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The Email Chronicles of Corporate Finance: Spring 2014

I confess. I send out a lot of emails and I am sure that you don't read some of them. Since they sometimes contain important information as well as clues to my thinking (deranged though it might be), I will try to put all of the emails into this file. They are in chronological order, starting with the earliest one. So, scroll down to your desired email and read on...

Date Email sent out

Happy new year! I hope you have have a wonderful break and that you will come back tanned, rested and ready to go.... This is the first of many, many emails that you will get for me. You can view that either as a promise or a threat...

I am delighted that you have decided to take the corporate finance class this spring with me and especially so if you are not a finance major and have never worked in finance. I am an evangelist when it comes to the importance of corporate finance and I will try very hard to convert you to my faith. I also know that some of you may be worried about the class and the tool set that you will bring to it. I cannot alleviate all your fears now, but here are a few things that you can do to get an early jump:
a. Get a financial calculator and do not throw away the manual.
b. The only prior knowledge that I will draw on will be in basic accounting, statistics and present value. If you feel insecure about any of these areas, I have short primers on my web site that you can download by going to
c. If you are taking the Foundations in Finance class simultaneously, don't panic. There will be 150 others in the same position and you will not be at any special disadvantage.
And trust me... We will get through this together...

Having got these thoughts out of the way, let me get down to business. You can find out all you need to know about the class (for the moment) by going to the web site for the class:

The syllabus has been updated and you will be getting a hard copy of it on the first day of class but the quiz dates are specified online. If you click on the calendar link, you will be taken to a Google calendar of everything related to this class.
You will note references to a project which will be consuming your lives for the next four months. This project will essentially require you to do a full corporate financial analysis of a company. While there is nothing you need to do at the moment for the project, you can start thinking about a company you would like to analyze and a group that you want to be part of.

I don't use Blackboard but I have been using a site developed by Lore, a young education company, that does everything that Blackboard does with a Facebook interface. You can see the site by going to
You will shortly be getting an invite to join in the site with a code. Please do accept the invitation. Once you log in, the site will remember you and you will automatically be put into the course page. In fact, feel free to post in the stream page well before class starts.

I will also be posting the contents of the site (webcasts, lectures, posts) on iTunes U. If you have never used it, here is what you need: an Apple device (iPhone or iPad), the iTunes U app on the device and you need to link to the link below:
Like all things Apple, the set up iis very well done and it is neat, being able to catch up on a lecture you missed on your iPad, while browsing through the lecture notes on it too.

Now for the material for the class. The lecture notes for the class are available as a pdf file that you can download and print. I have both a standard version (one slide per page) and an environmentally friendly version (two slides per page) to download. You can also save paper entirely and download the file to your iPad or Kindle. Make your choice.
If you prefer a copied package, the first part (of two) should be in the bookstore next week.

There is a book for the class, Applied Corporate Finance, but please make sure that you get the third edition. You can buy it at Amazon.com or the NYU bookstore
While I have no qualms about wasting your money, I know that some of you are budget constrained (a nice way of saying "poor") . If you really, really cannot afford the book, you should be able to live without it. I can even lend you a copy around quiz weeks. Before you jump in and buy this book, though, I do have one more thing to add. I am just finishing the fourth edition of the book and should be done by the middle of next week. I plan to post the pdf version of the book. (Link will come next week) Bad news: as a beta version, there will be bugs (typos, mistakes) aplenty. Good news: it will be free. If you are willing to live with the mistakes, you are welcome to use this version instead on one condition: that you let me know about any mistakes you find.

One final point. I know that the last few years have led you to question the reach of finance (and your own career paths). I must confess that I have gone through my own share of soul searching, trying to make sense of what is going on. I will try to incorporate what I think the lessons learned, unlearned and relearned over this period are for corporate finance. There are assumptions that we have made for decades that need to be challenged and foundations that have to be reinforced. In other words, the time for cookbook and me-too finance (which is what too many firms, investment banks and consultants have indulged in) is over.

That is about it. I am looking forward to this class. It has always been my favorite class to teach (though I love teaching valuation) and I would like to make it the best class you have ever taken... I know that this is going to be tough to pull off but I will really try. I hope to see you in a little less than ten days in class. Until next time!

1/31/14 As the long winter break winds down, I hope you are ready to get started on classes. I also hope you got my really long email last weekend. If you did not, you can find it here:
This one, hopefully, will not be as long and has only a few items
1. Website: In case you completely missed this part of the last email, all of the material for the class (as well as the class calendar) is on the website for the class:
Please do try to download the first lecture note packet by Monday.
2. Lore: I sent out an invitation for you to join the class on Lore. (http://www.lore.com) Many of you have accepted the invitation and I thank you. If you have not, please do accept the invitation. If you have absolutely no idea what I am talking about, please send me an email and I will send you a private invitation.
3. Pre-class prep: Are you kidding me? What kind of twisted mind comes up with a pre-class prep for the very first class. Just relax, have fun this weekend and try to be in class. If you cannot make it, never fear. The webcast for the class will be up a little while after the class, but it just won't be the same as being there in person.
For those of you who have not got around to checking, class is scheduled from 10.30-11.50 in Paulson Auditorium. See you there! Until next time!

I promised you with a ton of emails and I always deliver on my promises... Here is the first of many, many missives that you will receive for me.....

First, a quick review of what we did in today's class. I laid out the structure for the class and an agenda of what I hope to accomplish during the next 15 weeks. In addition to describing the logistical details, I presented my view that corporate finance is the ultimate big picture class because everything falls under its purview. The “big picture” of corporate finance covers the three basic decisions that every business has to make: how to allocate scarce funds across competing uses (the investment decision), how to raise funds to finance these investments (the financing decision) and how much cash to take out of the business (the dividend decision). The singular objective in corporate finance is to maximize the value of the business to its owners. This big picture was then used to emphasize five themes: that corporate finance is common sense, that it is focused, that the focus shifts over the life cycle, that it is universal and that violating first principles will exact a cost, no matter who does it.

On to housekeeping details:
1. Please find a group as soon as you can: In picking the group, try to keep the following in mind. Find people you like/trust/can get along with/ will not kill before the end of the semester. The group should be at least 4 and can be up to 8 (if you can handle the logistics). Each person has to pick a company. This group will do both the case and the project.

2. Get started on picking companies: Avoid money losing companies, financial service firms and firms with capital arms like GE and GM. Once you have your group nailed down, let me know the names of the people in your group and, if possible, the companies you have picked. In picking a company, pick a theme that is fairly broad and pick companies that match this. Thus, if your theme is entertainment, you can analyze Sony, Time Warner, Netflix and even Apple. I would encourage getting diverse companies in your group - large and small, focused and diversified, and non-US companies. (In other words, you don't want five companies that are carbon copies of each other. There is little that you will find interesting to say about differences across companies, if there are none)

3. Once you pick your company, you can start collecting the data. You should begin by accessing basic data on your company. I would begin with the old standard, the company's annual report, which you should be able to get off the company's website. If you have a non-US company, you should be able to find an English version of the annual report on most company sites. If not, you better be able to read Portuguese or Spanish. You can also get the latest filings (10K and 10Q) for US companies off the SEC website:

You can get good summary sheets from the Bloomberg terminals (there is one on the second floor in the reading room and there should be one downstairs in the computer room) and if you have never used a Bloomberg before, it can be daunting.... Once you find your company under Equities (and it can take a little searching), print off the following for your company: HDS, BETA, DES (all 4 pages). If you have no idea what I am talking about, just hold on until the end of the week and I will have something more for you to go on.

4. Board of Directors: If you do pick a company by Wednesday, use the annual report or 10K can get a listing of the board of directors for your company. It will dovetail nicely into our discussion for Wednesday. If you can find a mission statement for the company (on its website, from the annual report), that would be even better.

5. Webcasts for the class: The webcasts should be up a few hours after the clas ends. Please use the webcasts as a back-up, in case you cannot make it to class or have to review something that you did not get during class, rather than as replacement for coming to class. I would really, really like to see you in class. The web cast for the first class is not up yet, but it should be soon. When it is, you should be able to find it at
Try it out and let me know what you think. I have been told that it come through best if you have a 50 inch flat panel TV and surround sound. You will also find the syllabus and project description in pdf format to download and print on this page. The lecture note packet is also on this page.

6. Drop by: I know this is a large class but I would really like to meet you at some point in time personally. So, drop by when you get chance... I don't bite....

7. Lecture note packet 1: Please bring the first lecture note packet to class on Wednesday. You can buy it at the bookstore, if you have money to spare, or download it online.

8. Past emails: If you have registered late for this class and did not get the previous emails, you can see all past emails under email chronicles
on my web site

9. Lore stragglers: If you have not registered on Lore for the course, you will need a entry code. Please email me and I will send you the code.

10. Announcements: If you plan to make announcements in this class (and it may be way too early for this), there is a shared Google spreadsheet for sign-ups, since there will be only one announcement at the start of every class.

11. Post class test & solution: As promised in class, I will be sending out a post class test and solution for each class. I am attaching the ones for today's class.

Attachments: Post-class test and solution


Technology is wonderful until it does not work the way it should. That seems to be the case with the webcasts of yesterday's classes. The first attempts at processing the class failed. That is the bad news, but the tech people tell me that the raw files are still there and that they will reprocess them today. I will take them at their word and keep you posted.

While you wait for those webcasts, here is the first weekly puzzle. You probably saw the headlines today: Satya Nadella is Microsoft's new CEO. Since we are going to start looking at corporate governance tomorrow, I thought that this would make a good case study to get us into the topic. Here is the link:
It has more links within it, and a set of questions at the end. There is no grade attached to this and it is purely optional. There is not even a right or a wrong answer. It is just to get finance brain moving. And who knows? You may have the answers to Microsoft's decade long funk.


In today's (compressed) class, we started on what the objective in running a business should be. While corporate finance states it to be maximizing firm value, it is often practiced as maximizing stock price. To make the world safe for stock price maximization, we do have to make key assumptions: that managers act in the best interests of stockholders, that lenders are fully protected, that information flows to rational investors and that there are no social costs. We then looked at what can go wrong, by starting on the manager-stockholder linkage. The two mechanisms that stockholders can use to keep control of managers, the annual meeting and board of directors, are flawed and often ineffective.

1. Other People's Money: Just a few added notes relating to the class that I want to bring to your attention. The first is the movie Other People's Money, which I mentioned as a favorite. You can find out more about the movie here:
But I found the best part on YouTube. It is Danny DeVito's "Larry the Liquidator" speech:
Watch it when you get a chance. Not only is it entertaining but it is a learning experience (though I am not sure what you learn). Incidentally, it is much, much better than Michael Douglas's "Greed is good" speech in the first "Wall Street " which was a blatant rip-off of Ivan Boesky's graduation address to the UC Berkeley MBAs in 1986 (which I happened to be at, since I was teaching there that year).

2. DisneyWar: I will start the next class by talking about the dysfunctional actions taken by Disney during the 1990s. If you want to review these on your own, try this book written by James Stewart. It is in paperback, on Amazon:
If you are budget-constrained, you can borrow my copy and return in when you are done. (I have only one copy. First come, first served)

3. Company Choice: On the question of picking companies for your group, some (unsolicited) advice:
(1) Define your theme broadly: In other words, don't pick five money-losing airlines as your group. Pick Continental Airlines, Southwest, Singapore Airlines, Travelocity and Embraer.... Three very different airline firms, a travel service and a company that supplies aircraft to the airlines.
(2) Do not worry about making a mistake: If you pick a company that you regret picking later, you can go back and change your pick.... If you do it in the first 5 weeks, it will not be the end of the world.
(3) If you are leery about picking a foreign company, pick one that has ADRs listed in the US. It will make your life a little easier. You should still use the information related to the local listing (rather than the ADR).
(4) If you want to sound me out on your picks, go ahead. I have to tell you up front that I think that there is some aspect that will be interesting no matter what company you pick. So, do not avoid a company simply because it pays no dividends or has no debt.
(5) If you want to kill two birds with one stone, pick a company that you already own stock in or plan to work for or with .....
As a final reminder. Please pick your company soon... As you can see from yesterdayy's class, we are getting started on assessing your company...

4. Once you have picked your company, start by assessing the board of directors (and making judgments on how effective or ineffective it is likely to be). To help in this process, I have posted the original article in 1997 that covered the best and the worst boards as well as a more recent article detailing what Business Week looks at in assessing boards under corporate finance readings:
In fact, if you suffer from insomnia, read the Sarbanes-Oxley law, which I have also posted up there.. It will put you to sleep.

There are a number of interesting sites that keep track of directors and their workings. I have listed a few below:
http://corpgov.net/: This is a general site listing corporate governance issues and links
http://www.ecgi.org/ : Covers corporate governance in Europe
ISS (Institutional Shareholder Services) also measures corporate governance for many US companies with a corporate governance score. You can find out more by going to their site:
Finally, if you have used Capital IQ (and you have access to it, you can download all kinds of stuff on your company's corporate governance structure). I will be putting a webcast online on Friday on how to use Capital IQ to best effect to evaluate corporate governance.

You can find out more about your company by going to the SEC site (http://www.sec.gov) and looking up the 14-DEF for your US-based company.. You may not be able to find a 14-DEF (or its equivalent) for a foreign company, but the difficulty of finding this information may be more revealing than any information that you may have unearthed. On that mysterious note, until next time...

Attachments: Post-class test and solution


As I mentioned in class, today is project update day. Since it is the first week, your tasks are fairly minimal. You just need to find a group and if you can pick a company, great. If you have picked a company, and can find out who is on the board of directors, you are way ahead of the game.
1. Group picking: I know that most of you have found groups but that a few (especially non MBA1s) feel left out. If you are sociable, you may still be able to find a group, but if you find yourself on the outs, let me know. I have created an orphan list on Google that you can put your name down on and groups that are looking for more people can find you easily. You can also reach out to other orphans on the list and create your own orphan group (I know that sounds pathetic but it is really not too bad). Here is the link to the shared orphan spreadsheet:
2. Company picking: Just pick a company, even if you don't feel sure about whether it is the company for you. Then, visit the company's website and print off the most recent annual report. It should have a listing of who sits on the board for your company. If you can do that, you are doing well.

Don't be afraid of picking young companies or emerging market companies. You will learn a lot from doing them.

Finally, this has been a disastrous week for webcasts and I apologize. If you missed yesterday's class, the webcast links are up on the webcast page for the class:
When you open the webcast, don't panic if you see darkness and hear nothing. The webcast started recording before we even got into the class. Just fast forward the slider until the class starts and it should be okay. I will keep working on the tech end of this to make this work better by next week, but for the moment, this is it. I am working on getting the first session posted as soon as I can.

2/7/14 As you get ready to enjoy your weekend, a few notes for today:
1. Lecture note packets: The bookstore now has lecture note packet 1, if you are interested in buying it. The download for free on to your iPad or print if off some sucker's printer options are always available. You can get the packet by clicking on the link below:
2. Post-class tests: I posted post-class tests for both of this week's sessions and will continue to do so for all of the coming ones. If you have already worked through them, thank you. If not, just browse through them quickly to make sure that there are no loose ends. You will find them on the webcast page for the class (http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr14.htm), the Lore page for the class and on iTunes U. Take your pick.
3. Orphans: I am getting straggling emails from some of you about your sad plight as orphans. The orphan page can be found here for both listing and adoption:
4. Webcast of the week: I mentioned that I would do short in-practice webcasts each week. This week's webcast is up and ready to watch. It looks at ways to assess the corporate governance at your company, using HP from 2013 as an example. I use HP's annual report, its filings with the SEC and other public information to make my assessment of the company. You can find it in all three forums (webcast page, Lore, iTunes U) and it looks at what information to use and how to use it to assess the corporate governance structure of a company. Let me know if there are "production quality" issues and I know.. I know.. That striped sweater is not camera-ready, but I forgot... Sorry!
5. Corporate finance email chronicles: I have updated the email chronicles page to reflect all the emails sent out in this class:
If you joined the class late, have short term memory loss or are nostalgic for emails from days gone by, click on the link.
6. Weekly puzzle posting: I posted the first weekly puzzle of the week (Microsoft's choice of CEO). If you did or do get a chance to look at it, and have your answers to the questions that I posed, you can go to the discussion board on lore and post your views (with links, if you so desire). You have to be registered in the Lore version of the class to do this. Most of you are, but if you are not, go to http://www.lore.com and type in DPM7NY.

I hope that you have a relaxed weekend planned (since this may be one of your last easy weekends for a while). The newsletter for the week is attached. If you get a chance to browse through it, you will quickly realize that it is more of a GPS for the class than a newsletter, a marker of where we are in the class and where we plan to go.

Attachment: Newsletter #1


Before I start on the preview of next week's classes, a couple of quick reminders. First, please remember to download, print off or buy lecture note packet 1 before tomorrow's class. Second, if you are still groupless, please visit the orphan page and put your name down.
If you are in a group and would like to add someone, please visit that page as well.
Looking ahead to next week, we will spend tomorrow's session by continuing to explore the dark side of "stock price maximization". We will begin by completing our assessment of where the power lies in your company, using both the board of directors and the stockholder holding structure to answer that question. If you want to make the assessment on your company in real time, here is what you can bring to class: the board of directors and the top 17 stockholders in your company. While you can find the latter on Yahoo! Finance, you will get a much better listing, if you can get onto a Bloomberg terminal at school. Once you find your company under Equities, print off the following for your company: HDS, BETA, DES (all 4 pages). If you have never used a Bloomberg terminal before, here is a guide that I put together on using Bloomberg:
We will then move on to all the ways that lenders can be exploited by companies and moving on the market's many perceived or real shortcomings. We will also look at the delicate balance between private and public interest, or what has now become CSR (Corporate Social Responsibility) and draw out the chasm between words and practice. We will then turn to alternatives to stock price maximization, an alternate corporate governance system or a different objective, and examine the pluses and minuses. By Wednesday's class, we hopefully will be able to come some degree of consensus on what the objective should be. It is possible that we will take the first steps on defining and measuring risk. It will be time for the "meat and potatoes" portion of the corporate finance meal. In the meantime, if you want to start reading chapters 1 and 2 of the book, it should supplement what we are doing in class. See you in class tomorrow! Until next time!


Today's class extended the discussion of everything that can wrong in the real world. Lenders, left unprotected, will be exploited. Information can be noisy and markets can be irrational. Social costs can be large. Relating back to class, I have a couple of items on the agenda and neither requires extensive reading or research. I would like you to think about market efficiency without any preconceptions. You may believe that markets are short term, volatile and over react, but I would like you to consider the basis of these beliefs. Is it because you have anecdotal evidence or because you have been told it is so or is it based upon something more concrete? i also want to think about how managers in publicly traded companies can position themselves best to consider the public good, without being charitable with other people's money. We have spent a couple of sessions being negative - managers are craven, markets are noisy and bondholders get ripped off. In the next class, we will take a more prescriptive look at what we should be doing in this very imperfect world. As always, reading ahead in chapter 2 will be helpful.

I hope that your search for a group has ended well and that you are thinking about the companies that you would like to analyze. Better still, perhaps you have a company picked out already. If you do, try to find a Bloomberg terminal (there is one in the MBA lounge and there used to be one in the basement)... If you do find one vacant, jump on it and try the following:
1. Press the EQUITY button
3. Type the name of your company
4. You might get multiple listings for your company, especially if it is a large company with multiple listings and securities. Try to find your local listing. For a US company, this will usually be the one with your stock symbol followed by US. For a non-US company, it will have the exchange symbol for your country (GR: Germany, FP: France, LN: UK etc...) It may take some trial and error to find the listing....
5. Type in HDS
6. Print off the first page of the HDS (it should have the top 17 investors in your company).

If you cannot find a Bloomberg terminal or don't have access to one, try going on Yahoo! Finance and type in the name or symbol for your company. Once you find your company, scroll down the left hand column until you get to Major Holders and click on it. You should get a listing of the top stockholders in your company. In fact, while you are on that page, take note of the percent of your company's stock held by insiders and by institutions. I have also attached the post class test and solution for today's class. Until next time!

Attachments: Post-class test and solution

2/10/14 After the hiccups of last week, we are doing a little better this week (though not as well as I would like to be doing). The webcasts for today's class are up and running. For the widest choices, go to the webcast page for the class:
You can also try the lore version of the class
If you have the class on iTunes U. it should pop up there as well.
I am sorry it took so long, but the wait should be shorter for the Wednesday class.
2/11/14 I hope that your day is going well. It is Tuesday and time for the story/puzzle of the week. One of the issues that we will be looking at tomorrow is the one of social responsibility. That topic is now part of CSR, a big (and widely thrown around) buzzword in business schools and corporate boardrooms. At the risk of sounding like a reprobate, I am skeptical about much of what passes for debate in the area, since it reminds me of one of my favorite commercials:
In this week's puzzle, I look at the arguments for CSR which range the spectrum. Some argue that CSR is a moral imperative and that every person and business needs to give back to society, even if it means less profits and value. Others argue that CSR is a risk management tool and that socially responsible firms face less risk from litigation and catastrophic costs. Still others believe that there is no daylight between the standard objective of maximizing value and being socially responsible, and that socially responsible firms are more profitable and valuable.
I don't know where you fall in this spectrum, but take a look at the puzzle first:
At the end of the puzzle, I pose four questions:
If you were creating a CSR ranking, what are the factors that you would weigh into your ranking? (I know that this is subjective, but be as subjective as you want. That is the nature of the exercise).
Do you believe that being socially responsible is primarily a moral, a legal or an economic imperative?
Do you believe that firms that are socially responsible are more profitable or less profitable than firms that are not?
Do you believe that firms that are socially responsible are better or worse investments (for you as a potential stockholder) than firms that are not?
I know that you have points of view on these questions (and they may be very different from mine). Go to the discussion board on Lore and post your views on these questions and anything else related to CSR.
Until next time!

I got this email from OCD about Capital IQ. For those of you who are wondering, Capital ?, this is an insanely good database of global companies with data on everything from accounting to market to corporate governance data. If you have never used it, you should try it and you will probably find it helps a great deal in your projects. To be able to use it, though, it looks like you have to jump through a few hoops. Please try to do so, because the payoff is big.

Begin forwarded message:

From: Kathi To <kto@stern.nyu.edu>
Subject: Spring Enrollment for Capital IQ Accounts
Date: February 10, 2014 at 4:51:10 PM EST
Cc: Amanda Hower <ahower@stern.nyu.edu>

Dear Faculty,

If you are planning to have your MBA students use Capital IQ this semester, please be advised that the enrollment period for the spring semester is from February 3rd to February 28th. They can enroll by filling out the Capital IQ form on their Career Account www.stern.nyu.edu/careeraccount. Please note that if students will need Capital IQ for projects later on in the semester, they will need to request access during this official enrollment period at the beginning of the semester. Also, if they had an account last semester, they will still need to request an account for this semester if they need one because last semester's accounts will expire this month.

For non-MBA Stern students, there are 10 Capital IQ terminals on campus that don’t require a Capital IQ account. They are located in the undergrad lab (L-100) and on the fifth floor graduate student computers near the Office of Career Development.

If you have any questions about the process or Capital IQ access in general, please feel free to contact Amanda Hower (ahower@stern.nyu.edu) or Kathi To (kto@stern.nyu.edu) in the Office of Career Development.

Kathi To
Senior Associate Director | Office of Career Development


As we take baby steps towards measuring risk, I want to review where we stand. The objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? Third, take your objective (and the measurement device you have developed) and ask yourself a cynical question: How might managers game this system for maximum benefit, while hurting you as an owner? In the long term, you may almost guarantee that this will happen. On the theme of investor time horizon and stockholder composition, here is an interesting read: http://bit.ly/YrNIMX
Building on the theme of social good and stockholder wealth a little more, there are a number of fascinating moral and ethical issues that arise when you are the manager in a publicly traded firm. Is your first duty to society (to which we all belong) or to the stockholders (who are your ultimate employers)? If you have to pick between the two and you choose the former, do you have an obligation to be honest and let the latter know? What if you believed that the market was overvaluing your stock? Should you sit back and let it happen, since it is good for your stockholders, or should you try to talk the stock price down? On the question of socially responsibility, there are groups out there that rank companies based upon social responsibility. I have listed a few below, but they are a few of many:
Calvert Social Index: http://www.calvert.com/sri-index.html
Domini: http://www.kld.com/indexes/ds400index/index.ht
Dow Jones Sustainability Index: http://www.sustainability-index.com/
And this is just the tip of the iceberg. Environmental organizations, labor unions and other groups all have their own corporate rankings. In other words, whatever your key social issue is, there is a way to stay true (as a consumer and investor).
If you have picked a company, there are two orders of business you have for this weekend:
a. How much power do you as an individual stockholder have over the management of this company?
To make this assessment, you want to start by looking at the board of directors and examining it for independence and competence. I know that there are lots of unknowns here, but work with at least what you know - the size of the board, the appearance of independence, the (perceived) quality of these directors. With US companies, you can get more information about the directors from the DEF14 (a filing with the SEC that you can get from the SEC website). With non-US companies, you may sometimes find yourself lacking information about potential conflicts of interests, but what you cannot find is often more revealing than what you can find out; it points to how little power stockholders have in these companies. Also look at subtle ways in which power is shifted to managers at the expense of stockholders including anti-takeover amendments (poison pills, golden parachutes), if you can find reference to them.
b. Are there other potential conflicts of interests between inside stockholders and outside stockholders?
In some companies, you will find that there are large stockholders in the company who also play a role in running the company. While this may make you feel a little more at ease about managers being held in check (by these large stockholders), consider who these large stockholders are and whether their interests may diverge from yours. In particular, the largest stockholder in your company can be a founder/CEO, a family holding, the government or even employees in the company. What they might want managers to do may be very different from what you would want managers to do... Look for ways in which these inside stockholders may leverage their holdings to get even more power (voting and non-voting shares for inside stockholders, veto powers for the government...)
While it may seem like we are paying far too much attention to these minor issues, I think that understanding who has the power to make decisions in a company will have significant consequences for how the company approaches every aspect of corporate finance - which projects it takes, how it funds them and how much it pays in dividends. So, give it your best shot... On a different note, we will be continue with our discussion of risk on Wednesday (no class on Monday). As part of that discussion, we will confront the question of who the marginal investor in your company is. If you have already printed off the list of the top stockholders in your company (HDS page in Bloomberg or the Major Holders page from Yahoo! Finance), bring it with you again. If you have not, please do so before the next class. Also, watch for the in-practice webcast day after tomorrow, because I will go through how to break down the HDS page.

Finally, I mentioned a paper that related stock prices to corporate governance scores in class today. You can find the link to the paper below:
In closing, though, I know that the sheer size of the class and the setting make it intimidating for participation. I understand but I hope that (a) you will feel comfortable enough to make your views heard, even if they are violently at odds with mine and (b) that you talk to me in person or by email about specific issues that we are covering in class that you may not understand or have a different perspective.

I am also attaching the post-class test & solution for this session. Until next time!

Attachments: Post-class test and solution


I just got back into my house from shoveling and thought it would be a good time to repost my snowmen & shovels blog post from a couple of years ago that I mentioned in class yesterday.
I must confess that though I am naturally a snowman person, the shovels are dominating this winter.

As for the project & class, time sure does fly, when you are having fun... We are exactly 15.38% (4 sessions out of 26) through the class (in terms of class time) and we will kick into high gear in the next two weeks. I am going to assume for the moment that my nagging has worked and that you have picked a company to analyze. Here is what you can be doing (or better still, have done already):
1. Download the latest financials for the company: You don't have to print them off. In fact, I find it convenient to keep them in a folder in pdf format, since my computer can search the document far more quickly than I can. For all companies, this will include the latest annual report and with US companies, try to find the latest 10K and 10Q on the SEC website. If you are analyzing a private business, you will need to get the most recent financial data from the owner (who hopefully is related to you and still likes you...)
2. Put the board of directors under a microscope: The first step in understanding your company is to start at the top. Take a look at who sits on the board and how long they have been sitting there. In particular, the question that you are trying to answer is how effective this board will be in keeping any eye on the top management of the company. Start with the cosmetic measures, which is what most corporate governance services and laws focus on, but look for something more tangible. Has the board shown any backbone in stopping or slowing down management? For instance, here is my assessment of the Dell's board, without knowing a single person on the board....
3. Assess the "power" structure: As Machiavelli pointed out, power abhors a vacuum (he said no such thing, but you can pretty much attribute anything to him or Confucius and sound literate). Specifically, try to find who the largest stockholders in your company are. You can get this from the Bloomberg terminals (HDS page), Capital IQ (holders) or online for free (Yahoo! Finance or Morningstar). Once you have this list, here are the questions that you should try to answer:
If you are a small stockholder in this company, do you see any likelihood that any of these stockholders will stand up for stockholder rights or are they more likely to sell and run?
Are there any stockholders on the list whose interests may lie in something other than maximizing stockholder wealth? (For instance, we talked about the government as a stockholder and how its interests may be different from that of the rest of the stockholders.. Think of an employee pension fund being on that list... Or another company being the largest stockholder...)
As I mentioned yesterday, I will be putting up a webcast tomorrow on how to analyze the "top shareholder" list, using a range of companies. Hope you to get a chance to watch it. Since we have no class on Monday, you should have plenty of time. Until next time!


I hope you have fun plans for the long weekend, but perhaps you can slip in some corporate finance in there. A few loose ends:
1. Comcast's bid for Time Warner: Almost on cue, given our discussion of acquisitions last week, Comcast has made a bid for Time Warner. There is long way to go before the acquisition gets completed (if at all), but the market reaction yesterday to the announcement was revealing. First, in uninteresting news, Time Warner's market cap increased by about 7% or about $ 3 billion on the announcement.
Comcast's stock price moved in the opposite direction, dropping about 3% or about $4.2 billion on the announcement.
The stock is recovering a little today and the drop in market cap has been trimmed to $ 3 billion (approximately).
You can read the tea leaves as well as I can.

2. Google Groups & NYU Classes: As I struggle to get Google groups to update to have everyone on the list, I decided to open a new front and have created at least a version of the class on NYU classes. This has a couple of advantages. First, there is a chance that NYU classes may update faster than Google Groups (Why? I have no idea!) Second, NYU classes also has a grade book which will allow you to see your grades, as recorded by me, as we go through the class.

3. Holdings webcast: The webcast for this week is up and it is on assessing who the top stockholders in your company are and thinking through the potential conflicts of interest you will face as a result. The webcast went a little longer than I wanted it to (it is about 24 minutes) but if you do have the list of the top stockholders in your company (the HDS page from Bloomberg, Capital IQ, Morningstar or some other source), I think you will find it useful.
Webcast link: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/holders.mp4
Presentation link: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt
Finally, one hopeful sign for investors is the presence of activist investors (like Carl Icahn) in your midst, not because they always do the right thing but because they put managers on notice. To help you determine whether you have an activist investor in your listing, I have a link (dated, but it is the best I could do) that lists the top 50 activist investors in the US.
I have posted these links online on the webcast page, Lore and on iTunes U. Until next time!


Another week passes and the newsletter chronicles its passing. Last week, we completed our discussion of the firm's objective function by looking at the flaws in the market and how market price maximization can go wrong. However, we also noted that the alternatives to it also can go wrong and it becomes a question of choosing between flawed objectives. Next week, we will start our discussion of risk by looking at risk and return models in finance and how they look at/measure risk. I know that this is a long weekend and I hope that you can get your groups in place and companies picked, perhaps even get the corporate governance section done. In fact, if you do get a chance to get into school, please find a Bloomberg terminal and print off the pages that we will be using for the next week: HDS, BETA and DES. Have a great weekend!

Attachments: Newsletter #2

2/16/14 A quick note, previewing the week to come. Since we have no class tomorrow, it will be a short week. On Wednesday, we will look at risk and return models in finance. If you took Foundations last semester, or waived out of it, you may have seen these models already. If you are taking it right now, you may be seeing it in class now or very soon. Never fear! My focus in this class is very different. I will not be going through the statistical proofs and the mind-numbing portfolio theory. I am interested in something simpler: how do these models help me come up with hurdle rates in corporate finance? So, have a great rest of the weekend and I will see you in class on Wednesday. Until next time!
2/18/14 I hope that you had a great weekend, but it is over (as if you did not know). In this week's puzzle, I focus on risk and how we set ourself up for scams by forgetting that opportunity comes with danger. There are three news articles that I have linked up in this puzzle: the first one is to a Wikipedia description of Ponzi schemes (I have no intellectual pretensions and use Wikipedia all the time). The second is about Bernie Madoff and while gossipy, it provides some insight into how he pulled off his scam for decades. The third is the obituary of Robert Citron,the treasurer of Orange County at the time of the pension disaster in the 1990s.
Ponzi Scheme: The Original: http://en.wikipedia.org/wiki/Ponzi_scheme
The Bernie Madoff Story: http://money.cnn.com/2009/04/24/news/newsmakers/madoff.fortune/
Robert Citron, RIP: http://www.nytimes.com/2013/01/18/business/robert-citron-culprit-in-california-fraud-dies-at-87.html?_r=0
If you get a chance, here is what I would like you to think about. Put yourself in the shoes of the victims in these scams and think about why you may have been tempted to join in. Then, put yourself in the shoes of the scammer and determine how you would structure these scams to draw in gullible and greedy investors. A con game requires that the con man and the victim both cooperate and it is worth looking at why it happens. The puzzle can be found at this link:
You can use Lore to post your thoughts (and I have started a discussion topic around risk).
Until next time!

Some of you may be regretting the shift from the soft stuff (objectives, social welfare etc.) to the hard stuff, but trust me that it is still fun.. If it is not, keep telling yourself that it will become fun. Anyway, here are a few thoughts about today's class.
1. The Essence of Risk: There has been risk in investments as long as there have been investments. If you have the time, pick up a copy of Against the Gods by Peter Bernstein, John Wiley and Sons. It is a great book and an easy read. If you want more, you should also pick up a copy of Capital Ideas by Peter as well... That traces out the development of the CAPM....
2. More on Models: If you want to read more about the CAPM, you can begin with chapter 3 in the book. It provides an extended discussion of what we talked about in class today....
3. Diversifiable versus non-diversifiable risk: The best way to understand diversifiable and non-diversifiable risk is to take your company and consider all of the risks that it is exposed to and then categorize these risks into whether they are likely to affect just your company, your company and a few competitors, the entire sector or the overall market.
If you can, try to make your assessment of whether the marginal investors in your companies are likely to be diversified. Look at both the percent of stock held in your company and the top 17 investors to make this judgment. If your assessment leads you to conclude that the marginal investor is an institution or a diversified investor, you are home free in the sense that you can now feel comfortable using traditional risk and return models in finance. If, on the other hand, you decide that the marginal investor is not diversified, we will come back in a few sessions and talk about some adjustments you may want to make to your beta calculations.
Finally, if you are up for the challenge, try to estimate the risk free rate in the currency of your choice. Of course, if this is US dollars, not much of a challenge... It is a good exercise to try a more difficult currency. I will be posting a webcast on Friday on doing this. So, stay tuned. I have also attached the post class test & solution for today...

A couple of reading suggestions, if you get a chance. One relates to the puzzle that I mailed out for this week on risk and in particular, to Bernie Madoff. Peter Leahey (Thank you, Peter!) suggested the following article as background reading and I strongly recommend it: http://nakedshorts.typepad.com/files/madoff.pdf
On a different note, I was forwarded this piece on activist investing that ties into what we were talking about last week and will remain and undercurrent for future weeks:
Hope you enjoy both readings. If you missed class, the webcasts are up for today (See, we are improving)! Until next time!

Attachments: Post-class test and solution


I know that I don't give you much of a chance to catch up, piling on more and more, just as you get close. So, here is where we are in the class:
Class lectures: We are five sessions into the class. I hope that you have been able to come to class for all five, but just in case you have not, you should watch the webcast of the class. I don't think it is too painful, but then again, I am biased. You can get the webcasts of the classes by going to the webcast page for the class (http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr14.html), the Lore page for the class or the iTunes U site for the class. We have covered the syllabus packet and the first 96 pages of lecture note packet 1. If you don't have it yet, please get it on the webcast page for the class.
Post class tests/solutions: To test yourself on each class, I have post-class tests (with solutions). These are really 5-10 minute tests of the key concepts covered during the class. I have been remiss in not attaching these to the emails I send out after class (other than for the February 4 class) but they too are at all three sites listed above. In case, you have trouble clicking your way to them, here are direct links to the tests and solutions. I will try to email you the post-class tests for each of the remaining sessions, but even if I do not, you should be able to find them online.
Session 1: Post class test (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session1test.pdf ) and solution (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session1soln.pdf)
Session 2: Post class test (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session2test.pdf ) and solution (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session2soln.pdf)
Session 3: Post class test (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session3test.pdf ) and solution (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session3soln.pdf)
Session 4: Post class test (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4test.pdf ) and solution (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4soln.pdf)
Session 5: Post class test (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session5.test.pdf) and solution (http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session5soln.pdf)
Group project: At this stage, you should be in a group and have picked a company. If you are still unattached, please let me know. Assuming that you have picked your company, you should be able to apply what we did in the first two weeks to this company: assess the company's board of directors and analyze its stockholder composition. I have put up webcasts in the three sites listed above on the two tasks:
Webcast 1: Assessing a company's board of directors
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/corpgovHP.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/corpgov.ppt
Webcast 2: Analyzing a company's stockholder base
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/holders.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt

Corporate Finance Puzzles/ Stories: Each week, we will focus on a story close that week's topic and we have two postings so far:
Week 1: Microsoft gets a new CEO (http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr14puzzle1.html)
Week 2: Corporate Social Responsibility (http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr14puzzle2.html)
Week 3: Risk - Danger + Opportunity (http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr14puzzle3.html)
Readings: I know that you are busy and that there is plenty to keep you occupied. If you do have the time, though, I think it would help to read the book. We are on chapter 3 and will be moving into chapter 4 (which is a long and perhaps the most involved chapter in the book..).
Past emails: You can find all past emails (at least up to February 14) related to the class at http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfemail.html
As you can see, we have had a pretty busy two weeks. I hope you do get a chance to get abreast of where we are in the class, because I promise you that things will not slow down.... Until next time!


This week was a short one, but we did get started on risk free rates. At this stage, if you have picked a company, you should be able to pick a currency to do your analysis. Most of the time, the most pragmatic choice is to stick with the local currency, in which the financials are reported. Note, though, that if you have a commodity company, the conventional practice is often to report everything in US dollars, even for non-US companies. Once you pick the currency, you should try to get a risk free rate. As I promised, I do have a webcast on estimating the risk free rate that you may or may not find useful. It is posted on the webcast page for the class, Lore and iTunes U.
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
While the spreadsheet uses (and links) to the sovereign ratings and CDS spreads from March 2013, I have attached the updated Moody's sovereign ratings (from today) and CDS spreads from last week.

Two more notes. First, if you are having trouble with the class (I know its early, but its never too early to find yourself in trouble), please drop by or talk to one of the three TAs for the class.
Ines Orozco, ines.orozco@stern.nyu.edu, (M 3-5 pm)
Cecilia Seiden, cecilia.seiden@stern.nyu.edu (W 12.45-2.45)
Michael Burley, michael.burley@stern.nyu.edu (MW, 4.30-5.30 pm)

Second, in case you want to get started preparing for quiz 1 (Don't freak out. It is not until March 10), you can find all past quizzes that I have given in this class below (with solutions);
Link to past quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Link to solutions to past quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls
I have to caution you that the quiz will look foreign to most of you right now, since we will be covering the bulk of the number crunching material in the next two weeks. Until next time!

Attachments: Moody's ratings (3/13), CDS spreads (3/13)


I hope you get to enjoy what looks like the first good weekend in a long, long time! If you get bored and run out of stuff to do, here are a couple of reading suggestions. If you have been following the news, you probably read about Facebook's acquisition of Whatsapp for $19 billion. Mind boggling, right? Here is my take on it:
I have also attached the always-awesome, amazing-read newsletter (not and not) of the week! Until next time!

Attached: Newsletter #3


I hope that you had a great weekend! In tomorrow's class, we will begin our discussion of equity risk premiums and in Wednesday's class, we will take a closer look at how to estimate betas or relative risk measures. They are crucial building blocks to coming up with hurdle rates but there are lots of estimation issues and questions. If you have not had a chance to watch the webcast on risk free rates, please try to do so. It is only 14 minutes long and I don't think it is too painful. I am attaching the links again, in case you have nothing to do this weekend.
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
There is a typo on page 10 of the slides in the webcast (where I use 9.18% as the Brazilian government bond rate instead of 9.71% but it is now fixed in the slides. Sorry!

A final point. I have put lecture note packet 2 online, if you want to get a jump on downloading it, though we will not use it until after the break.


The bulk of today's class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium.
1. Survey Premiums: I had mentioned survey premiums in class and two in particular - one by Merrill of institutional investors and one of CFOs. I have attached the links to some of the surveys:
Merrill survey: http://rcr.ml.com/Archive/11347263.pdf?w=olivia.lockyer%40baml.com&q=nYpEg!0HnYJok5Pmi1h3qw&__gda__=1393273975_9f76ab0f44f2b198a2dfe21f5ba81519
CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2206538
Analyst survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2084213

2. Historical Premiums: We also talked about historical risk premiums. To see the raw data on historical premiums on my site (and save yourself the price you would pay for Ibbotson's data...) go to updated data on my website:
On the same page, you can pull up my estimates of country risk premiums for about 130 countries.

3. Implied equity premium: Finally, we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2014 update:
Play with the spreadsheet. Try changing the index level, for instance, and see what it does to the premium.

Beta reminder: As I mentioned at the end of class today, please do try to find a Bloomberg terminal. Click on Equities, find your stock (pinpoint the local listing; there can be dozens of listings....) and once you are on your stock's page of choices, type in BETA. A beta page should magically appear, with a two-year regression beta for your company. Print if off. If no one is waiting for the terminal, try these variations:
1. Time period: Change the default to make it about 5 years and the interval from weekly (W) to monthly (M). Print that page off
2. Index: The default index that Bloomberg uses is the local index (a topic for discussion next session). You can change the index. Type in NFT (Bloomberg's symbol for the MSCI Global Equity index) in the index box and rerun the regression.
Bring the beta page (s) with you to class on Wednesday. Let's get the project done in real time, in class.

The post class test and solution for today are attached. The webcasts for today are up and running.

Attached: Post-class test and solution

2/25/14 This week's puzzle revolves around something that we have talked about a lot in class in the last two sessions: country risk. Rather than bore you with abstractions, I decided to hit you with some data: the last 10 years of sovereign CDS spreads for five Latin American countries, Argentina, Brazil, Colombia, Peru and Venezuela. As you look at the divergence, start with a fundamental question as why it happened and when. Using the raw data in the link below, please follow up and try to address three other questions:
1. There are some who claim that investors often lump countries in a region together and mark up (or down) risk collectively for all of the countries at the same time. Use the raw data from quarterly CDS spreads for the five Latin American countries to see if there is evidence to back this up.
2. The political leaders in emerging markets that are having market troubles (such as Argentina and Venezuela) are quick to blame global conspiracies and markets for their troubles. Use the CDS data to assess whether their pain is more the result of external factors or self inflicted.
3. Now, assume that you are a company with operations across these five Latin American countries. What effect will the divergence in country risk have on the hurdle rates you use to decide whether to invest in a country or not and how this will play out in real investment/expansion decisions?
You can find the data, links and other fun stuff in the weekly puzzle page:
Have fun with it!

Today's class covered the conventional approach to estimating betas, which is to run a regression of returns on a stock against returns on the market index. We first covered the estimation choices: how far back in time to go (depends on how much your company has changed), what return interval to use (weekly or monthly are better than daily), what to include in returns (dividends and price appreciation) and the market index to use (broader and wider is better). We also looked at the three key pieces of output from the regression:
1. The intercept: This is a measure of how good or bad an investment your stock was during the period of your regression. To compute the measure correctly, you net out Rf(1-Beta) from the Intercept:
Jensen's alpha = Intercept - Riskfree rate (1- Beta)
If this number is a positive (negative) number, your stock did better (worse) than expected, after adjusting for risk and market performance.
2. The slope: is the beta, albeit with standard error
3. The R squared: measures the proportion of the risk in your stock that is market risk, with the balance being firm specific/diversifiable risk.
Finally, we used the beta to come up with an expected return for stock investors/cost of equity for the company.

If you can get your hands on the beta page for your company, you should be able to make these assessments for your company. You can also get a guide to reading the Bloomberg pages for your company by clicking below:
Please try to strike while the iron is hot and get this section done for your company.

Finally, I have also attached the post-class test and solution for today.

Attachments: Post-class test and solution


I hope that you have had a chance to print off the Bloomberg beta page for your company. Once you have it, do check the adjusted beta and confirm for yourself that it is in fact equal to
Adjusted Beta = Raw Beta (.67) + 1.00 (.33)
I mentioned in class that I initially was curious about where these weights were coming from but I think I have found the original source. It was a paper written about 30 years ago (which I have attached to this email) that looked at how betas for companies change over time and concluded based upon a small sample and data from 1926-1940 (I am not kidding!) that they converged towards one, with roughly the magnitudes used by Bloomberg. Why has it not been updated with larger samples and better data? Well, that is what happens when here when I got here becomes the response to questions about numbers we use all the time.

The bottom line is this. Do I believe that the betas of companies tend to move towards one over time, if they survive? Yes, partly because they get larger over time and partly because they get more diversified. When we get to valuation, in this class and the elective (if you choose to extend your torture at my hands), you will see that I move betas towards one in almost every valuation that I do. But I don't do it right away and I reserve the discretion to do it faster for some firms than for others. Bloomberg clearly does not trust you to know which direction one is... I do...

Attachment: Blume's paper on betas over time


It is Friday and time for the weekly in practice webcast. In the webcast, I take a look at Disney's 2-year weekly regression (from February 2011- February 2013). I have the Bloomberg page attached. I am also attaching the spreadsheet that I used to analyze this regression, which you are welcome to use on your company. The webcast is available at the link below:
If you have trouble with this download, try on Lore or on iTunes U.

It has also been a busy week for corporate governance.
1. Icahn versus Andreesen: Carl Icahn has not only targeted Ebay (demanding that Paypal separated from the company) but attacked corporate governance at the company:
His primary target is not just Andressen but the fact that the same VC can be on the boards of directors of competing companies. This is not a slam-dunk corporate governance issue and I think that there may be shades of gray.

2. Loeb versus Sotheby's: Talk about taking on a venerable name but Daniel Loeb has done just that with Sotheby's, arguing that it was "an old master painting in desperate need of restoration".
Again, I will let you make your own judgments on who you sympathize with more on this deal.

3. Pimco: Looks like an old fashioned war at the top, with Bill Gross winning out.
Allianz, Pimco's largest stockholder, seems okay with this.

Attachment: Bloomberg beta page, Spreadsheet for analysis, Excel regression beta page


Last week was a big one, as we completed our discussion of equity risk premiums and moved on to regression betas. The key thing to remember with both is that our objective is not to get the equity risk premium for the last 5 or 50 years but for the next decade and that the beta that we want is the one that will be capture the firm's risk, going forwards. Sounds like an impossible task, since all the data we have is backward looking but we are going to talk about getting forward looking estimates next week. The weekly newsletter is attached.

Attachment: Newsletter #4

3/2/14 In the week to come, we will look for a way to replace regression betas, which if you buy into my sales pitch, are flawed and backward-looking. In fact, I hate to play favorites, but tomorrow is my favorite session for the entire class. Please do come, even if it is snowing. I will make it worth your while, as we talk about the fundamentals that determine betas. You will never look at a beta the same way you did ever again. On Wednesday, we will talk about extending the beta estimation approach to private businesses and non-traded assets. If you are working with a private business in the project, this will be the week where you crack the code.
On a different note, I know that CSR is behind us, but I just read a news report of Apple's recent stockholder meeting and it brought the issue back into the forefront. According to the report, when asked about how much Apple spent being environmentally conscious, Cook refused to answer and then went on to say that Apple does not care about the "bloody IRR", when it has to do the right thing. While he is receiving a lot of good press for this retort, I don't think it was right or appropriate (even if you agree, as I do, with his core message which is that Apple should be a socially responsible company). I just posted my thoughts on my blog. If you have time, please check it out at http://bit.ly/1fB0Rew.

I want to spend this email talking about the determinants of betas. Before we do that, though, there is one point worth emphasizing. Betas measure only non-diversifiable or market risk and not total risk (explaining why Harmony can have a negative beta and Philip Morris a very low beta).

1. Betas are determined in large part by the nature of your business. While I am not an expert on strategy, marketing or productions, decisions that you make in those disciplines can affect your beta. Thus, your decision to go for a price leader as opposed to a cost leader (I hope I am getting my erminology right) or build up a brand name has implications for your beta. As some of you probably realized today, the discussion about whether your product or service is discretionary is tied to the elasticity of its demand (an Econ 101 concept that turns out to have value)... Products and services with elastic demand should have higher betas than products with inelastic demand. And if you do get a chance, try to make that walk down Fifth Avenue...

2. Your cost structure matters. The more fixed costs you have as a firm, the more sensitive your operating income becomes to changes in your revenues. To see why, consider two firms with very different cost structures
Firm A Firm B
Revenues 100 100
- Fixed costs 90 0
- Variable costs 0 90
Operating income 10 10
Consider what will happen if revenues rise 10%. The first firm will see its operating income increase to 20 (an increase of 100%) whereas the second firm will see its operating income go up to 11 (an increase of 10%)... that is why looking at percentage change in operating income/percentage change in revenues is a measure of operating leverage.

3. Financial leverage: When you borrow money, you create a fixed cost (interest expenses) that makes your equity earnings more volatile. Thus, the equity beta in a safe business can be outlandishly high if has lots of debt. The levered beta equation we went through is a staple for this class and we will revisit it again and again. So, start getting comfortable with it. (The equation for the levered beta was supposed to be on page 146, but went missing. I have attached it to this email. Please print it off)

I also introduced the notion of betas being weighted averages with the Disney - Cap Cities example. I worked out the beta for Disney under two scenarios: an all-equity funded acquisition of Cap Cities and their $10 billion debt/ $8.5 billion equity acquisition. As an exercise, please try to work out the levered beta for Disney on the assumption that they funded the entire acquisition with debt (all $18.5 billion). The answer will be in tomorrow's email.

One final point. When I was talking about the effect of leverage on betas, I mentioned the going public of Blackrock, when I actually meant to say Blackstone. Blackrock is a portfolio management company, without leverage, and Blackstone is a private equity investor, involved in lots of leveraged deals. My mistake and I hope that I don't get blamed if there is a run on Blackrock.

If you are ready to get started on preparing for the first quiz, here are the links that you need:
All past Quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Solutions to all past quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls

Attachments: Post-class test and solution

3/4/14 This week's puzzle stays close to a concept that we started talking about yesterday and will continue to talk about tomorrow: companies with multiple businesses and why hurdle rates should vary across businesses. The story itself revolves around companies that have been targeted by activist investors for breakups. You can review the puzzle at the link below:
The company that I have highlighted is Sony, with its mix of businesses, and an activist investor (Dan Loeb) demanding that the company break itself up. While I am not giving you enough information to make that judgment, you can look at the company's many businesses and start thinking about differences in risk (and hurdle rates) across businesses. I will post a thread on Lore for you to comment on multibusiness companies in general and this one in particular.

Moving right along, I know that today's class was a grind with numbers building on top of numbers. In specific, we looked at how to estimate the beta for not only a company but its individual businesses by building up to a beta, rather than trusting a single regression. With Disney, we estimated a beta for each of the five businesses it was in, a collective beta for Disney's operating businesses and a beta for Disney as a company (including its cash). If you got lost at some stage in the class, here are some of the ways you can get unlost:
1. Review the slides that we covered today.
2. Try the post-class test and solution. I think it will really help bring together some of the mechanical issues involved in estimating betas.
3. Read this short Q&A on bottom up betas which highlights the estimation process and some of its pitfalls:

Finally, watch your emails tomorrow, since I will be sending the cheating chart for quiz 1 as well as the presentation that I plan to use in the review session on Friday. That session is scheduled from 12-1 in KMEC 1-70. I know that many of you will not be able to make it. (In fact, I have to hope that you don't all show up since there are 320 people in this class and that room fits only 130). The class will be recorded and webcasts will be accessible by Friday evening.

Attachments: Post-class test and solution


Today is usually the project update day but before I launch into what you could be doing with the project, a reminder that the review session will be tomorrow from 12-1 in KMEC 1-70. You can get the review presentation by clicking below:

If you can, please print this off or download it and bring it to class. If you cannot make the class, not a big deal. I will put the webcast up by tomorrow evening. As for the seating for the quiz on Monday, here is the plan:
If your last name begins with Go to
A- F KMEC 1-70
G -Z Paulson Auditorium
After you finish your quiz, please find your way back to Paulson since we have class after the quiz.

Now, to the project. I know that you will put it on the back burner for this week and perhaps through spring break, but if you can keep working on your project, think of it as additional preparation for the quiz. In particular, we talked about bottom up betas this week and you can start building up to bottom up betas for your firm, Here are a couple of places that you can go:
1. Everything you wanted to know about bottom up betas (and were afraid to ask): I You may be unclear about why we go through this torture. I had sent you a link to this file yesterday online, but since many of you may be wary of clicking through links, I have attached the word document. It is short and should not take you more than 10-15 minutes to read.
After you have gone through both, you may still be unconvinced about the utility of this process. I completely understand. However, do not throw the baby out with the bathwater. In other words, just because you think this bottom up beta process is cumbersome does not mean that you should not be adjusting your hurdle rates within a company for businesses of different risk. So, hold on to that principle and come up with your own (perhaps simpler) ways of computing those hurdle rates. Until next time!

2. Bottom up betas by sector (and across regions): As I mentioned in class today, I do compute bottom up betas by sector and across regions at the start of every year. You can get these betas by going to
Scroll down and you should see the beta section. Click on the downloadable excel files to have a copy for yourself.

3. Capital IQ: Since you have free access to Capital IQ, while you are at Stern, you should take full advantage. You do have to jump through a few procedural hoops to get your login and password, but once you do, you can screen in lots of different ways - by sector, industry, region etc.

I will put together a webcast for tomorrow on the bottom up beta process. Finally, if you missed class yesterday, you probably have not been able to find the links to the webcasts of the class. Me too! That is the bad news but the good news (at least as conveyed to me) is that I will get the links sometime today.


I know that most of you were not able to make it to the quiz, but the webcast is now up online. You can get it by going to the webcast page for the class, Lore or iTunes U. Alternatively, you can try this direct link:
Please download he presentation to use along with the review:
I hope it helps. It may help even more if you go through some of the past quizzes and then watch it.

I know that you are in no mood for in practice webcasts or working on your project, but I have a webcast on the mechanics of estimating bottom up betas. I use United Technologies to illustrate the process and I go through how to pull up companies from Capital IQ. Even if you don't get a chance to watch it today or this weekend, it may perhaps be useful later on. Here are the links:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/BottomupBeta.mp4
United Technologies 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Bottomupbeta/UT10K.pdf
Spreadsheet to help compute bottom up beta: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Bottomupbeta/bottomupbeta.xls
The last spreadsheet has built into it the industry averages that I have computed for different sectors in the US. You can easily replace it with the global averages that I also have on my site and tweak the spreadsheet. Give it a shot!


I won't ask you how the weekend is going, because I may be hitting a sore spot. I did put together a list of the top ten questions that I am getting in my emails. Perhaps, you have one of these questions:

1. Why do we use past T.Bill rates for Jensen's alpha and the current treasury bond rate for the expected return/cost of equity calculation?
The Jensen's alpha is the excess return you made on a weekly/monthly basis over a past time period (2 years or 5 years, depending on the regression). Since you are looking backwards and computing short-term (monthly or weekly) returns, you need to use a past, short-term rate; hence, the use of past T.Bill rates. The cost of equity is your expected return on an annual basis for the long term future. Hence, we use today's treasury bond or long term government bond rate as the riskfree rate.

2. How do you decide whether to use a historical or an implied equity risk premium?
In a market like the US, with a long and uninterrupted history, the choice depends on whether you believe that things will revert back to the way they were (in which case you may decide to go with the historical premium) or that the world is a dynamic, ever-shifting place, in which case you should go with the implied premium. In most other markets, where you don't have a long history, it is not really a choice, since the historical premium is too noisy (big standard error) to even be in contention. Thus, I use a short cut. If it is a AAA rated country like Germany or Australia or Singapore, I use the US equity risk premium, arguing that mature markets need to share a common premium. If it is not a AAA rated country, see the answer to (4).

3. How do you estimate a riskfree rate for a currency in an emerging market?
If you are doing your analysis in US dollars or Euros, you would use the riskfree rates in those currencies: the US treasury bond rate for US dollars and the German Euro bond for the Euro. In the local currency, you should start with the government bond rate in the local currency and take out of that number any default spread that the market may be charging (see the Mexico example in the review packet). The default spread can be obtained in one of three ways: (a) The difference between the rate on a dollar (Euro) denominated bond issued by the country and the US treasury bond rate (German Euro bond rate), (b) CDS spread for the country or (c) typical default spread given the local currency rating for the country.

4. How do you adjust for the additional country risk in companies that have operations in emerging markets?
If the country you are analyzing is not AAA, you should adjust for the risk by adding an "extra" premium to your cost of equity. The simplest way to do this is to add the default spread for the country bond to the US risk premium. This will increase your equity risk premium and when multiplied by your beta will increase the cost of equity. A slightly more sophisticated approach is to adjust the default spread for the relative risk of equities versus bonds (look at the Mexico example in the review) and adding this amount to the US premium. This will give you a higher cost of equity. If you are given enough information to do the latter, do it (rather than use just the default spread). When assessing the equity risk premium for a company, look past where the company is incorporated at where it does business. The equity risk premium that you use should be a weighted average of the equity risk premiums of the countries in which the company operates.

5. Why do you use revenues (rather than EBIT or EBITDA) as the basis for your weighting?
Note that what you would really like to know is the value of a company's different businesses/geographies, but since you don't have value, you look for proxies. While you may have a choice of different measures (revenues, EBITDA, EBIT etc), I prefer revenues for three reasons. First, it is always a positive number, which is good since I want weights that are greater than zero. Second, it is less susceptible to accounting allocation judgments than numbers lower down on the accounting statement. Third, I can convert it into a value by using an EV/Sales multiple, which I can get from the sector.

6. Why do you use the average debt to equity ratio in the past to unlever a regression beta?
The regression beta is based upon returns over the regression time period. Hence, the debt to equity ratio that is built into the regression beta is the average debt to equity ratio over the period.

7. What is the link between Debt to capital and debt to equity ratios?
If you have one, you can always get the other. For instance, the Fall 2006 quiz gives you the average debt to capital ratio over the last 5 years of 20%. The easiest way to convert this into a debt to equity is to set capital to 100. That would give you debt of 20 and equity of 80, based upon the debt to capital ratio of 20%. Divide 20 by 80 and you will get the debt to equity ratio of 25%.

8. How do you annualize non-annual numbers?
The most accurate thing to do is to compound. Thus, if 1% is your monthly rate, the annual rate is (1.01)^12-1.... if 15% is your annual rate, the monthly rate is (1.15)^(1/12) -1... When the number is low, as is usually teh case with riskfree rates, you can use the approximation of dividing by 12 (to get monthly) or 52 (to get weekly). But try to always compound the Jensen's alpha numbers, since they can be much bigger.

9. What is the cash effect on beta? Why does it sometimes get taken out and sometimes get put back in?
I know that dealing with cash is on of the more confusing aspects of beta and cost of equity. Let's start with some basics. If a company has cash on its balance sheet, that cash is an asset with a zero beta (or at least a very low one) and it will affect the beta for the company and the beta that you observe for its equity (say, from a regression). What you do with cash will therefore depend upon what beta you are starting with and what beta you want to end up with.
For the pure play or unlevered beta by business: You start with the average (or median) regression beta across the comparable companies in the business. To get to a pure play beta for the business, here are the steps:
Step 1: Unlever the regression beta, using the gross debt to equity ratio for the sector
Unlevered beta for median company in sector = Regression beta/ (1+ (1- tax rate) (Debt/Equity Ratio for the sector))
Step 2: Clean up for the cash held by the typical company in the sector, using the median cash/ firm value for the sector (see below for firm value)
Unlevered beta for the business = Unlevered beta for median company/ (1 - Cash/Firm value for the sector)
Note that you use sector averages all the way through this process, for regression betas, debt to equity ratios and cash/firm value

To get to the bottom up equity beta for a company: You start with the unlevered betas with the businesses and work up to the equity beta in the following steps:
Step 1: Compute a weighted average of the operating business betas, using the values of the operating businesses in the company:
Unlevered beta for operating assets of the company = Pure play betas weighted by values of the operating businesses
Step 2: Compute a weighted average of all of the assets of the company, with the company's cash included (since cash has a beta of zero)
Unlevered beta for entire company = Unlevered beta for operating assets (Value of operating assets/(Cash + Value of operating assets))
Step 3: Compute a levered beta for just the operating assets of the company, using the debt to equity ratio of the company
Levered beta for operating assets of the company = Unlevered beta for operating assets (1+ (1- tax rate) Company's D/E ratio)
Step 4: Compute a levered beta for all of the assets of the company, with cash included
Levered beta for all assets of the company = Unlevered beta for entire company (1+ (1- tax rate) Company's D/E ratio)
It is the beta in step 4 that is directly comparable to your regression beta. Note that all the numbers in this part are the company's numbers - for values for the businesses, cash holdings and debt/equity.

10. Why do you weight unlevered betas by enterprise value (as you did in the Disney/Cap Cities acquisition) and in computing Disney's bottom up beta?
The unlevered beta is a beta fo the asset side of the balance sheet, right? So, when weighting these unlevered betas, you want to weight them by how much the businesses are worth (and not how much the equity is worth). That is why I used enterprise value weights in the Disney bottom up beta computation. I cheated on the Cap Cities acquisition by ignoring cash for both Disney and Cap Cities, but if cash had been provided, I would have used enterprise value. In case you are a little confused about the different values, here they are:
Market cap or Value of equity: This is the value of just equity
Firm value = Market value of Debt + Market value of Equity
Enterprise value = Market value of Debt + Market value of Equity - Cash (This of this as the value of just the operating assets of the company)
Thus, if a company has 100 million in equity, 50 million in debt and 20 million in cash:
Market cap = 100
Firm value = 150
Enterprise value = 150-20 = 130

I have also attached the newsletter for this week. That is about it... Hope I have not added to your confusion. Relax.. and I will see you soon.

Attachment: Newsletter #5 (March 8)


A few very quick points and I will leave you to your own devices:
1. Answers to the last page of the review: I had promised you the answers to the last page on the review session and I am sorry for not getting back to you sooner, but I have attached the solution page. Hope you find it useful.

2. The bane of technology: I must have not been clear about what I was allowing/not allowing during the quiz. Just to clarify. You can use your iPads, Kindles or Nooks, as long as you don't use connectivity. No laptops, though!

3. Levered betas, unlevered beta for company and unlevered beta for the business: There still seem to be some loose ends associated with betas. Just in case you are still confused, I put together a simple example to bring it home. See attachment.

4. Seating reminder: In case you have forgotten your room assignment for tomorrow:
If your last name starts with Go to
A- F KMEC 1-70
G -Z Paulson Auditorium

Finally, please do remember that there is class after the quiz and that we will also have class on Wednesday. I hope the complete the discussion of hurdle rates tomorrow by first defining debt, then laying out the first principles for computing the cost of debt and then coming up with weights for the cost of capital. On Wednesday, we will look at the first steps in measuring investments returns, before everyone leaves for spring break.

Attachment: Unlevered Beta example


I know that it is tough to sit in on a class, after you have taken a quiz and I appreciate it that so many of you did come to class. We started class today by looking at what makes debt different from equity, and using that definition to decide what to include in debt, when computing cost of capital. Debt should include any item that gives rise to contractual commitments that are usually tax deductible (with failure to meet the commitments leading to consequences). Using this definition, all interest bearing debt and lease commitment meet the debt test but accounts payable/supplier credit/ underfunded pension obligations do not. We followed up by arguing that the cost of debt is the rate at which you can borrow money, long term, today and then looked at ways of coming up with that number from the easy scenarios (where a company has a bond rating) to the more difficult ones (where you have only non-traded debt and bank loans and no rating). I have attached the post class test & solution. You will notice a few questions relate back to something we talked about in the prior class, total betas, since I did not get a chance to include those in my last post class test.

One final note. If you have checked your Google calendar, you will notice that there is a group case due on April 2 in class (at 10.30 am). I know that this is way in advance of that date, but that case is also now available to download. I am attaching the case to this email but I will send you another one specifically about the case and what you might be able to get started on in the near term. Back to grading quizzes..

Attachment: Post-class test and solution


The quizzes are done and are ready to be picked up outside the front door to the finance department. They are on a table to the right, in three piles (A-F, G-M, N-Z) in alphabetical order. Please leave them in that same order and don not flip the quizzes over. I have attached the solutions to both quizzes (just check your quiz problem 3 for the company in question) and the distribution. Much as I am reluctant to attach a grade to a 10% score this early in the class, I know that I will be nagged if I do not. So, don't take the grade too much to heart (in either direction). It is still early in the game.

As I noted in class, the TAs have nothing to do with the grading. So, you have only me to blame if your quiz has been misgraded or graded messily (I am sorry. It was late at night and I was grading while watching the Walking Dead!) If you feel that I have been unfair, please bring your quiz in and I will fix it. I have a meeting from 10.30-11.30 but will be in after that today or you can put it off until tomorrow.

Attachment: Solution (a or b)as well as the distribution of grades


I know. I know. You just finished up with your quiz and I am loading up more on your plate already. The case that you will have to do for this class is attached to this email but before you freak out, it is not due until April 2 just before class. Here are some general notes/facts to keep in mind on this case:
It is a group case, with one submission per group. The submission should be electronic in pdf format and I will grade the case and get it back to you, with my comments on the pdf file.
This is a case that is designed (I hope) to test you on every aspect of the investment principle. It will require you to think about how to estimate discount rates for projects, using the tools that we have talked about in class. The more time consuming part is estimating cash flows for the investment. To keep this process moving, I have provided all of the basic information you need for the projections, though you may have to make some assumptions to complete your number crunching. In practical terms, estimating cash flows is an exercise in model building from scratch (using Excel). It is not difficult but it does require that you pay attention to detail and that you think linearly. This may sound sick, but some of you will actually find this enjoyable, and while it may not be you, I hope it is someone in your group. You do not have to wait until we get this part of the class to start building the model.
A couple of pieces of unsolicited advice. First, if you are part of a group, where one or two people take over the process of building the model and estimating the numbers, please do try to stay involved and understand how the numbers are being computed. This is a critical component not just of finance but any business planning. Second, when building your models, try not to hard code numbers into the spreadsheet. In other words, have an input sheet from which you read the numbers. That way, if you have to change any of the numbers later, you don't have to redo the entire spreadsheet.
Be conscious of your mission. This is not just an exercise in number crunching. I would like you to be able to advice Whole Foods on whether they should enter the restaurant business. The numbers are a means to that end, not the end by themselves.
To protect you, I would like you to stay with the facts given in the case and not wander off into Google search or Cap IQ looking for more data. Also, remember that there is no single right answer, since there can be judgment calls that you make that will alter the numbers. So, don't worry if your numbers or even your decision don't match to other group numbers and decisions.
As I was writing the case last week, I was trying my best to be precise and clear in my language. I may not have succeeded. So, if there are gray areas, make your best judgments and assumptions and move on.
I know that many of you will be taking off for other parts of the world later this week. I hope you have a great time wherever you are going, but try to read the case before you leave. In fact, think about it during your break, especially if you are having trouble falling a sleep. It may act as a narcotic.

Attachments: The WF Dining Case, Peer group (as excel spreadsheet)


I know that some of you were in Spring break mode already, but today's class represented a transition from hurdle rates to measuring returns. We started by completing the last pieces of the cost of capital puzzle: coming up with market values for equity (easy for a publicly traded company) and debt (more difficult). We then began our discussion of returns by emphasizing that the bottom line in corporate finance is cash flows, not earnings, that we care about when those cash flows occur and that we try to bring in all side costs and benefits into those cash flows. Defining investments broadly to include everything from acquisitions to big infrastructure investments to changing inventory policy, we set the table for investment analysis by setting up the Rio Disney investment. We will return to flesh out the details in the next session (after the break). The post class test and solution are attached.

Attachments: Post-class test and solution

3/13/14 No nagging about the project today. Just enjoy your spring break and come back rested and ready. I will not send you an email (and that is a promise) until late next week. So, if you have serious withdrawal issues, check the email chronicles. Be safe and be good!

I know that spring break is not officially over but my hiatus from sending your emails is over and I do have a couple of notes on the case and the project, First, on the case. I know that most of you have not had a chance to read the case, let alone analyze it, but if you did read it, I hope that you will get started on it soon. (If your reaction is what case?, you may want to click on this link:
Second, on the project. I know it has been put on the back burner and will probably stay there until the case analysis is done. Just in case, you have some extra time on your hands, it would be great if you can get the cost of capital for your company done. This will of course require that you estimate a bottom up beta for your company and compute the market value of debt (and leases). I thought that a webcast on estimating the pre-tax cost of debt and the value of debt would come in useful. The webcast is from last year but I used Home Depot as my example for the analysis and it does providing an interesting test of getting updated information. The most recent 10K for the Home Depot at the time of the webcast was as of January 29, 2012. Since a new 10K was due a few weeks after the webcast, I used the 10Q from the most recent quarter (as of the time of the webcast) to update information. (Most of you will get lucky and your most recent 10K or annual report will be ready to use, but just in case it is not...)
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/debt.mp4
Home Depot 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Debt&Cost/HomeDepot10K.pdf
Home Depot 10Q: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Debt&Cost/HomeDepot10Q.pdf
The spreadsheet for computing market value of debt (with leases & synthetic ratings) is attached. While it has the Home Depot's numbers, you can use it for any company. I hope it is useful. Have a good rest of the break and I will see you on Monday!

Attached: HD Debt computation spreadsheet


I hope that you had a great break and have made it back home to enjoy a picture perfect day in New York city. The newsletter covering the last two weeks is attached. While nothing happened last week, it may help remind you of where we are in the class and where we are going. And don't forget to read the case!!

Attached: Newsletter #6

3/23/14 I hope that you are back from spring break and I know that some of you are fighting jet lag and sheer exhaustion. In case you are actually reading your emails tonight, here is a preview of what's coming this week. Tomorrow and Wednesday, we will start on a hypothetical project, a new theme park for Disney in Rio, and you will play the role of decision maker. We will start by projecting the expected earnings on the theme park, and convert those earnings into measures of accounting return. After taking a short detour into using accounting returns to judge entire companies, we will return to the theme park investment and talk about getting from earnings to cash flows first, and then from cash flows to incremental cash flows. We will close by working out ways to time weight the cash flows and come up with time weighted, cash flow measures of return. We will then look at how the analysis would be different, if it were done in a different currency, and dealing with uncertainty in project analysis. This week's sessions will also provide a great deal of background on what you will have to do on the Whole Foods Dining case. So, if you can read the case before the classes, I think you will be able to make the connections (if and when they occur).

I know that it is probably tough to get back into school mode, but I hope that you are making the transition. In today's class, we started by stating our ideal measure of return: it should be based upon cash flows, focus on just the incremental and be time weighted. After defining project broadly as including any type of investment, small or large, revenue generating or cost cutting, we started on the Rio Disney theme park analysis. We laid out the initial costs for the theme park and the assumptions about expenses, both direct and allocated. We began the assessment by estimating two sets of accounting numbers: the book value of capital invested in the project and the after-tax operating income each year for the next 10 years. We then used the two to estimate a return on capital, an accounting measure of return on the project. While that assessment did not look favorable for the project, with the return on capital of about 4% being well below the cost of capital of 8.46% (reflecting both the risk of the theme park business and its location in Rio), we noted that extending the project life may change the outcome.
We then moved from earnings to cash flows, by making three standard adjustments: add back depreciation & amortization (which leaves the tax benefit of the depreciation in the cash flows), subtract out cap ex and subtract out changes in working capital. Finally, we introduced the key test for incremental cash flows by asking two questions: (1) What will happen if you take the project and (2) What will happen if you do not? If the answer is the same to both questions, the item is not incremental. That is why "sunk" costs, i.e., money already spent, should not affect investment decision making. It is also the reason that we add back the portion of allocated G&A that is fixed and thus has nothing to do with this project.
I have attached the post class test for today, with the solution.

Attachments: Post-class test and solution


We talked about sunk costs in class yesterday and how difficult it is to ignore them, when making decisions. You can start your exploration of the sunk cost fallacy with this well-done, non-technical discourse on it:
You can then follow up by reading a tortured Yankee fan's (me) blog post on the Yankee's A Rod problem and the broader lessons for organizations that have made bad decisions in the past and feel the need to stick with them.

Finally, I know that you are probably busy working on your case (spare me my illusions) but in case you have some time, I would like to pose a hypothetical, just to see how you deal with sunk costs. Before you read the hypothetical, please recognize that I am sure that the facts in this particular puzzle do not apply to you, but act like they do, at least for purposes of this exercise:
I hope you get a chance to give it a shot. It will take only a few minutes of your time (though it may take a few years off your life).


In today's session, we made the transition fully to time weighted, incremental cash flow returns by introducing two measures: the NPV and IRR. With the Disney theme park, we brought in what happens after year 10 with a growing perpetuity to get a terminal value and as a result, both the NPV and IRR signaled a "good" project. We also looked at what would happen if we did everything in nominal reais, concluding that using adjusting both exchange rates (and cash flows) and discount rates for differential inflation would leave the NPV unchanged. Finally, we looked at three tools for dealing with uncertainty: payback, where you try to get your initial investment back as quickly as possible, what if analysis, where the key is to keep it focused on key variables, and simulations, where you input distributions for key variables rather than single inputs. Ultimately, though, you have to be willing to live with making mistakes, if you are faced with uncertainty.
I also mentioned Edward Tufte's book on the visual display of information. If you are interested, you can find a copy here:
It is a great book! I also talked about Crystal Ball in class. You have access to it as a student at Stern, at least on the school computers.
I am attaching the post-class test and solution for today's class. Give it a shot, when you get a chance.

I am off to Brazil tonight to do a seminar tomorrow and day after, but rest assured that you will still hear from me. Finally, if you found the risk hedging question we talked about in class this morning interesting or worth thinking about, here is a paper (actually a chapter in a book on risk that I have) that you may find useful:

Attachments: Post-class test and solution


I know that you have lots of other stuff on your plate right now and are not really thinking about corporate finance (I find that hard to believe but then again, I am biased..) In case your fascination with corporate finance leads you to work on the case, here are a few suggestions on dealing with the issues.
a. Do the finite life analysis first. It is more contained and easier to work with. Then, try the longer life analysis. It is trickier...
b. If you find yourself lacking information, make reasonable assumptions. Ignoring something because you don't have enough information is not a good choice.
c. I think the case is self contained. For your protection, I think you should stay with what is in the case. You are of course not restricted from wandering off the reservation and reading whatever you want on restaurants and grocery stores, but you run the risk of opening up new fronts in a war (with other Type A personalities in other groups who may be tempted to one up by bringing in even more outside facts to the case) that you do not want to fight. And please do not override any information that I have given you in the case. (I have given you a treasury bond rate and a risk premium, for instance.)
d. There are tax rules that you violate at your own risk. For instance, investing in physical facilities is always a capital expenditure. At the same time, make your life easy when it comes to issues like depreciation. If nothing is specified about deprecation, use the simplest method (straight line) over a reasonable life.
e. There is no one right answer to the case. In all my years of providing these cases, I have never had two groups get the same NPV for a case. There will be variations that reflect the assumptions you make at the margin. At the same time, there are some wrong turns you can make (and i hope you do not) along the way.
f. Much of the material for the estimation of cash flows was covered yesterday and in the last session. You can get a jump on the material by reviewing chapters 5 and 6 in the book. The material for the discount rate estimation is already behind us and you should be able to apply what we did with Disney to this case to arrive at the relevant numbers.
g. Do not ask what-if questions until you have your base case nailed down. In fact, shoot down anyone in the group who brings up questions like "What will happen if the margins are different or the market share changes?" while you are doing your initial run...

As I mentioned in class, Crystal Ball is probably not going be very useful to you on this case, but you should be able to play with it on the school computers. If you want to look at the product, you can download a trial version (you can use it for 15 days) at the Oracle site:
It is really fun to use (I know that sounds sick, but give it a shot... ) It works only on a PC (one of my pet peeves). So, if you have a Mac (like I do), you have to run Parallel or Virtual PC to get it to work... Sorry!


This may make no substantial change in the case, but Anthony DelPiano noticed a strange coincidence in exhibit 2 (the table with the other restaurant). Every restaurant in the group has revenues = book equity. Of course, this is too good to be true and the mistake was all mine. I copied the revenue column into the book equity column. I have fixed the problem and now have the right numbers for book equity. Notice that there are a few companies with negative book equity. That can and does happen (more often than you may think). I have fixed it both in the case and in the excel spreadsheet and they are attached. I am truly sorry and I will give myself a hundred lashes.

Attached: The WF Dining Case, Peer group (as excel spreadsheet)

3/28/14 I know that you are working on the case right now and that the project is on the back burner. When you get back to it, though, one of the questions that you will be addressing is whether your company's existing investments pass muster. Are they good investments? Do they generate or destroy value? To answer that question, we looked at estimating accounting returns - return on invested capital for the overall quality of an investment and the return on equity, for just the equity component. By comparing the first to the cost o capital and the second to the cost of equity, we argued that you can get a snapshot (at least for the year in question) of whether existing investments are value adding.
The peril with accounting returns is that you are dependent upon accounting numbers: accounting earnings and accounting book value. In the webcast for this week, I look at estimating accounting returns for Walmart in March 2013. Along the way, I talk about what to do about goodwill, cash and minority interests when computing return on capital and how leases can alter your perspective on a company. Here are the links:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ROIC.mp4
Walmart: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pdf (10K for 2012) and http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10Klast year.pdf (10K for 2011)
Spreadsheet for ROIC: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmartreturncalculator.xls
I hope you get a chance to watch the webcast. It is about 20 minutes long....

I hope that you are getting close to done with your DCF. Just a quick note with the newsletter for the week attached. (I am not sure whether the email that I sent about the option webcast came through yesterday. My wifi was spotty in the airport. But if you got it twice, I apologize).

Attached: Newsletter #7


In the week to come, we will continue and complete our discussion of investment returns, starting tomorrow with a comparison of NPV versus IRR and then moving on to look at side costs and side benefits. A big chunk of Wednesday's class will be dedicated to discussing the case (If you ask, "What case?", you are asking for retribution...) By the end of Wednesday's class, we will be close to done with packet 1. Packet 2 is ready to be either downloaded online or can be bought at the bookstore. To download it, go here:

Anyway, speaking about the case, here are some closing instructions:
1. As you write your case analysis, keep it brief. There is no need for story telling, strategic discussions or second guessing yourself. Crunch through the numbers, pick your investment decision rule and make your decision.
2. Once you are done with the case analysis, put together a report. In the report, make sure you include a table that shows your numbers by year (operating earnings, cash flows) and a computation of your discount rate or rates.
3. On the cover page, please include the following:
Names of the group members in alphabetical order
Cost of capital for WF Dining
Accounting Return on Project
NPV for WF Dining (15-year)
NPV for WF Dining (Longer life)
Decision: Accept or Reject
4. Convert your case report into a pdf file and email me the file, ccing everyone in your group. In the subject of the email, please enter "Dinner at WF?".
5. If you can take the key numbers that you get, put them in the Excel spreadsheet which is attached and email them to me by Tuesday night (or earlier if you have them), I will be everlastingly grateful. I would like to show you (as a class) the distribution of findings across groups.

Attachment: Case summary sheet


We started today's class by looking at how things change when you look at a project with an equity investor's perspective: the investment becomes just the portion that is put up by equity investors, income is defined as net income (and thus after interest expenses) and the cash flows are those left over after debt payments. The measures of return also shift to return on equity and NPV/IRR to equity investors, with the cost of equity becoming the hurdle to beat. We also argued that acquisitions are just large projects, governed by the same rules that any other project is governed by.
In the second part of the session, we looked at mutually exclusive investments and why NPV and IRR may give you different answers: a project can have more than one IRR, IRR is biased towards smaller projects and the intermediate cash flows are assumed to be reinvested at the IRR. As to which rule is better, while NPV makes more reasonable assumptions about reinvestment (at the hurdle rate), companies that face capital rationing constraints may choose to use IRR...
In the meantime, you have all of the tools you need to address the WF Dining project. Please send your group project report as a pdf file with "Dinner at WF?" as the subject before class on Wednesday. Please put the decision you made on the investment (Accept or Reject), the cost of capital that you used and the NPV of the project on the cover page. Also, please fill out the attached spreadsheet with your numbers and send them back to me when you have them (or as early as you can). Until next time!

Attachments: Post-class test and solution

4/1/14 I know that you are busy wrapping up the case. So, I don't think that you will have a chance to do this yet, but I just posted this week's puzzle. It is centered in Disney's acquisition of Lucasfilm in 2012, and in particular, its acquisition of the Star Wars franchise.
It is not deep and it is fun (I think) to see how the franchise has generated revenues in multiple ways. Of the $12 billion in toy revenues, I think I have accounted for a good fraction, just for my oldest two kids. As part of the post, I have also linked to a spreadsheet that I put up in November 2012 on the value of the Star Wars franchise, that you can update today. Until next time!

The bulk of today's class was spent on the Whole Foods Dining case. While the case itself will soon be forgotten (as it should), I hope that some of the issues that we talked about today stay fresh. In particular, here were some of the central themes (most of which are not original):
Theme 1: The discount rate for a project should reflect the risk of the project, not the risk of the company looking at the project. Hence, it is the beta for electronics companies that drives the cost of capital for the restaurant project, rather than the cost of capital for Whole Foods as a company. That principle will get revisited when we talk about acquisition valuation... or in any context, where risk is a consideration.
Theme 2: To get a measure of incremental cash flows, you cannot just ask the question, "What will happen if I take this investment?". You have to follow up and ask the next question: "What will happen if I don't take the investment? It is the incremental effect that you should count. That was the rationale we used for counting the savings from the parking expansion that would have happened anyway in year 12.
Theme 3: If you decide to extend the life on an investment or to make earnings grow at a higher rate, you have to reinvest more to make this possible. In the context of the case, that is the rationale for investing more in capital maintenance in the longer life scenario than in the finite life scenario. Thus, I am not looking for you to make the same capital maintenance assumptions that I did but I am looking for you to differentiate between the two scenarios.
I have put the presentation and excel spreadsheet with my numbers online:
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/WholeFoods/WFDiningPres.pdf (I fixed a couple of typos from the presentation in class on the cost of capital page.)
Excel spreadsheet with analysis: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/WholeFoods/WFDiningAnalysis.xls
Please download them. Not only will they be useful to do a comparison of why your numbers may be different from mine but also to get ready for the next quiz. I will also post the grading template for the case, once I am ready to start returning the cases. The post class test and solution for today are also attached. Until next time!

Attacjhments: Post-class test and solution


In a little while, the first graded cases will go out. (If you submitted early, you should get it first. If not, you may have to wait longer). As you look at the case and my grading, I will make a confession that some of the grading is subjective but I have tried my best to keep an even hand. I have put together a grading template with the ten issues that I am looking for in the case.
When you get your case, you will find your grade on the cover page. You will see a line item that says issues, with a code next to it. To see what the code stands for look at the attached document. In the last column, you will see an index number of possible errors (1a, 2b etc...) with a measure of how much that particular error/omission should have cost the group. I have tried to embed the comment relevant to your case into your final grade. So, if you made a mistake on sunk cost (4, costing 1/2 a point) and allocated G&A (5, costing 1/2 a point) in your analysis. On the front page of your case, you will see something like this in your grade for the class (Overall grade; 9/10; Issues: 4,5) I hope that helps clarify matters. It is entirely possible that I may have missed something that you did or misunderstood it. You can always bring your case in and I will reassess it.
Finally, on how to read the scores, the case is out of 10 and the scoring is done accordingly. I hate to give letter grades on small pieces of the class, but I know that will be hounded by some until I do. So, here is a rough breakdown:
9.5-10: A
9: A-
8.5: B+
7.5-8: B
6.5-7: B-
5.5-6: C

Attachment: WF Case Grading Template

4/3/14 We are in a bit of a holding pattern, with the case just turned in and the project on the back burner. The second quiz, though, is coming up. If you feel ready to get started, here are the details:
1. When is it: 10.30-11 on Wednesday, April 10
2. What will it cover: Everything since quiz 1 (Lecture note packet 1: 159-309) but not what we will be starting on Monday. In the book, it is the second part of chapter 4 (cost of debt & capital), chapter 5 and chapter 6.
3. Past quizzes: The past quizzes are already online:
Past quiz 2s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz2.pdf
Solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz2sol.xls
4. Review session: There will be a review session on Tuesday, April 9, from 12-1 in KMEC 1-70 (Sorry but all the larger rooms were taken). The review session will be recorded and the webcast should be up by later in the afternoon.
5. Quiz seating: The seating for the quiz will be as follows:
If your last name begins with Go to
G -M KMEC 1-70
A-F, N-Z Paulson
6. Quiz absence: If you are going to miss the quiz, please let me know before 10.30 am on Wednesday, April 10.
Good luck and happy quizzing.

I think all the cases are done and you should have got them already. It is entirely possible that a couple slipped through my fingers. If so, please email me with your case attachment again (with no changes of course.. I will go back and find your original submission in mailbox and get it graded. I am attaching that grading code that I had sent you before, so that you can make some sense of your grade. If you feel that i have missed something in your analysis, please come by and make your argument. I am always willing to listen. After 70+ cases, I am a little sick of Whole Foods... and I am sure you are too, but I thought that it would be a good time to talk about some key aspects of the case:

1. Beta and cost of equity: The only absolute I had on this part of the case was that you could not under any conditions justify using Whole Food's beta to analyze a project in a different business. However, I was pretty flexible on different approaches to estimating betas from the list of restaurant firms. Also, if you consolidated your cash flows from dining and prepared foods, it is perfectly appropriate (and in fact correct) to take a weighted average of the dining and prepared food betas. The catch, though, is that the weights change over time. It is avoid that re-weighting problem that I used my approach of discounting each of the cash flows using its own cost of capital.

2. Cost of debt and debt ratio: If there was one number that most groups agreed on, it was that the cost of debt for WF was 5% (the riskfree rate + default spread).
On the debt ratio, the only item is leases, there were variations in what you assumed would happen with the lump sum in year 6. I spread it over 13 years but I am fine with groups that used 8 or 10 years instead. It has only a small impact on the value.

3. Cash flows in the finite life case: I won't rehash the arguments about why we need to look at the difference between investing in year 6 and year 12 for computing the parking investment. Many of you either ignored the savings in year 12 or attempted to allocate a portion of the investment in year 6, a practice that is fine for accounting returns but not for cash flows. But here were some other items that did throw off your operating cash flows:
a. Interest expenses: The cash flows that you discount with the cost of capital should always be pre-debt cash flows. That is why it does not make sense to subtract out interest expenses before you compute taxes and income. If you do that, you will double count the tax benefits of interest expenses, once in your cash flows (by saving taxes) and once in your discount rate, through the use of an after-tax cost of debt.
b. Working capital: The working capital was fairly clearly delineated but there were three issues that did show up. One is that a few groups used the total working capital every year, instead of the change, which is devastating to your cash flows. The other is that the working capital itself was sometimes defined incorrectly, with accounts payable being added to accounts receivable and inventory. Third, the fact that working capital investments have to be made at the start of each year means that the change in working capital will lead revenues by a year; many of you had the change in the same year or even lagging revenues.
c. G&A: If you subtract out the allocated G&A to get to operating income, the difference between the allocated and the incremental G&A has to be added back to earnings. While many groups did do this, a few added back the entire amount, instead of the amount (1- tax rate). The reason you have to do this, is because if the expense is non-incremental, the tax benefit you get from it is also non-incremental. Adding back the after-tax amount eliminates both.
d. Capital maintenance: While I am glad that some of you were thinking about capital maintenance, putting in a large capital maintenance in the finite life case is unfair to that scenario. Why would you keep investing larger and larger amounts of money into a business as you approach the liquidation date? However, I allowed for some flexibility on this issue.
e. Salvage value: The salvage value should include both the working capital salvaged as well as the billion in fixed non-depreciable assets.

4. Cash flows in the infinite life case: The key in this scenario is that you need more capital maintenance, starting right now. (Here is a simple test: If your after tax cash flows from years 1-15 are identical for the 10-year life and longer life scenarios, you have a problem...) Though some groups did realize this, they often started the capital maintenance in year 16, by which point in time you are maintaining depleted assets. Those groups that did not include capital maintenance at all argued that they felt uncomfortable making estimates without information. But ignoring something is the equivalent of estimating a value of zero, which is an estimate in itself. Also, you cannot keep depreciation in your cash flows (in perpetuity) and not have capital maintenance that matches the depreciation, since you will run out of assets to depreciate, sooner rather than later. The basis for capital maintenance estimates should always be depreciation and your book capital; tying capital maintenance to revenues or earnings can be dangerous.

Finally, and this is a pet peeve of mine. So, just humor me. Please do not use the word "net income" when you really mean after-tax operating income. Not only is it not right but it will create problems for you in valuation and corporate finance. Also, try to restrain your inner accountant when it comes to capital budgeting. As a general rule, projects don't have balance sheets, retained earnings or cash balances. Also, if a project loses money, don't create deferred tax assets or loss carryforwards but use the losses to offset against earnings right now and move on.

Now that the case is behind us, time to get ready for a busy week coming up. On Monday, we will start on financing choices tomorrow and continue with the trade off between debt and equity after the quiz on Wednesday. So, please do bring packet 2 to class with you.


The first note for the day is that there is an in-practice webcast up and running, just in case you feel the urge to do part 5 of the project. It involves identifying a "typical" project for your company, and unlike the other webcasts, it is not grounded in 10Ks or annual reports. It is short and not particularly intense. The links to the webcast and the slides that accompany it are below:
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/typicalproject.pptx
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/typicalproject.mp4
The links are also online on the webcast page for the class.

As for the quiz next week, I got the dates off in yesterday's email and I apologize. The quiz is on Wednesday, April 9 from 10.30-11 and the review session is on Tuesday, April 8, from 12-1 in KMEC 1-70. I hope that you have had a chance to scan through your case. The comments are embedded in the pdf files and will not show up on a smart phone but will on a computer. If you have any questions, please drop by.


The weather seems to have turned spring-like, just in time for the weekend and I am sorry if the upcoming quiz is keeping you inside for the next two days. The newsletter for the week is attached. In addition, there was one slide from the Wednesday class (where I computed the synergy value to Tata Motors of buying Harman) which was screwed up. I have attached only that page as an attachment. Please replace the slide in your notes (physical or electronic) with this corrected version when you get a chance. I have also replaced the entire file online to make sure that it is okay if you download the file again. Until next time!

Attachments: Newsletter #8, Page 307 of lecture note packet 1


In today's class, we started our discussion of the financing question by drawing the line between debt and equity: fixed versus residual claims, no control versus control, and then used a life cycle view of a company to talk about how much it should borrow. We then started on the discussion of debt versus equity by looking at the pluses of debt (tax benefits, added discipline) and its minuses (expected bankruptcy costs, agency cost and loss of financial flexibility). Even with the general discussion, we were able to look at why firms in some countries borrow more than others, why having more stable earnings can make a difference in how much you can borrow and why having intangible assets can affect your borrowing capacity. After the quiz on Wednesday, we will continue with this discussion. The post class test relates mostly to session 15 (last session on synergy and side benefits), but it is worth doing just to get that part under your belt.

Attachments: Post-class test and solution


I hope to see you at the review, though only some of you, since occupancy of KMEC 1-70 by more than 140 people is both dangerous and unlawful (at least that's what the sign says). I am attaching the presentation that I plan to use for the session. While I will make a few copies, I would appreciated it if you could download and make copies for yourself. The session will be recorded and the webcasts will be up and running by later today. I have also been remiss in not updating the email chronicles. I am sorry. I have no excuses, but I did update them this morning. So, if you want to go back and review every email I have sent for clues about the quiz, please do so. Finally, the standard add ons for the quiz. If you are going to be missing, please let me know before 10.30 am tomorrow. The seating for the quiz is listed below:
If your last name begins with Go to
G -M KMEC 1-70
A-F, N-Z Paulson

Attachments: Quiz 2 review presentation

4/8/14 I know that there is no chance that you will be able to take a look at this before tomorrow, but please do when you do get a chance. It centers around the agency cost question that we talked about in class, i.e., that what is good for stockholders is not necessarily what bondholders like and uses Sears recent actions to illustrate the issues. Start with this article in the Wall Street Journal:
Then follow up by reading the entire discussion question:
Give the discussion questions a shot, especially the last one. Until next time!

The turnaround on the webcast was amazingly fast. The review session webcasts are up and running.
Rich Media Playback (Direct stream): https://nyu.echo360.net/ess/echo/presentation/8f94e867-c1ad-4b1e-9116-022256a7e490

Vodcast Playback (Download video): https://nyu.echo360.net/ess/echo/presentation/8f94e867-c1ad-4b1e-9116-022256a7e490/media.m4v

Podcast Playback (Download just audio): https://nyu.echo360.net/ess/echo/presentation/8f94e867-c1ad-4b1e-9116-022256a7e490/media.mp3

I know that some of you had trouble printing off the pdf version of the slides. Attached is the link to the powerpoint slides.
Hope you find it useful.


I know that you probably had a tough time keeping focus after the quiz, but enough about the quiz. In today's class, we explored the trade off that animates the financing decision. Looking at the debt versus equity choice, we looked at how the simple trade off that we set up in the last class can be used to assess not only the right mix for your company but to analyze broader policy decisions (on tax rates, bailing out companies that are too big to fail etc.). We then followed up by looking at one limiting case, where there are no bankruptcy costs or agency issues, and determined it would not matter how much you borrowed in that scenario. We also looked at what firms seem to prefer to do, when it comes to financing, and why that might be. I am attaching the post class test and solution.

Attachments: Post-class test and solution


The quizzes are done and can be picked up outside the front door to the finance department. As was the case last time, they are in neat, alphabetical piles. Please do not mess them up or take someone's quiz without letting them know that you are picking it up for them. I have put copies of the solutions and the distribution in the shelf below the quizzes, but I am also attaching them. As you review the solutions/ grading, here are some general points I would like to make and these have less to do with the quiz (which is a sunk cost at this point in time) and more with general themes.
Currency, Country Risk and Cost of capital: On problem 1, you were asked to compute a cost of capital in Euro (Swiss Franc) terms. That essentially locks you into using the risk free rate in that currency. You still have to estimate a levered beta (based on the project's debt to equity ratio and the tax rate in the country that it is located) and an equity risk premium based on operations (not on incorporation or project location). There are a few things you can never, ever do in finance. One is averaging rates computed in different currencies. Thus, if you compute a German (Swiss) and a Polish (Hungarian) cost of capital, in different currencies, you cannot average them out to come up with a composite cost of capital. The analogy I would offer would be averaging the temperature in New York today (60 degrees Fahrenheit) with that in London (22 degrees centigrade) and coming up with an average of 41 degrees. So, pick one currency to work with and estimate everything in that currency.
Project cash flows and synergies: This was a fairly conventional problem. On part a, you had to compute an after-tax cash flow and in part b, the value of synergy. The only tricky part is that the discount rates are different for the two: 10% for part a and 12% for part b. That is why it is best in part b, to isolate the after-tax operating income from equipment sales and discount it at the synergy cost of capital of 12%. Those of you who tried to compute the entire cash flows for the project with the synergy not only went through a lot more work, but your discount rate will be wrong. (You would have to use some weighted average of 10% and 12%.. and the weights will change over time)
Risk and discounting; I thought I gave away the solution to this problem in the quiz review, when I talked about a project with cash flows guaranteed by the government and we used the risk free rate to discount those cash flows. In this case, the first option, with fixed licensing fees that are guaranteed by Amgen (Pfizer), the only risk you face is that these firms will default and that risk is captured in the costs of debt for these firms. The biotechnology firm's cost of debt or capital don't enter into the discussion. On the second part, there were quite a few solutions that used EBITDA as cash flow to discount. While this may pass muster in some investment banks, let me lay down the law (for this class) when it comes to EBITDA. It is not a measure of free cash flow and never will be. You have lots of stuff you still have to pay for from this EBITDA, including taxes and reinvestment (if any).
Finally, for those of you who got carried away with capital maintenance, you don't have to incorporate it for finite life projects where the project is expected to end if 5 or 15 years. As always, if you have a problem with the grading of your quiz, don't take it with the TAs. They are innocent. I am the guilty culprit, and you need to talk to me.

Attachments: Solution (a or b)as well as the distribution of grades


I know that you just got back your quiz and you are in no mood for corporate finance but this is a great weekend to get caught up with your big project. We are in the capital structure section and the first thing you can do (if you remember what company you are analyzing) is to take it through the qualitative analysis, i.e., the trade off items on capital structure:
a. Tax benefits: Check out your company's marginal tax rates, relative to those of others in your group. If you have the only Irish company in your group, you have the lowest marginal tax rate in your group and other things remaining equal, should have the least debt.
b. Added discipline: Go back and check the HDS page (with the top 17 stockholders in your company). If you don't see anyone from your management team in that list and no activist investors (Carl Icahn or Bill Ackman), your company could benefit from having more debt (to discipline management).
c. Bankruptcy cost: To assess your company's expected bankruptcy cost, look at two variables. The first is whether they are in a stable or risky business. If you are in a risky business, you have a much higher risk of bankruptcy than if you are in a nice safe business. The second is indirect bankruptcy cost. As I noted in class, these are the negative consequences of being viewed as being in financial trouble: customers stop buying, suppliers demand cash and customers leave. If those costs can be high at your company, you should borrow less money.
d. Agency costs: The more trouble lenders have in monitoring and keeping track of the money that they lend, the more borrowers will have to pay to borrow. Thus, if your company has intangible assets and difficult-to-monitor investments (R&D, for example), it should borrow less money.
e. Financial flexibility: If the investment needs in your company tend to be stable and predictable (a regulated utility, for instance), you should not value flexibility very much. If you grow through acquisitions and/or are in an unstable business, you will value it more and borrow less.
At the end of the qualitative assessment, you are just trying to decide whether you would expect your company to borrow no money, only some money or a lot of money.

Today's in practice webcast takes you through the process of assessing this trade off, with suggestions on variables/proxies you can use to measure each of the above factors. If you are interested, here are the links:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/tradeoffdebt.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/tradeoffdebt/debttradeoff.ppt
Spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/tradeoffdebt/tradeoffHP.xls
I am also attaching two spreadsheets: one contains the marginal tax rates by country and the other has the average effective tax rates by sector for US companies. Hope you find them useful!


I will keep this really short, since I am sure that you are sick of me. Last week, we began our discussion of capital structure by laying out the trade off between debt and equity for all businesses. That trade off, with tax benefit and added discipline as pluses and expected bankruptcy and agency costs as minuses, sets up the framework that we will build on in the coming week to find the right mix of debt and equity for any business. The newsletter is attached.

Attachment: Newsletter # 9 (April 12)

4/13/14 This week, we continue with our discussion of finding the right financing mix. Tomorrow, we will complete our discussion of using the cost of capital approach to find the optimal debt ratio for Disney, Tata Motors, Baidu and Vale. On Wednesday, we will talk about finding the right financing mix for financial service firms and talk about the adjusted present value approach. By the end of the week, you should be able to compute the optimal debt ratio for your firm (in the big project). By the way, if you have not picked up your quiz yet, they are still outside the front door to the Finance department.

In today's class, we started on the cost of capital approach to deriving an optimal financing mix: the optimal one is the debt ratio that minimizes the cost of capital. To estimate the cost of capital at different debt ratios, we estimated the levered beta/ cost of equity at each debt ratio first and then the interest coverage ratio/synthetic rating/cost of debt at each debt ratio, taking care to ensure that if the interest expenses exceeded the operating income, tax benefits would be lost. The optimal debt ratio is the point at which your cost of capital is minimized. Using this approach, we estimated optimal debt ratios for Disney (40%), Tata Motors (20%), Vale (30% with actual earnings, 50% with normalized earnings), Baidu (10%) and Bookscape (30%). Disney was underlevered, Tata Motors was over levered and Bookscape was at its optimal. We closed the class by looking at an extension of the cost of capital approach, which allowed us to bring in expected bankrutpcy costs into the discussion. Again, if you get a chance, please try the optimal capital structure spreadsheet for your firm and bring your output to class on Wednesday.

Attachments: Post-class test and solution

4/15/14 We talked in class, yesterday, about recapitalizations, where a company keeps its operations untouched and changes the mix of debt and equity (by either borrowing money and buying back stock or by issuing equity and retiring debt). In today's puzzle/discussion topic, I look at recaps, using the fight over Dell last year (between Michael Dell and Carl Icahn) as the center. You can get the details of the puzzle by clicking below:
I hope that you get a chance to look at it. It will make the discussions we are having in class more grounded in reality.

We started today's class, using the optimal capital structure spreadsheet to compute the optimal debt ratios for Apple (80%) and Google (20%). You can get the spreadsheets and the financial summary pages for both companies, by clicking on the links below:
Apple & Google Bloomberg summary pages: http://www.stern.nyu.edu/~adamodar/pc/blog/AAPL&GOOGFA.pdf
Apple optimal capital structure: http://www.stern.nyu.edu/~adamodar/pc/blog/AAPLcapstruApr2014.xls
Google optimal capital structure: http://www.stern.nyu.edu/~adamodar/pc/blog/GOOGcapstruApr2014.xls

We then looked at extending the approach to financial service companies, where the focus shifts to regulatory capital and equity and the determinants of optimal debt ratios. We noted that higher tax rates, higher cash flow capacity (EBITDA/EV) and lower risk all translate into higher optimal debt ratios and explain differences in optimals across companies. Across time, the optimal debt ratios for all firms will become higher if the bond market demands less of a premium for risk (default spreads) than the equity market (with equity risk premiums). In the final part of the class, we looked at coming with optimal debt ratios by looking at the rest of the sector and the rest of the market. Next session, we will move on to the other half of the financing principle: whether and when to move to the optimal and designing the perfect debt. The post class test and solution are attached.

Attachments: Post-class test and solution


I know that I have been nagging you to get the optimal debt ratio for your firm done. To bring the nagging to a crescendo, I have done the webcast on using the cost of capital spreadsheet, using Dell as my example. You can find the webcast and the related information below:
Webcast: https://dl.dropboxusercontent.com/u/24597893/CFSpr13/Webcasts/optdebt.mp4
Dell 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/optdebt/dell10K2013.pdf
Dell optimal capital structure spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/optdebt/dell10K2013.pdf
I have attached the Dell capital structure spreadsheet. You will notice that this spreadsheet which is from last year has a few minor tweaks that make it different from this year's version, but it is fundamentally similar.

I know that I have been sending you serial emails on the project over the whole semester and that some of you are way behind. Since it may be overwhelming to go back and review every email that I have sent out over time, I thought it would make sense to pull all the resources that I have referenced for the project into one page, which you can use as a launching pad for starting (or continuing) your work on the project.
1. Resource page: I put the link up to the corporate finance resource page, where I will collect the data, spreadsheets and webcasts that go with each section of the project in one place to save you some trouble:

2. Main project page: I had mentioned the main page for the project at the very start of the class, but I am sure that it got lost in the mix. So, just to remind you, there is an entry page for the project which describes the project tasks and provides other links for the project:
It also has sample projects from prior years that you can browse through.

3. Project formatting: I guess some of you must be starting on writing the project report or some sections thereof. While there is no specific formatting template that I will push you towards, I do have some general advice on formatting and what I would like to see in the reports:
Note, in particular, to put muscle my plea for brevity. I have put a page limit of 25 pages on your entire written report (You can add appendices to this, but use discretion).

Attachment: Dell optimal capital structure

4/18/14 Last week, the TAs ran a tutorial session for those having the most trouble with the quizzes. While I reached out only to those who I thought needed the help most, based upon the first two quizzes, I don't want to shut anyone out of this process. There will be three more tutorial sessions, one each week for the remaining weeks. In the next two weeks, the focus will be on quiz 3.
Monday, April 21, 5-6, Room 2-80
Monday, April 28, 5-6, Room 2-80
Monday, May 5, 12-1, Room 2-80
If you feel that this something that will be helpful to you, please do sign up in the shared spreadsheet below. There is a limit of 45 people, per session.

hope you are enjoying this great weekend! I will keep this short. The newsletter for the week is attached. If you do get a chance, watch the webcast on using the optimal capital structure spreadsheet that I put up on the webcast page yesterday. Better still, if you can plug the numbers in for your own company and get the optimal, I would be ecstatic. Until next time!

Attachment: Newsletter # 10 (April 19)


As we approach the closing weeks for the class, we will build on the optimal debt ratio that we estimated last week and look at the next step: whether to move to the optimal and if so, how quickly and what the right type of debt for a firm should look like. We will them move on to the basics of designing the perfect debt for a firm, both in intuitive terms and by using a quantitative approach. So, if you have the optimal debt ratio for your firm worked out, bring it to class with you tomorrow.

Also, in case it got lost in the email I sent on Friday, I have created a hub for all of the materials related to the project. Visit it, when you get a chance.


In today's session,we looked at applying closure to the optimal debt ratio analysis by looking at how quickly you should move to the optimal and what actions to take (recap versus taking projects), drawing largely on numbers that we have estimated already for the company (Jensen's alpha, ROC - Cost of capital). We then followed up by examining the process of finding the right debt for your firm, with a single overriding principle: that the cash flows on your debt should be matched up, as best as you can, to the cash flows on your assets. The perfect security will combine the tax benefits of debt with the flexibility of equity.

At this stage in the class, we are close to done with capital structure (chapters 7,8 &9) and with all of the material that you will need for quiz 3 (which is not until a week from Wednesday). Thus, you can not only finish this section for your project but start preparing for the quiz at the same time. Quiz 3 and the solution to it are also up online, under exams & quizzes on the website for the class:
I have also attached today's post class test & solution.

Attachment: Post-class test and solution

4/22/14 This week's puzzle lays the foundation for what we will talk about tomorrow: the perfect financing vehicle. Specifically, the perfect financing for a firm will combine the best of equity (the flexibility it offers you to pay dividends only when you can afford them) with the best of debt (the tax advantages of borrowing). While this may seem like the impossible dream, companies and their investment bankers constantly try to create securities that can play different roles with different entities: behave like debt with the tax authorities while behaving like equity with you. In this week's puzzle, I look at one example: surplus notes. Surplus notes are issued primarily by insurance companies to raise funds. They have "fixed' interest payments, but these payments are made only if the insurance company has surplus capital (or extra earnings). Otherwise, they can be suspended without the company being pushed into default. The IRS treats it as debt and gives them a tax deduction for the interest payments, but the regulatory authorities treat it as equity and add it to their regulatory capital base. The ratings agencies used to split the difference and treat it as part debt, part equity. The accountants and equity research analysts treat it as debt. In effect, you have a complete mis mash, working to the insurance company's advantage.
What are surplus notes? http://en.wikipedia.org/wiki/Surplus_note">Surplus notes: What are they?
The IRS view of surplus notes: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/taxview.pdf
The legal view of surplus notes: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/courtview.pdf
The ratings agency view of surplus notes: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/ratingsviewnew.pdf
The regulator's view of surplus notes: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/regulatorview.pdf
The accountant's view of surplus notes: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/GAAPview.pdf
After you have read all of these different views of the same security, try addressing some of the questions in the attached document.

In today's class, we looked at the design principles for debt. In particular, we noted the allure of matching up debt cash flows to asset cash flows: it reduces default risk and increases debt capacity. We then looked at the process of designing the perfect debt for your company, starting with the assets you have, checking to see if you still get your tax deduction, keeping different interest groups happy and sugarcoating the bond enough to make it palatable to bond holders. We then went through three basic approaches to debt design: an intuitive assessment of a company's products and pricing power, an analysis of expected cash flows on a single project and a macro economic regression of firm value/operating income against interest rates, GDP, inflation and exchange rates.
Keeping in mind the objective of matching debt to assets, think about the typical investments that your firm makes and try to design the right debt for the project. If your firm has multiple businesses, design the right kind of debt for each business. In making these judgments, you should try to think about
- whether you would use short term or long term debt
- what currency your debt should be in
- whether the debt should be fixed or floating rate debt
- whether you should use straight or convertible debt
- what special features you would add to your debt to insulate the company from default
Your objective is to get the tax advantages without exposing yourself to default risk. If you want to carry this forward and do a quantitative analysis of your debt, I will send you a spreadsheet tomorrow that will help in the macro economic regressions.

In the second half of the class, we started on our discussion of dividend policy. We began by looking at some facts about dividends: they are sticky, follow earnings, are affected by tax laws, vary across countries and are increasingly being supplanted by buybacks at least in the United States. We will continue the discussion of how much companies should return to investors in the next session. The post class test & solution for today is attached.

Attachment: Post-class test and solution


If you have done the intuitive analysis of what debt is right for your firm, you can try to do a quantitative analysis of your debt. I have attached the spreadsheet that has the macroeconomic data on interest rates, inflation, GDP growth and the weighted dollar from 1986 to the present (I updated it to include 2013 data. The best place to find the macro economic data, if you want to do it yourself, is to go to the Federal Reserve site in St. Louis:
Give it a shot and download the FRED app on your iPad and iPhone. You can dazzle (or bore) your acquaintances with financial trivia.

You can enter the data for your firm and the spreadsheet will compute the regression coefficients against each. You can use annual data (if your firm has been around 5 years or more). If it has been listed a shorter period, you may need to use quarterly data on your firm. The data you will need on your firm are:
- Operating income each period (this is the EBIT)
- Firm value each period (Market value of equity + Total Debt); you can use book value of debt because it will be difficult to estimate market value of debt for each period. You can also enterprise value (which is market value of equity + net debt), if you are so inclined. I know that you should be including the present value of lease commitments each period, but that would require doing it each year for the last ten.

The easiest way to get this data is to use the FA function in Bloomberg and choose the income statement items for operating income and the enterprise value breakdown. You can print off either annual or quarterly data.

I have to warn you in advance that these regressions are exceedingly noisy and the spreadsheet also includes bottom-up estimates by industry. There is one catch. When I constructed this spreadsheet, I was able to get the data broken down by SIC codes. SIC codes are four digit numbers, which correspond to different industries. The spreadsheet lists the industries that go with the SIC code, but it is a grind finding your business or businesses. I am sorry but I will try to create a bridge that makes it easier, but I have not figured it out yet. My suggestion on this spreadsheet. I think it should come in low on your priority list. In fact, focus on the intuitive analysis primarily and use this spreadsheet only if you have to the time and the inclination. My webcast for tomorrow will go through how best to use the spreadsheet.

Finally, I don't know whether you noticed this article in today's Wall Street Journal, but since it is on catastrophe bonds (which we talked about in class) it is perfectly timed for our discussion of debt design in class;

4/25/14 I know that you are busy but I have put the webcast up on debt design, using Walmart as my example, online (on the webcast page as well as on the project resource page). In the process, I did modify the macrodur.xls spreadsheet I sent you and created a version that is a little simpler to use for the bottom up estimates:
Here are the details on the webcast:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/debtdesign.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/debtdesign/debtdesign.ppt
WMT financial summary: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/debtdesign/WMTFAsummary.pdf
WMT macrodur.xls spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/debtdesign/WMTmacrodur.xls
I hope you get a chance to watch the webcast and design the perfect debt for your firm.

Bad news: Another weekly newsletter for you. Good news: It is the second to last one, which is my not-so-subtle way of telling you that the end of the semester is fast approaching.

Attachment: Newsletter # 11 (April 26)

4/27/14 Next week is shaping up as a busy one. In tomorrow's class, we will continue our discussion of dividend policy by looking at the trade off on dividend policy. On Tuesday, there will be a review session for the quiz from 12-1 in KMEC 1-70. On Wednesday, the third & final quiz will be in class. (Seating arrangements will be sent out tomorrow) After the quiz, wewill return to talk about how much companies should return tostockholders.

I am sorry about the confusion around today's class and having to switch rooms on you. Thank you for adjusting so well to the new surroundings. We spent all of the session setting up the trade off on dividends, starting with the argument that Miller/Modigliani made that dividends don't matter (in a world where investors are taxed at the same rate on dividends & capital gains & stock issuance is costless) to the dividends are bad school (built on the almost century long higher tax on dividends) to the dividends are good school. We closed by looking at two bad reasons for paying dividends (that they are more certain, that you had a good year) and three potentially good reasons (to signal to market, to make your clientele happy and to take advantage of debt holders).

However, most of you are are probably focused on the third quiz and a few quick notes:
1. Seating arrangement: The seating for Wednesday's quiz is as follows:
If your last name starts with Go to
A -M Paulson
N- Z KMEC 1-70

2. Review session: The review session will be in KMEC 1-70 from 12-1. The review presentation is attached.

3. Tutorial session: The tutorial session, if you signed up for it, will be in KMEC 2-80 but it will start earlier (at 4.30) to accommodate more questions.

4. Content: The quiz will cover capital structure; Lecture note packet 2: 1-141; Chapters 7-9 in the book.

Attachments: Review session presentation, Post-class test and solution


Since there seems to be some confusion about what will happen if you miss quiz 3 or to your worst quiz, in general, I thought I should clarify the grading process.
1. If you take all three quizzes, your worst quiz will have its score replaced with the average score you get on all of the other exams in the class (two quizzes and the final). Thus, if you get 8, 6 and 4 on your three quizzes and a 26/30 on the final, your worst quiz is of course the 4 and the average score you got on your other exams was 80% (8+6+26)/50, giving you a score of 8 on your worst quiz.

2. If you did not take all three quizzes, the 10% on the quiz you missed was moved to the remaining exams:
Thus, if you missed quiz 1, your weights on the remaining quizzes would be 12% for quiz 2, 12% for quiz 3 and 36% for the final
If you missed quiz 2, your quiz 1 remains at 10%, but your quiz 3 will be 12.5% and your final will be 37.5%
If you miss quiz 3, your quizzes 1 and 2 remain at 10% apiece but your final is worth 40%

The open question seems to be whether you should choose to miss quiz 3, if you did really well on quizzes 1 and 2. The answer is no, since it will not change your scores on those quizzes and your final will now be worth 40%. So, you will be creating more pressure on yourself for the final exam.
Hope that helps!


The webcast for the review session is ready. You can find the links below:
Rich Media Playback: https://nyu.echo360.net/ess/echo/presentation/9bebc756-3fff-4540-a948-5caad7a654a3

Vodcast Playback: https://nyu.echo360.net/ess/echo/presentation/9bebc756-3fff-4540-a948-5caad7a654a3/media.m4v

Podcast Playback: https://nyu.echo360.net/ess/echo/presentation/9bebc756-3fff-4540-a948-5caad7a654a3/media.mp3

I have also attached the presentation for the review session. Please remember the seating for tomorrow is:
If your last name begins with Go to
A- M Paulson
N - Z KMEC 1-70
See you tomorrow!

Attachment: Review session presentation

4/29/14 I know that you are no mood for puzzles and challenges right now, but perhaps you will be after the quiz. If your mood brightens, take a look at the puzzle for the week:
In the puzzle, I take a look at the meandering road that Apple has taken in dealing with its monumental cash build up, from initially acting like it did not exist to actively using it to try to prop up their stock. It is a fascinating story, with twists and turns and my latest blog post (from today) takes you for the ride:
Hope you enjoy it!

The quiz is not done yet. Today, in class, we moved on to look at how much a company can afford to pay out as dividend. This measure, that I titled FCFE, is the cash left over after taxes, reinvestment needs and net debt payments. When a company pays out less than its FCFE, it is accumulating cash, and we laid the foundations for analyzing dividend policy by asking the key question: do you trust managers with your cash? Next session, we will apply this framework to the Disney, Vale, Tata Motors and Baidu. Post class test and solution attached.

Attachment: Post-class test and solution


Your quiz is done and is ready to be picked up outside the front door to the finance department. As always, they are in alphabetical order. Please leave them in the same order. I am attaching the solutions to the quizzes (Quiz a: Lister in problem 1; Quiz b: Castor in problem 1) and the distribution for the quiz. You will be getting a much longer email later today (with the remaining to-dos on the project) and you can view that either as a promise or a threat.

Attachments: Solution (a or b) and distribution of scores


I hope you have had a chance to pick up your quiz. As you look at the calendar, there is some bad news and some good news. The bad news is that you have three class sessions and two weekends left in the class. I know that you may be in a bit of a panic, but here is what needs to get done on the project. (I am going to start off from the end of section 5, since I have nagged you sufficiently about the steps through that one).

1. Optimal capital structure: You need to compute the optimal debt ratio for your company
1.1: Estimate the cost of capital at different debt ratios.
Use capstru.xls, if you need to.
1.2: If you want to augment the analysis by using the APV approach (apv.xls), do so. Clearly, these approaches will add value only if you have a sense of how operating income will change as the ratings change for your company or the bankruptcy cost as a percent of firm value.
1.3: Assess how your firm's debt ratio compares to the sector. You can just compare the debt ratio for your firm to the average for the sector. If you feel up to it, you can try running a regression of debt ratios of firms in your sector against the fundamentals that drive debt ratio (Look at the entertainment sector regression I ran for Disney in the notes).

2. Debt design: As you work your way through or towards the debt design part, here are a few sundry thoughts to take away for the analysis:
2.1. The heart of debt design should be the intuitive analysis, where you look at what a typical project/investment is for your firm (perhaps in each business it is in) and design the most flexible debt you can, given the risk exposure.
2.2. The quantitative tools (the regression of firm value/ operating income versus macro variables) may or may not yield useful data. The bottom-up approach (using sector averages) offer more promise. If you have a non-US company, a US company with little history or get strange results, stick with just the intuitive approach. Use the spreadsheet at this link to do both:

2.3: Compare the actual debt to your perfect debt (either from the intuitive approach or from the quantitative approach) and make a judgment on what your company should do.

3. Dividend analysis: We will be developing a framework for analyzing whether your company pays out too much or too little in dividends. You can read ahead to chapter 11, if you want, and use the attached spreadsheet to examine your company. The session on Monday will be a lot easier, if you do one or the other.
3.1: Examine whether your company has returned cash to its stockholders over the last few years (5-10 or whatever time your firm has been in existence) and if yes, in what form (dividends or stock buybacks). The information should be in your statement of cash flows.
3.2: Assess whether your firm is holding back cash or returning in excess by running your numbers through the attached spreadsheet.
You can watch the webcast I posted on Thursday, if you run into questions.
3.3: Make a judgment on whether your company should return more or less cash to its stockholders.

The next section has not been covered yet in class, but you can get a jump on it now, if you want.

4. Valuation: This is a corporate finance class, with valuation at the tail end. We will look at the basics of valuation next week and you will be valuing your company. Since we will not have done much on valuation, I will cut you some slack on the valuation. It provides a capstone to your project but I promise not to look to deeply into it. Knowing how nervous some of you are about doing a valuation, I have a process to ease the valuation: Download the fcffsimpleginzu.xls spreadsheet on my website. It is a one-spreadsheet-does-all and does everything but your laundry.
You will notice that the spreadsheet has some default assumptions built in (to prevent you from creating inconsistent assumptions). I do let you change the defaults and feel free to do so, if you feel comfortable with the valuation process. If not, my suggestion is that you leave the inputs alone.

You will notice that I ask you for a cost of capital in the input page. Since you already should have this number (see the output in the optimal capital structure on section 1), you can enter it. If you want to start from scratch, there is a cost of capital worksheet embedded in the valuation spreadsheet. There is a diagnostic section that points to some inputs that may be getting you into trouble. I also ask you for information on options outstanding to employees/managers. That information is usually available for US companies in the 10K. If you cannot find it, your company may not have an option issue. Move on.

5. Project write-up and formatting: If you are thinking of the write-up for the project and formatting choices, you can look at some past group reports on my site (under the website for the class and project). I prefer brevity and have imposed a page limit of 25 pages on the report. Please keep your report to that limit. As a general rule, steer away from explaining mechanics - how you unlevered or levered betas -and spend more time analyzing your output (why should your company have a high beta? And what do you make of their really high or low return on capital?). I will send an email just on this part of the process soon.

Ah, where is the good news? You will be done with the project exactly 11 days from today. It is due by 5 pm on May 12


As we work through the analysis of dividend policy, we are setting up for an assessment of dividend policy on Monday where we assess the potential dividends, compare to actual cash paid out and make judgments of where a company should go next. The key is to analyze this over 3-5 years or longer, rather than one year. In the spreadsheet that is attached, I do the mechanics, which are really straightforward to compute the numbers for your company. You can get the webcast by going here:
I have attached Disney's most recent 10K (which I use in the webcast) and the spreadsheet that I used for Disney. I have made some modifications to this spreadsheet since I did this webcast. So, please use the updated version that I have also attached.

Attachments: Spreadsheet , Disney Annual Report (2012)

I have a feeling that notwithstanding the good weather, this may be shaping up as the weekend from hell and I am sure that I contributing to the heat. I don't mean to pile on but the newsletter for this week is attached. As you work through the project, here are some suggestions:
If you are ahead of the others in your group in terms of number crunching, please consider starting to pull the numbers that you already have estimated for the earlier sections together that you can use to build your narrative around.
The key work is narrative. Please don't make the project just a collection of numbers and equations. Instead, think of it as a narrative that you are building about your companies, with the numbers acting as the building blocks. In your final report, think of yourself as sitting across the table from the top managers, reviewing both what they do well right now as well as what they need to change.
No matter how much you crack the whip, there will be a person in your group who is behind and is immune from pressure. You have to trust me on this one, but remember the story of the prodigal son. Get the fatted calf ready and relax: the person will get their work done by next Sunday.
While this is a corporate finance project, it does not mean that you cannot bring your marketing, operations or technology skills into your assessment. You can even use the word "strategy", as long as you don't use it as a shield from discussion.
If you are running into small or big questions, do email me. I will try to get back to you as soon as I can. I would rather that you do that than waste your time on something that may not change your narrative very much.
Finally, the tutorial session for Monday (May 5) has been moved to 4.30-5.50 and a new one has been added on Monday (May 12). If you did sign up for the 12-1 session on Monday, I am sorry to pul this move on you but I have left your names in the Google shard spreadsheet:

If you want to sign up for May 12, please do so.

Attachments: Newsletter #12


In tomorrow's class, we will finish the dividend discussion by looking at Disney, Vale, Tata Motors and two other companies, estimating potential dividends (FCFE) and following through with whether as investors in these companies, we would push them to return more, less or leave dividend policy unchanged. We will then start on valuation, laying the foundation (which should be familiar from investment analysis) tomorrow, and continue talking about value on Wednesday, tying together investment, financing and dividend policy to it.

One more quick note. One nightmare I used to have, when I was a student in a large class, was that my scores were recorded incorrectly. Since I am sure that some of you may have similar concerns about your scores, your quiz and case scores have been entered on NYU classes. If you log in, you should be able to see your scores and confirm that I have them right. This is especially important, if you were one of the few who had their scores changed by me on your quizzes or cases.


In today's class, we put the closing touched on dividend policy analysis by going through the possess of estimating FCFE, the cash flow left over after capital expenditures, working capital needs and debt payments. My suggestion is that you estimate the aggregate FCFE over 5 years (or as many years as you have data) and compare it to the cash returned. If the cash returned = FCFE, you have a rare company that pays out what it can afford in dividends. If cash returned <FCFE, your company is building up cash and you should follow through and look at how much you trust the management of the company with your cash (use the EVA and Jensen's alpha that you have estimated for your company).
If cash returned > FCFE, check to see whether the company is digging a hole for itself and whether you can find a way for them to exit as painlessly as possible. Remember that if you found your company to be under levered, you want them to pay out more than their FCFE at least in the near term.
We ended the session by looking at how most companies set dividends, which is by looking at what everyone else in the sector is doing. I have attached the sector averages for dividend policy (in two files). If you want to see my dividend market regressions, click on the link below:
Note the low R-squareds before you use the regression.
Finally, the post class test and solution are attached.

Attachments: Apple's dividends & FCFE, Post-class test and solution