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|
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:
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.
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
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:
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.
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
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:
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:
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
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
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.
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:
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:
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:
3. Company Choice: On the question of picking companies for your group, some (unsolicited) advice:
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:
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...
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.
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:
|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.
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:
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!
|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 <firstname.lastname@example.org>
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 (email@example.com) or Kathi To (firstname.lastname@example.org) in the 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
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:
I am also attaching the post-class test & solution for this session. Until next time!
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.
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):
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:
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.
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.
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
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:
Corporate Finance Puzzles/ Stories: Each week, we will focus on a story close that week's topic and we have two postings so far:
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.
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.
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);
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:
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.
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.
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:
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:
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:
The post class test and solution for today are attached. The webcasts for today are up and running.
|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:
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:
Finally, I have also attached the post-class test and solution for today.
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
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:
It has also been a busy week for corporate governance.
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".
3. Pimco: Looks like an old fashioned war at the top, with Bill Gross winning out.
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
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:
|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.