating the Debt Trade off – Disney, Aracruz and Bookscape
Answers to Concept Questions 7.1-7.16
Data Sets
  1. Debt Ratios and Fundamentals by Industry
  2. Book and Market Debt Ratios By Industry
Spreadsheets
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. A Simple Test of Debt
  2. The Treatment of Hybrid Securities
  3. The Treatment of Warrants and Convertibles
  4. Valuing Flexibility
  5. Dilution as a Bogey
Readings
  1. Miller-Modigliani - Forty years later...

For more readings, click here.

Live Case Study The Financing Choices

Chapter 8: Capital Structure: Model and Applications
Overheads Download as pdf file
Illustrations

8.1: Estimating Debt Capacity Based Upon Operating Income Distribution: Disney
8.2: Analyzing the Capital Structure for Disney: May 2009 and with debt betas
8.3: Sensitivity Analysis on Disney’s Optimal Debt Ratio
8.4: Disney - Enhanced Cost of Capital Approach
8.5: Applying the Cost of Capital Approach with Normalized Operating Income to Aracruz Cellulose
8.6: Applying the Cost of Capital Approach to Tata Chemicals

8.7: Applying the Cost of Capital Approach to a Private Firm: Bookscape
8.8: Deutsche Bank's Capital Mix
8.9: Using the Adjusted Present Value Approach to calculate Optimal Debt Ratio for Disney in 2004
8.10: Estimating Disney’s debt ratio using the cross sectional approach

Answers to Concept Questions 8.1-8.7
Data Sets
  1. Cross Sectional Debt Ratio Regression for the US
  2. Cross Sectional Debt Ratio Regression for Europe
  3. Cross Sectional Debt Ratio Regresssion for Emerging markets)
Spreadsheets
  1. Optimal Capital Structure with WACC (Operating Income held constant)
  2. Enhanced Capital Stucture with WACC (Operating Income allowed to vary)
  3. Optimal Capital Structure with APV
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. Extensions on the WACC Approach
  2. Building in Constraints
  3. Applying Cost of Capital Approach to Financial Service Firms
  4. Normalizing Earnings: Some Simple Approaches
  5. Getting Inputs for Present Value Approach
  6. Minimizing WACC versus Adjusted Present Value Approaches
  7. Building a Cross-Sectional Regression
Readings
Live Case Study Analyzing a Firm's Optimal Debt Ratio

Chapter 9: Capital Structure: The Financing Details
Overheads Download as pdf file
Illustrations

9.1: Debt Capacity and Takeovers
9.2: Increasing financial leverage quickly: Nichols Research
9.3: Decreasing financial leverage quickly: Aracruz
9.4: Charting a Framework for Increasing Leverage: Disney
9.5: Decreasing Leverage gradually: Tata Chemicals
9.6: Calculating Duration for Disney Theme Park
9.7: Coming Up With The Financing Details: Disney with regression details
9.8: Estimating the Right Financing Mix for Bookscape, Aracruz, Tata Chemicals and Deutsche Bank

Answers to Concept Questions 9.1-9.10
Data Sets
  1. Macro Economic Data: Historical
  2. Sensitivity to Macro-economic Variables: By Industry
Spreadsheets
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. Determinants of whether a firm is a takeover target
  2. Determinants of whether a firm is under risk of bankruptcy
  3. Determinants of project quality
  4. Duration: Traditional Measure versus Regression
  5. Simple versus Multi-variate regression
Readings
  1. Stock Buybacks are not always good news
  2. Catastrophe Bonds
  3. Mismatching Financing: The Indonesian Experience
    For more readings, click here.
Live Case Study Developing a Firm's Financial Details

Chapter 10: The Determinants of Dividend Policy
Overheads Download as pdf file
Illustrations 10.1: Dividends, Dividend Yields and Payout Ratios
Answers to Concept Questions 10.1-10.10
Data Sets
  1. Dividends and Earnings: S&P 500
  2. Dividend Yield and Payout Ratio: By Sector
Spreadsheets
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. Dividends versus Stock Buybacks: The Determinants
  2. Spin-offs, Split-offs and Divestitures: The Determinants
  3. Stock Dividends and Stock Splits
For more readings, click here.
Readings
Live Case Study Analyzing a Firm's Dividend Trade Offs

Chapter 11: A Framework for Analyzing Dividend Policy
Overheads Download as pdf file
Illustrations 11.1: Dividends and Stock Buybacks: Disney, Aracruz, Tata Chemicals and Deutsche Bank
11.2: Estimating Free Cash Flows to Equity – Disney, Aracruz, Tata Chemicals and Deutsche Bank
11.3: Comparing Dividend Payout Ratios to FCFE Payout Ratios: Disney, Tata Chemicals and Aracruz
11.4: Evaluating Project Quality at Disney, Tata Chemicals and Aracruz
11.5: Analyzing the Dividend Policy of Disney, Tata Chemicals and Aracruz and Deutsche Bank.
11.6: Analyzing Dividend Payout : Disney and Deutsche Bank
11.7: Analyzing Dividend Payout Using The Cross Sectional Regrssion
Answers to Concept Questions 11.1-11.7
Data Sets
  1. Dividend Policy and Fundamentals: By Sector
  2. Dividend Payout and FCFE Payout: By Sector
  3. Firms with poor projects, low dividends
  4. Firms with good project, low dividends
  5. Firms with poor projects, high dividends
  6. Firms with good projects, high dividends
  7. Cross-Sectional Dividend Regression
Spreadsheets
  1. FCFE versus Dividends: Historical Analysis
  2. Assessing Project Quality
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. An Intuitive Explanation of FCFE
  2. Estimating FCFE for a financial service firm
  3. Analyzing Project Quality for a Firm
Readings
  1. Stock Buybacks: Out of Control?
  2. BP's dividend/buyback strategy
  3. Buybacks in Europe: A Trend

For more readings, click here.

Live Case Study Analyzing Dividend Policy

Chapter 12: Basics of Valuation
Overheads Download as pdf file
Illustrations

12.1: Length of High Growth Period
12.2: Growth in Earnings per share: Deutsche Bank in early '08
12.3: Valuing equity using the Dividend Discount Model: Deutsche Bank in January 2008
12.4: Valuing Equity in unsettled times: Deutsche Bank in 2009
12.5: Estimating Growth Rate in Net Income
12.6: FCFE Valuation: Tata Chemicals
12.7: Estimating Growth Rate in Operating Income - Disney
12.8: Cost of capital - Disney
12.9: Stable Growth Inputs and Transition Period - Disney
12.10: Value of Non-Operating Assets at Disney
12.11: Value of Equity Options
12.12: FCFF Valuation: Disney
12.13: Valuing a Private Business: Bookscape
12.14: Value Enhancement at Disney
12.15: Comparing PE ratios and growth rates across firms: Entertainment companies
12.16: Price to Book Value Ratios and Return on Equity: European Banks
12.17: Applying Market Regression to Estimate Multiples - Disney
12.18: Valuing Equity as an Option
12.19: Firm Value and Equity Value
12.20: Equity Value and Volatility
12.21: Probabilities of Default and Default Spreads
12.22: Valuing Equity as an Option- Aracruz (with firm valuation)

Answers to Concept Questions 12.1-12.12
Data Sets
  1. Fundamental Growth Rate in EPS: By Sector
  2. Fundamental Growth Rate in EBIT: By Sector
  3. Net Capital Expenditure Ratios: By Sector
  4. Working Capital: By Sector
  5. PE, PEG and Fundamentals: By Sector
  6. PBV, ROE and Fundamentals: By Sector
  7. PS, Net Margin and Fundamentals: By Sector
  8. Value/EBITDA: By Sector
Spreadsheets
  1. Model Chooser: Helps choose the right model for a firm
  2. Stable Growth DDM
  3. Two Stage DDM
  4. Three Stage DDM
  5. Stable Growth FCFE Model
  6. Two Stage FCFE
  7. Three Stage FCFE
  8. Stable Growth FCFF
  9. Two Stage FCFF
  10. Three Stage FCFF
  11. Capital Expenditure Estimator
  12. Estimating Equity Multiples
  13. Estimating Firm Value Multiples
Problems and Solutions Download the problems and solutions
Derivations, In-Practice Questions and Discussion
  1. How do you choose between firm and equity valuation?
  2. How do you estimate an expected growth rate?
  3. How do you estimate how long expected growth will last?
  4. What is terminal value and how is it estimated?
  5. What is a stable growth rate and why can it not be greater than the discount rate?
  6. What is an exit multiple andhow is it used in DCF valuation?
  7. What are the most common errors in dividend discount model valuation?
  8. What are the most common errors in FCFE/FCFF model valuation?
  9. How do you value a firm that is losing money?
  10. How do you value a financial service firm?
  11. How do you value a private firm?
Readings
  1. Estimating Earnings Growth
  2. Top-down versus Bottom-up Growth
  3. Revamping the Earnings Statement
    For more readings, click here.
Live Case Study Valuing a Firm

Spreadsheets
Risk Analysis
  1. Estimating Implied Equity Premium in a Market
  2. Estimating CAPM parameters for a firm
  3. Unlevering and Levering Betas
  4. Estimating Synthetic rating for a firm
  5. Cost of Capital Estimation
Return Estimation
  1. Estimating Cash Flows to Firm and Return Diagnostics on Project
  2. Estimating Cash Flows to Equity and Return Diagnostics on Project
  3. Present Value Calculator
  4. Valuing the Option to Delay
  5. Valuing the Option to Expand
  6. Valuing the Option to Abandon
Capital Structure
  1. Optimal Capital Structure with WACC (Operating Income held constant)
  2. Optimal Capital Stucture with WACC (Operating Income allowed to vary)
  3. Optimal Capital Structure with APV
Dividend Policy
  1. Analyzing Dividend Policy (looking at FCFE and Project Choice)
Valuation
  1. Model Chooser: Helps choose the right model for a firm
  2. Stable Growth DDM
  3. Two Stage DDM
  4. Three Stage DDM
  5. Stable Growth FCFE Model
  6. Two Stage FCFE
  7. Three Stage FCFE
  8. Stable Growth FCFF
  9. Two Stage FCFF
  10. Three Stage FCFF
  11. Capital Expenditure Estimator
  12. Estimating Equity Multiples
  13. Estimating Firm Value Multiples

Overheads
The Big Picture
The Objective of the Firm
Models for Risk and Return
Estimating Hurdle Rates
Measuring Returns on Investments
Capital Structure: The Choices
The Optimal Financing Mix
Designing Debt
Dividend Policy: Theory
Dividend Assessment
Valuation

Solutions
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6
Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12

Derivations and Discussion
General The Objective of the Firm Basics of Risk Appplying Risk and Return Models Measuring Returns Side Costs, Benefits and Options in Projects
Choices in Financing The Optimal Debt Ratio Moving to the Optimal Dividend Policy: Trade Offs Dividend Analysis Valuation