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The Corporate Finance Email Chronicles: Spring 2015


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...

Email content

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

I am delighted that you have decided to take the corporate finance class this spring with me and especially so if you are not a finance major and have never worked in finance. I am an evangelist when it comes to the 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.
b. The only prior knowledge that I will draw on will be in basic accounting, statistics and present value. If you feel insecure about any of these areas, I have short primers on my web site that you can download by going to
c. If you are taking the Foundations in Finance class simultaneously, don't panic. There will be 150 others in the same position and you will not be at any special disadvantage.
And trust me. We will get through this together.

Having got these thoughts out of the way, let me get down to business. You can find out all you need to know about the class (for the moment) by going to the web page for the class:
This page has everything connected to the class, including webcast links, lecture notes and project links.

The syllabus has been updated and 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.
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 am a minimal user of NYU Classes (I hate closed systems) but am planning to use a young upstart site that allows content, social media and commentary to co-exist called Yellowdig. The site is listed below:
You will shortly be getting an invite to join in the site with a code. Please do accept the invitation. Once you log in, the site will remember you and you will automatically be put into the course page. In fact, feel free to post in the stream page well before class starts.

I will also be posting the contents of the site (webcasts, lectures, posts) on iTunes U. If you have never used it, here is what you need: an Apple device (iPhone or iPad), the iTunes U app on the device and you need to link to the link below:

Like all things Apple, the set up iis very well done and it is neat, being able to catch up on a lecture you missed on your iPad, while browsing through the lecture notes on it too.

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:
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.
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
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.

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 two objectives. 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 2nd in class.


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. Online classes: I sent out an invitation for you to join the class on Yellowdig (https://www.yellowdig.com/board/Corporate+Finance+Spring+2015 ) Many of you have accepted the invitation and I thank you. You can choose to also follow the class on iTunes U or on YouTube (see last email for details).

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 on February 2. See you there!


I am sorry for hitting with you a third email before class has even started, but it never hurts to be prepared. Just to prevent any shock that you might feel when you walk into the class on Monday, here is what you can expect to see:
A soulless auditorium: Paulson Auditorium fits a lot of people, is functional (for the most part), but it is not a warm and fuzzy place. I don’t particularly like the room either, but it is what it is.
A big class: I know that given what you pay for an MBA, you never expected to be back in a big class, but this one is big. At last count, it was 340 and still rising.
If you are a first-year MBA, you will have lots of company: About 320 of the 340 people in the class are first year, full-time MBAs, which is about 80% of the total full-time class. So, you should know lots of people in the class, even if you have never socialized with people outside your block.
If you are taking Foundations simultaneously, you’ve got lots of company too: About a third of the class is taking foundations at the same time as corporate finance. It does add to your work in the first few weeks, but trust me. You will get through it, and I will help.
If you are a EMBA/Langone/2nd year MBA student, I won’t let you get orphaned: There are a few Langone, EMBA and 2nd year MBA students in the class. Some of you have already emailed me, telling me that you know no one in the class and are afraid that you will not be able to find a group. I understand that many of you have different time constraints than the full-time first-year MBAs. However, there may be enough of you to create your own group(s). To help, I have set up a shard Google spreadsheet (I have called it The Orphan List, but don’t take that personally), where you can enter your details and then contact other people on the list.

See you on Monday! Until next time!


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

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

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

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

3. Once you pick your company, you can start collecting the data. You should begin by accessing basic data on your company. I would begin with the old standard, the company's annual report, which you should be able to get off the company's website. If you have a non-US company, you should be able to find an English version of the annual report on most company sites. If not, you better be able to read Portuguese or Spanish. You can also get the latest filings (10K and 10Q) for US companies off the SEC website:
You can get good summary sheets from the Bloomberg terminals (there is one on the second floor in the reading room and there should be one downstairs in the computer room) and if you have never used a Bloomberg before, it can be daunting.... Once you find your company under Equities (and it can take a little searching), print off the following for your company: HDS, BETA, DES (all 4 pages). If you have no idea what I am talking about, just hold on until the end of the week and I will have something more for you to go on.

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

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

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

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

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

9. Yellowdig stragglers: If you have not registered on Yellowdig and would like to and have not got an invitation, please let me know. You can get to the site by typing in:

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: 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.

Attachments: Post-class test and solution


I am glad to see the sun out today, though I wish it were 40 degrees warmer (fahrenheit, not celsius). Anyway, three quick notes for today. The first is that the corporate finance puzzle #1 is up and running. In class yesterday, we talked about the perils of ignoring first principles in finance generally and about mismatching currencies specifically. In this week's puzzle, I look at the turmoil created by the Swiss Central Bank's decision to unpeg the Swiss Franc. I highlight six stories of entities/groups affected by the decision. They range the spectrum from homeowners in Poland to hedge fund honchos. After you read about their plight and empathize with them, please do think about what they share in common, why they are in trouble and how (if at all) they could have avoided their problems.
I have opened up the discussion board on Yellowdig. Feel free to post your thoughts or related articles/links/webcasts.

Second, it took me a while but all of the streams of yesterday’s class are up and running. I know that most of you were in class yesterday but check out the links anyway. You never know when you might need them.
Webcast page for the class for Stream, downloadable video and downloadable audio: http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr15.htm
iTunes U: https://itunes.apple.com/us/course/id959944936
Yellowdig: https://www.yellowdig.com/board/Corporate+Finance+Spring+2015
YouTube: http://youtu.be/hc9JuBlfor4

Third, I hope that you are well on your way to finding a group. In case you are not attached yet, the orphan list that I put up last Friday seems to have quite a few people on it. Please add your name to the list or better still, contact other people on the list. And as you find groups, please take your names of the list:

One final reminder. Please get lecture note packet 1 before class tomorrow and bring it to class. We will be starting on the packet.


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 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 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:
But I found the best part on YouTube. It is Danny DeVito's "Larry the Liquidator" speech:
Watch it when you get a chance. Not only is it entertaining but it is a learning experience (though I am not sure what you learn). Incidentally, it is much, much better than Michael Douglas's "Greed is good" speech in the first "Wall Street " which was a blatant rip-off of Ivan Boesky's graduation address to the UC Berkeley MBAs in 1986 (which I happened to be at, since I was teaching there that year).

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

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

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

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

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

Aswath Damodaran

P.S: Post class test and solution for today’s class attached

Attachments: Post-class test and solution

2/5/15 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:
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/1m1Ij9t0JEFEoxAyKHyFJ6QxRgFHOaN-972frKG7NLeI/edit?usp=sharing )
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.
Find the most recent annual report for your company.
If your company has quarterly reports or filings pull them up as well.
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. However, to use Capital IQ, you have to enroll and this is an email I got earlier this week about enrolling. Please, please register now. 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.
2/6/15 As you get ready to enjoy your weekend, a few notes for today:
1. Lecture note packets: The bookstore has lecture note packet 1 back in stock, 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/webcastcfspr15.htm ), the Yellowdig page for the class, on iTunes U or on the Youtube channel for the class. 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 (the after effects of the surge in the Swiss Franc). 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 Yellowdig and post your views (with links, if you so desire). You have to be registered on Yelllowdig to do this. Most of you are, but if you are not, go to https://www.yellowdig.com.
Until next time!

The first newsletter is attached. It is filled with gripping details of Kim Kardashian’s balance sheet (assets and liabilities detailed), an expose of what exactly is bedeviling the New York Knicks this season and it also contains the true reasons why Russell Wilson threw that pass in the waning minutes of the Super Bowl. (Not really, but a little hype does not hurt). Think of it as the National Enquirer on steroids. Seriously, do whatever you need to do this weekend first, then what you want to do and if you have time left over, take a look at the newsletter. It should not take more than a couple of minutes to browse through.

Attachment: Newsletter #1


This week, we will continue with our discussion of corporate governance, focusing first on where power in a company rests (stockholders, managers, labor, the government) and the consequences for corporate finance. We will then move on to lenders/bondholders and how left unprotected, they can be exploited, and on to financial markets, examining both the predilection of firms to delay/manage bad news and investor reactions to it. Having laid bare the limitations of the assumptions that underlie traditional corporate finance, we will examine alternatives to stock price maximization.

On a different note, the TAs have lined up tutorial sessions starting on February 17th. These are optional and for anyone who feels that they can use extra help. Since the room for the TA sessions fits only 65, I have a Google shared spreadsheet created for the TA sessions and you can see the first two sessions. Please sign up if you are interested. If you lose interest after you sign up, please take your name off the list.

One final reminder. The lecture note packets are back in stock at the bookstore. So, please bring lecture note packet 1 with you to class tomorrow (either in the bookstore version, your downloaded version or a printout). See you in class tomorrow!


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

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

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

Attachments: Post-class test and solution

2/10/15 Ever been to the Shake Shack in Madison Square Park? I remember seeing it when it first opened, being tempted to try it out and giving up on it because of the long lines. Anyway, Shake Shack went public to rapturous response a few weeks ago, with the stock doubling on the opening day. As traders and portfolio managers fell over each other trying to buy the stock and the founder, restauranteur Danny Meyer, was feted, there were a few discordant notes, especially about the way corporate governance is structured at the company. The company not only has high-voting and low-voting shares that are tilted to give Mr. Meyer full control of the company, with well below 50% of the overall holding, but it also has some strange clauses that come close to self dealing. Of course, Shake Shack is not the first company to play this game but it is the latest in a series of companies that have copied the Google model of governance. I would suggest that you start with this Bloomberg article specifically on the corporate governance issue:
Follow up with this document from Shake Shack about their corporate governance practices:
If you really have the time and the inclination, start reading through the prospectus and see if you can catch all the little tricks being used to preserve control in the hands of existing managment:
Finally, take a look at the questions that I have on the issue both from the perspective of the founders/insiders and investors:
And if you can get a conversation going on Yellowdig, all the more power to you!

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

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

I am also attaching the post-class test & solution for this session.

Attachments: Post-class test and solution


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. Since we have no class on Monday, you should have plenty of time.

One final note. If you are trying to watch the webcast of yesterday’s class, you are probably getting a blank screen. I am working on a fix and hopefully should have it up and running soon. Until next time!


I hope you have fun plans for the long weekend, but perhaps you can slip in some corporate finance in there. A few loose ends:
1. Big Acquisition Stories: Since we talked about the sorry history of acquisitions in class on Wednesday, I thought I would brighten your mood with a deal that the market seems to like (Expedia buying Orbitz)
Expedia buys Orbitz: http://www.reuters.com/article/2015/02/12/us-orbitz-worldwide-m-a-expedia-idUSKBN0LG1OA20150212
To connect corporate governance to national interest to acquisition, especially when the company in question is Club Med, but this story has all three in spades:
How the Club Med acquisition happened: http://www.wsj.com/articles/how-the-club-med-bidding-war-was-waged-1423692196

2. Holdings webcast: The webcast for this week is up and it is on assessing who the top stockholders in your company are and thinking through the potential conflicts of interest you will face as a result. The webcast went a little longer than I wanted it to (it is about 24 minutes) but if you do have the list of the top stockholders in your company (the HDS page from Bloomberg, Capital IQ, Morningstar or some other source), I think you will find it useful.
Webcast link: http://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 (dated, but it is the best I could do) that lists the activist investors in the US (with phone numbers, if you ever want to call them):

3. Google Shared Spreadsheet: I have posted these links online on the webcast page, Yellowdig and on iTunes U. Finally, the TAs will be starting their weekly sessions next week. In case you are interested in attending these sessions, the Google shared spreadsheet to sign up is open.


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 (4-5 pages). If you are unsure about how to read this output, I have prepared a packet on how to use your Bloomberg printouts for the rest of this class:
Please take a look at it, if you need a reference.

Attachments: Newsletter #2


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?

We have been dancing around the question of activist investors and whether they are good or bad for markets. The Economist has a cover article on the topic this week that you may find useful:

You may also find this blog post I put up a couple of years ago interesting (or not):

2/17/15 I hope that you had a great weekend, but it is over (as if you did not know). I did give you a break yesterday with no emails but that respite is over. 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 the obituary of Robert Citron,the treasurer of Orange County at the time of the pension disaster in the 1990s. The third (and this is the focus of the puzzle) is a news story about the arrest of an MIT Professor and his HBS-educated son for a hedge fund scam. While it is not the biggest scam of all time, I think it crystallizes why these investment schemes are born, why they work and why they inevitably fail:
Ponzi Scheme: The Original: http://en.wikipedia.org/wiki/Ponzi_scheme
Robert Citron, RIP: http://www.nytimes.com/2013/01/18/business/robert-citron-culprit-in-california-fraud-dies-at-87.html?_r=0
MIT Professor/son arrested: http://www.bloomberg.com/news/articles/2014-08-12/ex-mit-professor-son-to-plead-guilty-in-hedge-fund-scam
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 Yellowdig to post your thoughts (and I have started a discussion topic around risk). Until next time (from Dartmouth College at Hanover, NH, where it is even colder than New York)!

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

A couple of reading suggestions, if you get a chance. One relates to the puzzle that I mailed out for this week on risk and in particular, to Bernie Madoff. If you are fascinated by Madoff, the following article is relevant/readable and I strongly recommend it: http://nakedshorts.typepad.com/files/madoff.pdf
On a different note, here is another article on activist investing that you may (or may not) find interesting"
Hope you enjoy both readings.

Attachments: Post-class test and solution


This week was a short one, but we did get started on risk free rates. At this stage, if you have picked a company, you should be able to pick a currency to do your analysis. Most of the time, the most pragmatic choice is to stick with the local currency, in which the financials are reported. Note, though, that if you have a commodity company, the conventional practice is often to report everything in US dollars, even for non-US companies. Once you pick the currency, you should try to get a risk free rate. As I promised, I do have a webcast on estimating the risk free rate that you may or may not find useful. It is posted on the webcast page for the class, Lore and iTunes U.
Webcast:http: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
While the spreadsheet uses (and links) to the sovereign ratings and CDS spreads from March 2013, I have attached the updated Moody's sovereign ratings (from today) and CDS spreads from January 2015.

Second, in case you want to get started preparing for quiz 1 (Don't freak out. It is not until March 9), you can find all past quizzes that I have given in this class below (with solutions);
Link to past quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Link to solutions to past quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls
I have to caution you that the quiz will look foreign to most of you right now, since we will be covering the bulk of the number crunching material in the next two weeks.

Attachments: Moody's Ratings (January 2015), Sovereign CDS Spreads (January 2015)


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. I have also attached the always-awesome, amazing-read newsletter (not and not) of the week!

Attachment: Newsletter #3

2/22/15 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 tonight or early tomorrow morning.
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
A final point. I have put lecture note packet 2 online, if you want to get a jump on downloading it, though we will not use it until after the break.

The bulk of today's class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium.
1. Survey Premiums: I had mentioned survey premiums in class and two in particular - one by Merrill of institutional investors and one of CFOs. 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:
On the same page, you can pull up my estimates of country risk premiums for about 130 countries.

3. Implied equity premium: Finally, we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2015 update:
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 January 2015 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 on Wednesday. Let's get the project done in real time, in class.

The post class test and solution for today are attached.

Attachments: Post-class test and solution

2/24/15 This week’s puzzle is a really simple one but it is very useful to go from the abstract to real on the notion of firm specific and market risk. You can start with the puzzle description here:
In effect, here is what I do. I take today’s Wall Street Journal and break down the stories under What’s News into firm specific and market risk as well as good/bad/neutral news. If you can do the same with the journal for the rest of this week, you will be surprised at how quickly it becomes second nature. Try it. It’s not that bad.

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

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

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

Attachment: Post-class test and solution


I hope that you have had a chance to print off the Bloomberg beta page for your company. Once you have it, do check the adjusted beta and confirm for yourself that it is in fact equal to
Adjusted Beta = Raw Beta (.67) + 1.00 (.33)
I mentioned in class that I initially was curious about where these weights were coming from but I think I have found the original source. It was a paper written 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.

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… You and I do...


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

Attachments: Bloomberg beta page, Spreadsheet for analysis, Disney Annual Report (2012), Excel regression beta page


The weekly newsletter is attached and as you can see, we are moving along at a reasonable clip. If you have not been keeping up, this is a good weekend to catch up since the first quiz is a week from Monday.

Attachment: Weekly Newsletter #4

3/1/15 I hope that you had a good weekend. In tomorrow’s class, we will continue with our discussion of betas by looking at the determinants of betas and then a way to get around the limitations of a single regression beta. We will continue that discussion on Wednesday and use the approach to estimate a cost of equity for private firms. While we may start on debt and its cost on Wednesday, the first quiz, which is a week from tomorrow, will end with the beta discussion.

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

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

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

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

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

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


Last week, Warren Buffett came out with his much anticipated letter to Berkshire Hathawaystockholders. What made it even more special was that it was his 50th annual letter and he used it to summarize how he built the company up and his investment philosophy. The letter can be found at this link:
In the letter, Mr. Buffett lays out the returns earned by BH stockholders over the last 50 years and contrasts it with the S&P 500. I have put the returns into an excel spreadsheet that is attached and is also at this link:
While that there are numerous corporate finance lessons in the newsletter that are worth debating, I would like you to focus just on the returns and answer specific questions about risk and performance. You can find the questions here:
I hope that you have a chance to try your hand at disentangling the Oracle’s track record. Until next time!


Moving right along, I know that today's class was a grind with numbers building on top of numbers. In specific, we looked at how to estimate the beta for not only a company but its individual businesses by building up to a beta, rather than trusting a single regression. With Disney, we estimated a beta for each of the five businesses it was in, a collective beta for Disney's operating businesses and a beta for Disney as a company (including its cash). If you got lost at some stage in the class, here are some of the ways you can get unlost:
1. Review the slides that we covered today.
2. Try the post-class test and solution. I think it will really help bring together some of the mechanical issues involved in estimating betas.
3. Read this short Q&A on bottom up betas which highlights the estimation process and some of its pitfalls:
Finally, watch your emails tomorrow, since I will be sending the seating chart for quiz 1 as well as the presentation that I plan to use in the review session on Friday. That session is scheduled from 12-1 in KMEC 2-60. I know that many of you will not be able to make it. (In fact, I have to hope that you don't all show up since there are 330 people in this class and that room fits only 160). The class will be recorded and webcasts will be accessible by Friday evening.

Finally, 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.

Attachments: Post-class test and solution


On days like these, I think of moving to San Diego and I am sure that you are tired of winter as well. But the wheels keep grinding and your quiz is still on Monday. Good news is that the break is a few days later and you may be able to get to someplace warmer. For the review session, scheduled from 12-1 in KMEC 2-60 tomorrow (Friday, March 6), I have attached the slides that I will be using. Please download or make copies of these slides:
As I mentioned in class, the session will be webcast and ready for viewing by later tomorrow.

The quiz is on Monday from 10.30-11 and to alleviate the crowding in Paulson, I have also reserved KMEC 1-70 for that time. The seating for the quiz is as follows:
If your last name starts with Go to
A - G KMEC 1-70
H - Z Paulson
If you will be missing the quiz, either because you have another engagement that is too important to break or because you plan to be sick on Monday (just kidding.. that is just my cynical side showing), please email me before the quiz and put “Missing CF Quiz 1” in the subject head.

I won’t even mention the project, since I am a realist.


I know that most of you were not able to make it to the quiz, but the webcast is now up online. You can get it by going to the link below:
I will post versions to Yellowdig and iTunes U, when the downloadable versions are ready. Please download he presentation to use along with the review:
I hope it helps. It may help even more if you go through some of the past quizzes and then watch it.

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


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

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

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

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

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

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

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

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

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

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

Alternatively, you can use the net debt to equity ratio and cut it down to one step
Net Debt to Equity = (Debt - Cash)/ Market value of equity
Unlevered beta for the business = Levered Beta for median company /(1+ (1-tax rate) (Net Debt to Equity))

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

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

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

Attachment: Newsletter #5


A few very quick points and I will leave you to your own devices:

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

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

4. Seating reminder: In case you have forgotten your room assignment for tomorrow:
3f your last name starts with Go to
A- G KMEC 1-70
H -Z Paulson Auditorium

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

Attachment: Beta Addendum


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

One final note. If you have checked your Google calendar, you will notice that there is a group case due on April 1 in class (at 10.30 am). I know that this is way in advance of that date, but that case is also now available to download. I am attaching the case to this email but I will send you another one specifically about the case and what you might be able to get started on in the near term. Back to grading quizzes...

Attachments: Post-class test and solution, Case


Your quizzes are ready to pick up. To get them, please come up to the 9th floor of KMEC. When you get off the elevators, walk towards the main doors to the finance department but before you go in, look to your right. You should see the quizzes in three neat piles on top of the table, sorted alphabetically and face down. Please leave these piles in the same order that you found them, after you have found your quiz.

I have attached the solutions with the grading templates to both quizzes (if you had the risk free rate in 2a in Zlotys, you had Quiz a and in Forints, you had Quiz b). I have also attached the distribution for the first quiz. As I mentioned in class, please don’t overreact to your score on the first quiz. There is plenty more to come. And if you have any issues with the quiz grading, please drop by and let me know your concerns. If you feel strongly that your multiple choice answer was right (and I have found it to be wrong), I am willing to listen to your rationale, though I may not accept it. Do not approach the TAs since they are blameless in this process. I grade the quizzes and any mistakes are mine.

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

3/10/15 I hope you have had a chance to pick up your quiz. I do know that some of you have questions about the grading, and if you do, please do come by. I don’t bite. On a different note, if you are still in the mood for corporate finance, this week’s puzzle is built around bond ratings (since we just finished talking about it in class). The place to start, if you are unfamiliar with the process, is with this very old document from Moody’s which still describes the process well:
Follow it up by reading the news story on Petrobras being downgraded:
Next, take a look at the financials of Petrobras to get a measure of why they are in this much trouble:
Once you have the lay of the land, try answering the questions in this document:
See you in class tomorrow!

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

I also emailed you the case on Monday. Just in case you did not get it (or skipped over that email), you can get the case by going to the link below:

Attachments: Post-class test and solution

3/12/15 No nagging about the project today. Just enjoy your spring break and come back rested and ready. I will not send you an email (and that is a promise) until late next week. So, if you have serious withdrawal issues, check the email chronicles. Be safe and be good!

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

While it has the Home Depot's numbers, you can use it for any company. I hope it is useful. I have also attached the newsletter for the week, in case you have completely forgotten where we were in class.

Attachments: Newsletter #6

3/22/15 I hope that you are back from spring break and I know that some of you are fighting jet lag and sheer exhaustion. In case you are actually reading your emails tonight, here is a preview of what's coming this week. Tomorrow and Wednesday, we will start on a hypothetical project, a new theme park for Disney in Rio, and you will play the role of decision maker. We will start by projecting the expected earnings on the theme park, and convert those earnings into measures of accounting return. After taking a short detour into using accounting returns to judge entire companies, we will return to the theme park investment and talk about getting from earnings to cash flows first, and then from cash flows to incremental cash flows. We will close by working out ways to time weight the cash flows and come up with time weighted, cash flow measures of return. We will then look at how the analysis would be different, if it were done in a different currency, and dealing with uncertainty in project analysis. This week's sessions will also provide a great deal of background on what you will have to do on the Apple iCar case. So, if you can read the case before the classes, I think you will be able to make the connections (if and when they occur).