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The Corporate Finance Email Chronicles: Spring 2017

 


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. They are in chronological order, starting with the earliest one. So, scroll down to your desired email and read on, or if the scrolling will take you too long, click on the link below to go the emails, by month.

Date
Email content
1/9/17

Happy new year! I hope you have a wonderful break (good news: it is still 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 centrality 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. I know that you feel more comfortable using Excel, but you will need a calculator for your quizzes/exams.
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
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/primer.html
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 page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.html
This page has everything connected to the class, including webcast links, lecture notes and project links. The syllabus has been updated:
http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfsyllspr17.pdf
You will be getting a hard copy of it on the first day of class but the 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.
http://bit.ly/2hsWk6E
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 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 use this enroll code: EXC-JJS-XEA. Alternatively, try this link:
https://itunes.apple.com/us/course/id1192407290
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. I know that you are feeling overwhelmed by now, but for those of you with devices and slower broadband, I also have a YouTube Playlist for the class:
https://www.youtube.com/playlist?list=PLUkh9m2Borqn0-LdT27pVxn-nJwpxTvYa
Please check it out.

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.
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr17.htm
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 fourth edition. It is exorbitantly over priced but you can buy, rent or download it at Amazon.com or the NYU bookstore
http://www.amazon.com/Applied-Corporate-Finance-Aswath-Damodaran-ebook/dp/B00P6SS6MU/ref=sr_1_1?s=books&ie=UTF8&qid=1421799164&sr=1-1&keywords=applied+corporate+finance+4th+edition
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.

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. To close, I will leave you with a YouTube video that introduces you (in about 3 minutes) to the class.
https://youtu.be/ox1ZQ0sbqc8?list=PLUkh9m2BorqnapcQ03A0a_jsbele2kKbp
I hope you enjoy it. 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 have a singular objective. I would like to make it the best class you have ever taken, period. I know that this is going to be tough to pull off but I will really try. I hope to see you on February 1st, in class. Until next time!

1/25/17

As the long winter break winds down, I first hope that you are far away from the gray weather in New York, some place warm and sunny. I also hope that you are ready to get started on classes and that you got my really long email a weeks ago. If you did not, you can find it here:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfemail.html
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:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/corpfin.html
Please do try to download the first lecture note packet by Monday. The direct link to the lecture note packet is below:
Lecture note packet 1: http://www.stern.nyu.edu/~adamodar/pdfiles/clovhds/cfpacket1spr17.pdf (as pdf file) or http://www.stern.nyu.edu/~adamodar/pptfiles/acf3E/cfpacket1spr17.pptx
You can print it off or just keep it on your tablet (as long you can make notes on the pages). You can also buy the packet at the bookstore, at their usual nosebleed prices, if you prefer a bound packet.
2. 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.
3. iTunes U and YouTube links: I had sent these out in my previous email but no harm repeating:
a. iTunes U: To follow the class on iTunes U, download the app from the App store to your device (easier if you have an Apple device but can be done on an Android device as well) and once you have it installed, use this enroll code: his enroll code: EXC-JJS-XEA.
b. YouTube Playlist: There will be a playlist for all of the lectures on this class. You can find it at
https://www.youtube.com/playlist?list=PLUkh9m2Borqn0-LdT27pVxn-nJwpxTvYa

For those of you who have not got around to checking, class is scheduled from 10.30-11.50 in Paulson Auditorium on January 31. See you there!

1/30/17

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 and that you cannot break first principles with immunity.

On to housekeeping details.
1. Project Group: I have not described the project yet, but you don’t have until Wednesday to get started. For the moment, try to at least find a group that you can work with for the rest of the semester. 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 will be picking a company and having a larger group will not mean less work. This group will do both a case and the project, both of which I will talk about next class.
2. Webcasts: The webcasts should be up a few hours after the class 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 up now and you can get it at
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr17.htm
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. If you were not able to come to class today, because of weather issues (or anything else), here are the links to the syllabus and project that were handed out:
Syllabus: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfsyllspr17.pdf
Project: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/cfproj.pdf
3. 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…. One of my regrets with Paulson is that there is no place for you to put a name plate in front of you. I will try to learn names but if I mangle yours or don’t know it
4. Lecture note packet 1: Please bring the first lecture note packet to class on Wednesday. If you want to buy it at the bookstore and the bookstore does not have it, just print off the first 15 pages for Wednesday’s class. Here is the link to lecture note packet 1.
Lecture note packet 1: http://www.stern.nyu.edu/~adamodar/pptfiles/acf4E/cfpacket1spr17.pptx
5. 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
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfemail.html
6. Post class test & solution: Each class, I will be sending out a post class test and solution for each class. This is just meant to reinforce what we did in class that day and there are no grades or prizes involved. I am attaching the ones for today's class.
That is about it, for this email.

Attachments: Post-class test and solution

1/31/17 As promised, here is the first weekly challenge. It is about corporate governance at one of India’s oldest and best regarded family groups, the Tatas. The group which has been around since 1868, has more than a hundred companies under it, and has had only seven heads over its 150-year life, most of whom came from the Tata family. In 2012, Ratan Tata stepped down and Cyrus Mistry was named the new head. While not an immediate Tata family member, he is related by marriage to the family and he himself comes from a family with deep connections to the group going back in time. It is perhaps because of the group’s history that people were shocked when Cyrus was fired on October 24, 2016, and Ratan Tata reinstated as the head. You can start with the blog post that I had on the group in November:
http://aswathdamodaran.blogspot.com/2016/11/the-4c-tradeoff-promise-and-peril-of.html
That lays out my views not just on the Tata group but on family groups in general. Once you have that read, you can then look at the specifics of this week’s puzzle, where I bring the story up to date.
http://people.stern.nyu.edu/adamodar/New_Home_Page/cfpuzzles/cfspr17puzzle1.htm
Once you have read these pieces (and other links), there are four questions that I would like you to answer:
1. What do you see as the pluses and minuses of family group control of publicly traded companies?
2. Can you use that trade off to explain why family group companies grew to dominate Asian and Latin American markets? Can you use it to look at the challenges that family groups will face in the future?
3. Given the Tata Group's current standing and the evolution of the Indian economy/market, do you think that the pluses still outweigh the minuses?
4. Do you believe the governance problem has been resolved with the appointment of Mr. Chandrasekaran as the new CEO of Tata Sons? Why or why not? If no, what would you like to see done at the company to make you feel more comfortable with your investment in a Tata company?
As you can see, these are open ended questions where there is no right answer. To be clear, there is no grade attached to answering these weekly puzzles but I believe that there is a payoff in understanding. I have created a forum on NYU classes (this may be one of the few things that I use NYU classes for) where, if you feel the urge to share, you should. Until next time!
2/1/17

In today's 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 started on why one of these assumptions, that stockholders have power over managers, fails and we will continue ripping the Utopian world apart next class.

1. Administrative Stuff: I went through the structure for the class and mentioned the quiz dates. As noted in class, if you are going to miss a quiz, the 10% from that quiz will be moved to the rest of the exam grade for the class and if you take all three, your worst quiz will get marked up to the average on your remaining exams. Here are a few other details:
Class announcements: I will allow one announcement at the beginning of each class, limited to two minutes. If you are interested in making an announcement, please use this Google shared spreadsheet to sign up. (Link: https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1zeNEAJUZKtZ8lkwkDTXJrk6WDIznHYttfak2Bm5kJLg/edit?usp=sharing)
Orphan list: If you have trouble finding a group, I have started the orphan list at this link. (https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1EU5ifKxB3uep697TLSjdkO0od-TDbPOsK9InHLa-u1w/edit?usp=sharing ) Please go sign up. I filled in the first row with my information but I am not really interested in being part of a group or being adopted.
2. 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 is one of my favorites for illustrating the straw men that people like to set up and knock down. You can find out more about the movie here:
http://www.imdb.com/title/tt0102609/
But I found the best part on YouTube. It is Danny DeVito's "Larry the Liquidator" speech:
https://www.youtube.com/watch?v=JOcz-H5u3Rk
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).

3. DisneyWar: In next week’s session, I will be talking about the dysfunctional state of Disney in the 1990s. If you want to review these on your own, try this book written by James Stewart. It is in paperback, on Amazon:
http://www.amazon.com/DisneyWar-James-B-Stewart/dp/B000W3W6NO
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)

4. 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 airlines as your group. Pick United 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 (these are Depository Receipts that are traded in US dollars) 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 today's class, we are getting started on assessing your company…

If you want to print off the financial statements for your company, I would recommend that you start with the annual report for the most recent year. You should be able to pull it off the website for the company, under investor relations. If you want to keep going, and it is a US company, go to o the SEC site (http://www.sec.gov). If it is a non-US company, you will have to find the equivalent regulatory body in your country. For some of your companies, you will find less data than on others. Don’t fret. This too shall pass. More on this in tomorrow’s email.

Attachments: Post-class test and solution

2/2/17 It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
Project hub: To find out pretty much anything you need to about the project, get questions answered or look at past project reports, here is where you should go: http://people.stern.nyu.edu/adamodar/New_Home_Page/cfproj.html
Find a group: If you have trouble finding one, try the orphan spreadsheet for the class (https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1ZQhI4GzHT4DJSN4RGBUvy7r_I3QLl545nqm6VG5Z-ts/edit?usp=sharing ). If you have a group and need an orphan to adopt, try the spreadsheet as well.
Pick a company/theme: This will require some coordination across the group but pick a company and find a theme that works for the group. Each person in the group picks a company and the companies form the theme.
Annual Report: Find the most recent annual report for your company. If it is a US company, also download the 10K from the SEC website.
Updated information: If your company has quarterly reports or filings pull them up as well.
Board of Directors: Get a listing of the board of directors for your company & start your preliminary assessment.
In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable dataset with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. I believe that you have automatic access to Capital IQ and you should fine it in your Stern Life Dashboard. You will not regret it and it will not only save you lots of time in the future but will give you another weapon you can use in analysis. That’s about it, for now.
2/3/17 As promised, here is the first of the weekly in-practice webcasts. These are 10-15 minute webcasts designed to work on practical issues in corporate finance. This week’s issue is a timely one, if you are working on picking companies for your project (as you should be..). It is about the process of collecting data for companies, the first step in understanding and analyzing them. The webcast link is below:
http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/gettingdata.mp4
I don’t think it is too painful to watch and you may even find it useful. I have also put the link up on the webcast page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr17.htm
The webcasts for the first two classes should be on there, if you missed (physically, metaphysically or mentally) and the links to the project and syllabus that I handed out in the class. At the risk of nagging, please do get the lecture note packet 1 printed off or bought before Monday’s class. It is now available (or was at least yesterday) in the bookstore. One final note. I had mentioned that you had access to S&P Cap IQ yesterday but I did receive a couple of emails from people who were unable to access it still. Let me work on that today.
2/4/17

As you start the weekend, I decided to butt in with the first of my newsletters. As you browse through it (and I hope you do), you will realize that this is not really news or even fake news. It is more akin to a GPS for the class telling you where we’ve been and where we plan to go. It is a good way to get a sense of whether you are falling behind on either the class or the project, especially as we get deeper into the class. So, enjoy your Super Bowl parties and I will see you on Monday!

Attachment: Issue 1 (February 4)

2/5/17 I am sure that you are at a Super Bowl party now and if you bet on the New England Patriots, not feeling that great! So, I’ll keep this short. This week, we will complete our discussion of the objective function in corporate finance, continuing with stock price maximization tomorrow and alternatives to that objective thereafter. Along the way, we will look at shareholder wealth maximization and corporate sustainability and I may kill a few sacred cows along the way. I also noticed that last semester’s corporate finance orphan list has become mixed up with this one. So, here is a new link for this year’s sheet. I am sorry but that was a Google malfunction on my part:
https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1zeNEAJUZKtZ8lkwkDTXJrk6WDIznHYttfak2Bm5kJLg/edit?usp=sharing
If you had added your names to the last list, please put them on this list and if you are looking for group members, please look on this list. I will see you in class tomorrow!
2/6/17

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? We closed by talking about how managers in publicly traded companies can position themselves best to consider the public good, without being charitable with other people's money. Again, plenty to think about while you are sitting in your CSR class! 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
2. Choose FIND YOUR SECURITY
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, find the tab that says 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.

Attachments: Post-class test and solution

2/7/17

Hi,
This week’s puzzle is centered on the growing tendency, at least among tech companies, to issue dual class shares. The founders of these companies argue that dual class shares give them the freedom to make long term decisions that are in the best interests of the company, without having to worry about short term earnings effects and consequences. (Embedded in that belief are presumptions about how markets work or don’t work and you may want to think about them). The puzzle itself is contained at this link:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr17puzzle2.htm
After you have reviewed the puzzle, the questions that I would like to to answer are as follows:
If you are a founder of a successful start-up, would you issue dual class shares? Why or why not?
If you are an investors, would you buy shares in a company with dual class shares? Why or why not
If you were buying shares in Snap, how much you value the non-voting shares at, relative to voting shares? (You don't have to give a number but a sense of whether you would discount the shares and if so by a lot or by very little? What were the factors that you considered?)
More generally, do you think having dual class shares allows a company to be better run as a business? Why or why not?
I am opening a discussion board on NYU classes, if you want to put in your two cents. Even if you don’t plan to go public with your response, please do think about the questions since they will force you to crystallize what you think about public markets and the objective in corporate finance.

Staying on corporate governance, we will continue tomorrow with our discussion in class and return to the Disney story, picking up with Michael Eisner finally getting pushed out of the firm in 2005 and a new CEO, Bob Iger, coming in. Iger was the ant-Eisner, a CEO who seemed to embrace more openness and willingness to listen to shareholders. It is now 12 years later and this story in the Wall Street Journal about Iger captures how much things have changed:
https://www.wsj.com/articles/disney-ceo-robert-iger-may-extend-tenure-again-1486377000
There is a lesson in here somewhere for corporate governance. We’ll try to extract it in class tomorrow.

2/8/17

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.
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:
Ethisphere (never heard of them): http://ethisphere.com/worlds-most-ethical/wme-honorees/
Calvert Social Index: http://www.calvert.com/perspective/social-impact
Domini: http://www.kld.com/indexes/ds400index/index.htm
Dow Jones Sustainability Index: http://www.sustainability-indices.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).
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 Monday & Wednesday. 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:
http://pages.stern.nyu.edu/~adamodar/pdfiles/articles/corpgovstockprice.pdf
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.

This email has gone on way too long already, but one final note. A little more than two years ago, I took a look at Petrobras, just as a cautionary note on what happens to a company when its objective function becomes muddled (with national interest constraints). You can read it here.
http://aswathdamodaran.blogspot.com/2015/02/how-low-can-you-go-doing-petrobras-limbo.html

Attachments: Post-class test and solution

2/9/17

Hi,
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?
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. For those of you have tried to get on Capital IQ and have been unable to, I have good news. I heard back from the powers-to-be that the class has been added to the Capital IQ list and you should be able to access it under SternLife and download data. Let me know if you have any trouble.

On a related note, I will not keep tabs on your company choices officially, since I leave the choice up to you and will let you live with the consequences. It would be interesting though (to me and to everyone else in the class), if we could see the choices. I have never done this before, but I think it would be useful to keep tabs on numbers that you get for your company as we go through the class. It may help you keep tabs on where you are in the project, relative to everyone else.
https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1TpRNmcpg-gNu6mU18bcPbItrGX30xb_domd8hwh5O-c/edit?usp=sharing
Remember that nothing is set in stone and that you can always change your company at any time (even as late as May 8, if you so desire) and I am not grading you on how much you are keeping up but on your final analysis. So, don’t freak out about this, please!

2/10/17

Since you have a long weekend ahead of you, with nothing to do but binge watch The Walking Dead and old episodes of Game of Thrones, I thought I would get in two in-practice webcasts this week and nag you about your project (yet again). Since these webcasts are directly connected to what you will or should be doing on the project, the best way to use them is to pick a company and use the webcasts to get the relevant parts of the project done.

1. Assessing Corporate Governance: This webcast 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.
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/corpgovHP.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/corpgov.ppt
HP Annual Report: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/HPAnnual.pdf
HP 14DEF: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/HPAnnual.pdf
You can find these links in all three forums (my webcast page, iTunes U) and it looks at what information to use and how to use it to assess the corporate governance structure of a company. (Sorry about the striped sweater… Should have known better).

2. Stockholder Holding Assessment: This webcast 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://youtu.be/x_H_4KTeOkc
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 that lists the activist investors in the US:
https://www.carriedin.com/activist-investors/

I hope that you get a chance to not only watch these webcasts but try them out on your company.

2/11/17

I know that you don’t want to spend too much time on this email. So, let me cut to the chase. Second newsletter is attached, hope you have picked a company and checked out your S&P Cap IQ access. Also, one more nag, when you get a chance, please go in and enter your company choice into the shared Google sheet.
https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1TpRNmcpg-gNu6mU18bcPbItrGX30xb_domd8hwh5O-c/edit?usp=sharing
As I said, no grade involved but it will help me see what you are doing (and perhaps suggest some things you should be thinking about) and you to keep tabs of progress. Have a weekend.

Attachments: Issue 2 (February 11)

2/12/17 I hope that you survived the miserable weather this weekend. If you did not, you would not be reading this email anyway, and since you are, I will assume that you have either become one of the Walking Dead or that you are a survivor. Tomorrow, we will complete our derivation of the CAPM and talk about alternatives to it, in hyper speed for two reasons. One is that I have zero interest in reinventing modern portfolio theory and showing the mechanics of correlation and covariance. The second is that while I use the CAPM as a tool to estimate hurdle rates, I am not wedded to it and accept all kinds of alternatives (some of which we will talk about tomorrow). If you are still shaky about even the assumptions that underlie the model, my suggestion is that you read chapter 3 from the applied corporate finance book before tomorrow’s class. On Wednesday, we start on the fun stuff of applying the model, starting with what should be a slam dunk (risk free rates) which is increasingly not and then turning to the equity risk premium, a number that analysts often turn towards services to look up but really has deep implications for both valuation and corporate finance. So, much to do and I hope that you come along for the ride. And a final nag: if you have not picked a company, do! If you have, enter the name into the Google shared spreadsheet, please!
2/13/17

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. You may want to look at the in-practice webcast I sent on the topic last Friday (and is also posted on the webcast page for the class), if you get stuck.

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… If it is in an emerging market currency, more so since you need default spreads (either from a sovereign rating or a sovereign CDS spread). Here are links to the latest versions of both:
Moody’s ratings (Jan 2017): http://www.stern.nyu.edu/~adamodar/pc/blog/sovrRatingsJan17.xls
Sovereign CDS spreads (Jan 2017): http://www.stern.nyu.edu/~adamodar/pc/blog/sovrCDSJan17.xls

Attachments: Post-class test and solution

2/14/17

It is time for this week’s puzzle: Yesterday, we talked about risk and return models in finance, and how they are all built on the presumption that marginal investors are diversified. While the argument for diversification is always a slam dunk in class rooms, with statistical evidence at its base, it is surprisingly contested. Thus, there is a significant subset of investors who believe that diversification hurts investors rather than helps them, and while it is easy to dismiss them as uninformed, I think we make a mistake by doing so. In this week’s challenge, I would like you to think about diversification intuitively and personally. In particular, read the full challenge here:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr17puzzle3.htm

In fact, I can see why some investors may be better off with more concentrated portfolios and I captured the essence of the trade off in a blog post that I did a while back:
http://aswathdamodaran.blogspot.com/2011/11/how-much-diversification-is-too-much.html

Then, please try to answer the following questions:
1. Both sides of this debate use overwrought claims to make their case.
- Some proponents of diversification claim that diversifying across assets and asset classes eliminates all risk from your portfolio. Explain why this is not true.
- Some proponents of concentrated portfolios claim that if you diversify, all you can ever do is keep up with the market. Explain why this is not true.
2. How many stocks/assets would you hold in your portfolio?
a. One to two stocks/assets
b. Three to five
c. Five to ten
d. Ten to Twenty
e. Twenty to Fifty
f. More than Fifty
3. Explain why you chose the number that you did in the last question and how it may change over time (as you age, gain more investing knowledge, get wealthier).
4. If you have an entrepreneurial streak and want to start your own business, you will end up undiversified, investing all your human and financial capital in that start up, at least to begin with. How do you reconcile this action with the argument for diversification?
As before the puzzle is posted on NYU Classes, if you are interested). Please post your thoughts.

2/15/17

We started today’s class by tying up the last loose ends with risk free rates: how to estimate the risk free rate in a currency where there is no default free entity issuing bonds in that currency and why risk free rates vary across currencies. The key lesson is that much as we would like to believe that riskfree rates are set by banks, they come from fundamentals - growth and inflation. I have a post on risk free rates that you might find of use:
http://aswathdamodaran.blogspot.com/2017/01/january-2017-data-update-3-cracking.html

The rest 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. You can find the Merrill survey on its research link (but you may be asked for a password). You can get the other surveys at the links below:
CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422008
Analyst survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2450452

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:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html
On the same page, you can pull up my estimates of country risk premiums for about 150 countries from February 2017
http://www.stern.nyu.edu/~adamodar/pc/ctryprem.xls
The approach that I use for computing country risk premiums is described more fully in this post:
http://aswathdamodaran.blogspot.com/2017/01/january-2017-data-update-4-country-risk.html

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 2017 update:
http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb17.xls
Play with the spreadsheet. Try changing the index level, for instance, and see what it does to the premium.

4. Company revenue exposure: As a final step, see if you can find the geographic revenue distribution for your company. You can then use my latest ERP update to get the ERP for your company.

Beta reminder: Pease 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 next Wednesday. Let's get the project done in real time, in class.

Attachments: Post-class test and solution

2/16/17 If my nagging is paying off, you should have picked a company by now and if you have, you can move on to the equity risk premium part of your project. The first step is to review the material from yesterday’s class first, so that you understand the basics of equity risk premium estimation. Once you have done that, you should print off or download (I prefer the latter) the annual report or 10K for your company. As you browse through the document, look for any information that the company gives you on where it does business. Most companies will give you a breakdown of revenues geographically, though not always at the level of detail that you like, and some may even go further and give you EBITDA or assets geographically. Take what you can get and stick with revenues as your measure of geographic exposure. Your final task is to create a weighted average of the equity risk premiums and while you can use the equity risk premium spreadsheet below and your task can range from simple to slightly messy, depending upon your regional breakdowns:
http://www.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xls
1. If you have your company’s exposure to individual countries: Your task is simple. You can use the equity risk premiums that I have for those countries and take a weighted average.
2. If you have your company’s regional exposure and it matches my regional breakdown: I computed weighted averages for Asia, North America, South America, Western Europe, Eastern Europe/Russia, Asia and Australia/NZ. If your company breakdown is similar or close, you can use my weighted averages.
3. If you have your company’s regional exposure but it does not match mine: You will have to be ingenious, but it is not too difficult to do. Within the country risk premium spreadsheet, you will notice a worksheet that says regional weighted averages, with GDP and ERP for every country, classified by region. Set the GDPs of any country/ region you don’t want to count in your average to zero and the spreadsheet will compute the ERP for your designated region. Thus, if you has a US company that breaks down revenues into the US and the rest of the world, all you need to do is set the GDP for the US to zero and the global weighted average that you get will now be for the rest of the world. If you have no idea what I am talking about, watch the in-Practice webcast which will be put up tomorrow. And one more nag: please remember to enter your company name in the Google shared spreadsheet. We are moving slowly in filling it up but we are getting there:
https://docs.google.com/spreadsheets/d/1TpRNmcpg-gNu6mU18bcPbItrGX30xb_domd8hwh5O-c/edit#gid=0
2/17/17

In advance of a long weekend, I thought I would be delusional and give you the tools to get caught up on the project (as if there is any chance of it happening). There are two in-practice webcasts for this week, one on estimating risk free rates in a currency and the other on computing an ERP for a company:
1. Risk free rate webcast: The first webcast looks at how to estimate risk free rates in different currencies, and how sovereign default spreads can be useful in getting there:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Slides: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
Additional material:
Moody’s ratings (3/13): http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/Moodys.pdf
Sovereign CDS spreads (3/13): http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webc

2. ERP for a company: This webcast looks at both how I estimate equity risk premiums for countries and how to estimate the equity risk premium for an individual company, even one that uses an eclectic geographic breakdown of revenues:
Webcast: https://youtu.be/D3IGn6tH03c?list=PLUkh9m2BorqkNIdjpZY2kI0qzRbEv5F5L
Slides: http://people.stern.nyu.edu/adamodar/pdfiles/blog/ERPforCompany.pdf
ERP&GDP spreadsheet: http://www.stern.nyu.edu/~adamodar/pc/datasets/ERP&GDP.xls

I hope that you get a chance to take a look at one or both.

2/18/17

As you begin a long weekend, I am sorry to intrude (not really, but I thought it was the polite thing to say anyway). The newsletter for the week is attached. It contains scintillating writing, breaking news and mind-blowing insights. I know that we have not got to valuation yet, but I have always believed that you don’t need to take valuation to understand valuation. You can test out that proposition by reading my Snap IPO valuation, if you have the inclination:
http://aswathdamodaran.blogspot.com/2017/02/a-snap-story-valuing-snap-ahead-of-its.html
I have had Snap installed on my phone for five years now, mostly because my daughter was an early adopter and she was very persistent about getting all of us on board. It is an app that is designed for sharers with impulse control and I see its attraction! (In keeping with Snap’s visual focus, if you prefer not to read my (really long) post, you can watch the YouTube video instead:
https://youtu.be/NDK-N9wb5dw?list=PLUkh9m2Borqk3IDRAWNFvMqVqlJDVtcd-

Attached: Issue 3 (February 18)

2/19/17 I should probably give you a day off, since the weather is amazing and you have a long weekend, but I cannot help myself. I will keep it short, though. Since we have only one class this week, we will start on our discussion of relative risk (or beta, if you prefer Greek). In advance, it would really help if
1. You have picked a company
2. Downloaded the financials for the company
3. Chosen a currency to do your analysis in
4. Estimated a risk free rate in that currency
5. Estimated an ERP for your company, given its operating exposure
6. Printed off the beta page for your company from a Bloomberg terminal (If you don’t know where to find one, there are a few in the MBA lounge.)
In fact, if you are well along in this process, please go to the Google shared spreadsheet and enter your company details (so far).
https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1TpRNmcpg-gNu6mU18bcPbItrGX30xb_domd8hwh5O-c/edit?usp=sharing
I will be reaching out tomorrow to those of you who have not visited the page and that is not a threat, just a promise!
2/21/17

Both economics and finance are built on the pillar of risk aversion, i.e., that investors need to be paid extra (over and above an expected value) to take risks. That notion of risk aversion has been challenged and modified over time, but it still is at the heart of how we measure risk and come up with expected returns. Economists agree that not only does risk aversion vary across individuals but it also varies, for the same individual, across time. In this puzzle, which has no right answer, I would like you to wrestle with the question of how risk averse you, explanations that you can offer for that risk aversion and the consequences for your business and investment decision making. You can find the full details of the puzzle here:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr17puzzle4.htm

One of the side products of the growth of robo advisors is a proliferation of tools that investors can use to assess how risk averse they are. This article in the New York Times nicely sets the table. In the article, though the links to free risk assessment services are no longer free. There are, however, plenty of risk aversion tests online. Here are a couple that you can try at no cost:
Vanguard: https://personal.vanguard.com/us/FundsInvQuestionnaire
NJAES: http://njaes.rutgers.edu:8080/money/riskquiz/
Take one of the tests, both to get a measure of how risk aversion gets measured and how risk averse you are as an individual. Then, try to answer the following questions:
Consider the equity risk premium in the market today (use the implied premium from the start of this month). Given your risk aversion, do you feel this premium is sufficient given how risky you think equity is as an investment? (I know that this is subjective but make your best choice)
Do you think that your risk aversion is affected by what you read and watch? If no, why not? If yes, how?
If the market goes up strongly for the rest of the year, do your think your risk aversion will change? If so, in which direction?
If the market goes down significantly for the rest of the year, do your think your risk aversion will change? If so, in which direction?

2/22/17

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:
http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/guidetobloomberg.pdf
Please try to strike while the iron is hot and get this section done for your company.

Attachments: Post-class test and solution

2/24/17 In keeping with project Thursday, 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 more than 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. I have also forwarded this email to the beta calculation guy at Bloomberg. I hope that they have let him out of that basement room, where he was locked up. Tomorrow’s second In-Practice webcast will cover how to read a regression beta.
2/25/17

I went through the Bloomberg regression beta page in class and suggested that you try doing the same with your company. In this week’s 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:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Regression.mp4
Disney’s Regression Bloomberg beta page: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Regression/Disneyregression.pdf
The best way to make this stick is to try this on your company quickly (like right now).

Attachment: Risk Checker spreadsheet

2/26/17 The first quiz is coming a week from tomorrow, but this week, we will continue with our discussion of regression betas. Tomorrow, we will look at alternatives to regression betas starting and that discussion will spill into Wednesday. Along the way, we will look at how to estimate the beta of a company after a merger and the betas for different parts of a multi-business company. If you want to read ahead in chapter 4 of the book, please do so. It is one of the most critical parts of the class, especially since it will feed into almost everything else we do later in the class.
2/27/17

We spent most of today's class 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.

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.

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

2/28/17 I hope that you are out in the park or on that walk down fifth avenue, testing out your beta reading skills. This week’s challenge is on betas and I have used two companies, Valeant and GoPro as my lab experiments. First, check out the description of the puzzle (with the beta pages for both companies):
http://people.stern.nyu.edu/adamodar/New_Home_Page/cfpuzzles/cfspr17puzzle5.htm
Once you have browsed through it, here are the questions that I would like you to consider:
For Valeant, list out the key regression statistics (alpha, beta and R squared) in the four regressions. Do you notice any patterns? Can you explain them?
If you are analyzing Valent and were required to use one of these regression betas, which one would you use and why?
With the beta that you decided to us, estimate the range on the beta and what it means for your estimate of cost of equity.
During the period of the regression, Valeant lost almost 80% of its market value and was involved in multiple scandals and management turnover. What effect, if any, do you think this crisis has had on your estimated regression betas (increased them, decreased them, left them unchanged)? Explain why.
With GoPro, why is the standard error on the beta so high? What are the consequences for using GoPro's regression beta?
On a different note, the first quiz is on March 6 (next Monday). Here are a few notes on the quiz:
What it will cover: The quiz will cover all the material we get through before tomorrow’s class (roughly side 174 or 175 in the packet). It will be on risk free rates, equity risk premiums and betas for the number crunching part and there will be a section on corporate governance, for those of you like the fuzzy stuff. In chapters in the book, it will cover from chapter 1 through midway in chapter 4, when I estimate betas for companies.
How to prepare: The best start, if you have missed a class or classes, is by watching that class. If you start early, I would also recommend working through the post class test and solution for each class. Once you feel comfortable with that, you can start on the past quizzes. The quizzes go back to 1997 and I would suggest starting with the most recent quizzes and working backwards. The links are below:
Past quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls
Quiz Review: I am truly sorry that I will not be able to do the quiz review in person (and I promise that I will be back to doing that on the next two quizzes) but I have leave for Lagos, Nigeria, right after my afternoon class tomorrow and won’t be back until Sunday. Don’t worry! I will still be checking emails and answering questions, if you have any. However, I do have the review session from last year recorded on YouTube and you can watch it when you get a chance. The slides that I used are also in the attachment:
Review webcast: https://youtu.be/ZPo46wQGfe0
Review slides: http://www.stern.nyu.edu/~adamodar/pptfiles/acf3E/reviewQuiz1.ppt
TA review sessions: The TAs are all incredibly knowledgeable and helpful. Please avail yourself of the TA review session on Thursday. The sign up sheet is at this link: https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1EU5ifKxB3uep697TLSjdkO0od-TDbPOsK9InHLa-u1w/edit?usp=sharing.
3/1/17

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:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/TenQs/TenQsBottomupBetas.htm

Catching up with past promises, if you remember, we looked at the beta for Disney after its acquisition of Cap Cities in the last class. The first step was assessing the beta for Disney after the merger. That value is obtained by taking a weighted average of the unlevered betas of the two firms using firm values (not equity) as the weights. The resulting number was 1.026. The second step is looking at how the acquisition is funded. We looked at an all equity and a $10 billion debt issue in class and I left you with the question of what would happen if the acquisition were entirely funded with debt. (If you have not tried it yet, you should perhaps hold off on reading the rest of this email right now)
Debt after the merger = 615+3186 + 18500 = $22,301 million ( Disney has to borrow $18.5 billion to buy Cap Cities Equity and it assumes the debt that Cap Cities used to have before the acquisition)
Equity after the merger = $31,100 (Disney's equity pre-merger does not change)
D/E Ratio = 22,301/31,100= 0.7171
Levered beta = 1.026 (1+ (1-.36) (0.7171)) = 1.497
Note that I used a marginal tax rate of 36% for both companies, which was the case in 1996.

I mentioned that there the class will be spilt on Monday for the 10.30-11 quiz slot. I was lucky enough to get KMEC 2-60, which is a bigger room and here is the seating arrangement for the quiz:
If your last name begins with Go to
A -J KMEC 2-60
K - Z Paulson
The review session slides and links are on the webcast page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr17.htm
That is about it for now. The post class test and solution are attached.

3/2/17

Three very quick notes.
1. The Quiz
The review session is tomorrow from 12-1 in KMEC 2-60. I know that many of you will not be able to make it, but the session will be recorded and the webcast should be up and running by tomorrow night. I have attached the slides that I will be using for the review. I sent out the class seating in yesterday’s email, but in case you missed it:
If your last name begins with Go to
A -J KMEC 2-60
K - Z Paulson

2. Class yesterday:
In class yesterday, I went through how I computed the beta for the move business in Disney. Since there were a lot of numbers and a fair amount of calculation, I don’t blame you if you lost track of what I was doing. I did a YouTube video that takes you through the process a little more slowly and in steps. So, if you have any questions, try this link:
https://youtu.be/sC3N8Kt8EOw?list=PLUkh9m2Borqls7VGVRN0qpfba4Zdevusi

3. Project
I won’t nag you about the project this week, though computing a bottom up beta for your company can be a good review for the quiz, while getting you caught up at the same time. I am planning on checking the shared Google spreadsheet and sending you a prompter if I don’t see a company name next to yours. So, consider yourself warned.

And this email is from Nigeria.

3/3/17 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 after the quiz, 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 in 2015. You can easily replace it with the global averages from 2016 that I also have on my site and tweak the spreadsheet. Give it a shot!