a. iTunes U: I will also be posting the material for the class on iTunes U. If you have never used iTunes U, you need an Apple device (iPad or iPhone) and have to download the iTunes U app (free). Then use the enroll code: ENT-ZXA-JYL.

I really like the set up and I think you may enjoy it too. If you have an android, it is a little more involved, but try downloading Tunesviewer, an Android app that lets you use iTunes U.

b. YouTube Channel: There is a final option, if your broadband connection is not that great and you are watching on a Tablet/smartphone. There is a YouTube playlist for this class, where all class sessions will be loaded.

https://www.youtube.com/playlist?list=PLUkh9m2BorqkuWvvYH30HoAG8WwZfN6pK

When you get a chance, check it out.

I know that week one is approaching and one of the themes of this class will be that while your valuation looks like a collection of numbers, the story that holds these numbers together is the glue. Consequently, to get a handle on valuation, you have to learn to navigate that space between stories and numbers and your skills have to be broad. I know that you are still on break and that the last thing you want to do is reading, but if you do get a chance, please read this post that I have on my blog:

http://aswathdamodaran.blogspot.com/2016/08/investing-and-valuation-lessons-from.html 

The post was triggered by the awe I felt, looking up at Brunelleschi’s Duomo in Firenze this summer, but the thoughts are all investing/valuation thoughts. In fact, I jwrote a book on connecting stories to numbers and here is the post introducing the book (which became available about a year and a half ago).

http://aswathdamodaran.blogspot.in/2017/01/narrative-and-numbers-how-number.html 

If you did get a chance to read my long email last week (and I would not blame you if you skipped it), you probably missed the link to the lecture note packet that I said was available at this page:

Also, if you missed the first email, the email chronicles will record them for posterity and you can find them by going to this link:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqUGemail.html 

That is about it for the moment. If you want to get ready for the class, start by keeping up with the business news for the next week. See you next week in class. 

We are officially rolling. If you enrolled in the class in the last couple of days, you did miss the first two emails but they are already in the email chronicle, in case you are interested:

Email chronicles: http://people.stern.nyu.edu/adamodar/New_Home_Page/eqUGemail.html

This chronicle will be updated at the end of each week to include all emails sent up until then. There were three handouts in class today and you can find the links in the email I sent out earlier today. The final exam is scheduled for May 15 from 2 pm- 3.50 pm.  A quick note about today's class.  During the session, I told you that that this was a class about valuation in all of its many forms – different approaches (intrinsic, relative & contingent claim), different forums (for acquisitions, value enhancement, investing) and across different types of businesses (private & public, small and large, developed & emerging market). After spending some time laying out the script for the class (quizzes, exams, weekly tortures), I laid out the philosophical foundations for valuation, by noting that it is a bridge between story and numbers and that it is different from pricing. Next session, we will spend a little time talking about the project that will run through the entire semester, but you can get a jump by trying to find a group and a company (each of you will be doing a company)

1. Group: Please do find a group to nurture your valuation creativity, and a company to value soon. 
2. Company Choice: Once you pick a company, collect information on the company. I would start off on the company's own website and download the annual report for the most recent year (probably 2017) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings. (You can pick any publicly traded company anywhere in the world to value. The non-US company that you value can have ADRs (but does not have to have ADRs) listed in the US but you still have to value it in the local currency and local market. You can even analyze a private company, if you can take responsibility for collecting the information.)
3. Webcast of today’s class: The web cast for the first class are up and running (or at least the streaming version). You can access it by going to: http://people.stern.nyu.edu/adamodar/New_Home_Page/webcasteqUGspr20.htm. The links to iTunes U and YouTube will also be up shortly.
4. Lecture Note Packets: You can wait for the bookstore to get its act together and get the packets ready or you can get a jump by downloading the lecture note packet online. It is available at the top of the webcast page (see link above) in either pdf or ppt format. 
5. Post class test: To review what we did in class today, I prepared a very simple post-class test. I have attached it, with the solution. Give it your best shot.

I had also mentioned my blog as the venue that I post my most recent ruminations on markets, and I just posted the second of the data updates that I do at the start of each year 

It looks back at a very interesting decade, one where I learned more about all the things that I still have to learn.

Attachments: Post-class test and solution.

1. Valuation of the week: I know that you have been told that valuation is boring and I am going to try to prove that wrong with your first valuation of the week.  So, let’s have some fun. I have always been a Star Wars fan, and like other fans, I was a little worried when Disney bought Lucas Films (and with it the rights to the Star Wars franchise) for $4 billion a few years ago. Disney was explicit about its plans at the time, and said that it planned to produce three major Star Wars movies, continuing the story, and three side stories (like Rogue One) filling in history. I went to see Force One in December 2015 and wrote this post on my blog about what I thought the value of Star Wars was at the time;

I assigned a value of almost $10 billion to the franchise, with a big chunk coming from the side products (toys, software, apps) coming from the franchise. You can download the spreadsheet that contains the valuation here:

The problem with technology is that you cannot live with it and you definitely cannot live without it. As those of you who were in today’s class know, the sound system failed catastrophically, which also means that the recordings of the classes have no sound. If you were unable to come to class, you will be unable to watch the class. I do have a fall back for you to use. I have a recording that I made last year for this same class, which actually goes all the way through the valuation introduction packet (we got through only page 8 in the actual class). If you are interested, you can try the recordings.

You can even watch it, if you were in the class, and it passed by in a haze. I am sorry, but that is the best that I can do. Until next time!

The problem with technology is that you cannot live with it and you definitely cannot live without it. As those of you who were in today’s class know, the sound system failed catastrophically, which also means that the recordings of the classes have no sound. If you were unable to come to class, you will be unable to watch the class. I do have a fall back for you to use. I have a recording that I made last year for this same class, which actually goes all the way through the valuation introduction packet (we got through only page 8 in the actual class). If you are interested, you can try the recordings.

You can even watch it, if you were in the class, and it passed by in a haze. I am sorry, but that is the best that I can do.

This is the first project-related email that you will be getting. Remember that every Thursday is project email day, and in this one, I want to make sure that you

1. Find a group: The groups are yours to create and you should try to have at least 4 people in a group and not more than 7 (that limit is for your own projection).  If you are being ostracized and no one wants you, I would suggest some therapist time in the near future, but for the moment, you can add your name to what I will call the orphan list for the class: https://docs.google.com/spreadsheets/d/1gjlvbVj7YgzAqOZY5SODBnUNVLx88k5BVrWyFUCQbn8/edit?usp=sharing 
2. Pick a company: This will require some coordination across the group to make sure that you meet the minimum criteria (at least one money loser, high growth, emerging market, service company). In making this choice, remember that you can value any business you want, public or private, small or large, listed in any market. There are at least a couple of entrepreneurs in the class who are valuing their own businesses and  quite a few valuing privately owned family businesses. 
3. Annual Report: Find the most recent annual report for your company. If you are valuing a private business, just ask for income statements and balance sheets for as long as you can get them (I will assume that you know the owner or better still, you are the owner).
4. Public filings: If your company has quarterly reports or filings pull them up as well. 

In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable dataset with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. I sent you the instructions on how to sign up in yesterday’s email. 

On a different note, I mentioned that you have two teaching fellows for this class. Their names and email addresses are below:

They will be holding weekly review sessions on Tuesdays from 12.30- 1.30 every week, starting week after next (February 11) and you can sign up, if you are interested in the google sheet below:

https://docs.google.com/spreadsheets/d/1wFqamsj9ARHZQdVvLsuecZjAFrZ3O70HNGeTcfiQCPE/edit?usp=sharing 

Finally, I just put up my Tesla valuation update, after it blew out expectations on its earnings release yesterday:

https://bit.ly/2S2vSF9 

If you get a chance, browse through it. Until next time!

Two quick notes. 

1. Valuation Tools Webcast #1: The first is that I did put up the first valuation tools webcast on the basics of data collection. I know that many of you still pondering your company choices and group dynamics, but if and when you pick a company, the first step is to get the raw material you need for your valuation. These include data on the company (annual reports, regulatory filings like the 10K/10Q), sector wide data (numbers for other companies in your sector) and macro economic data. I know that many of you already know exactly how to do this. However, if you feel uncertain, you can try this webcast out.

Nothing earth shattering to report after the first week. I hope that you have a fun weekend planned, because I have nefarious plans to ruin your next 15 weekends. If you have a group, enjoy it with them. If you don’t, find one. If you are ostracized and feel abandoned, join the orphan list that I sent out earlier this week. 

Attachment: Newsletter #1 (2/1/20)

It is Super Bowl Sunday and I hope that you find a party. Remember that this is less about football and more about the chips and dip. Once you are done partying, though, please check on the following ahead of class tomorrow:

1. If you missed a class, either physically or mentally, please watch the webcasts of the classes (even though the second session is a recorded webcast)
2. If you have not found a group yet, I have heard that Super Bowl parties are good times to look for one. Please find a group.
3. Start thinking about a company to value for the class or better still, pick a company.
4. We will be starting on the first lecture note packet tomorrow. I am not sure whether the bookstore has the packets for sale, but if they don’t and you don’t waste your money anyway, download the first packet (and just the first one). You can find them here: http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqUGspr20.htm.  If you do, please don’t use the Stern printers to print the packet. It is 360 pages and its screws up the printers.

We started class by completing the discussion of pricing and real options, at least in a big picture sense. We then began our intrinsic value discussion by talking about the weapons of mass distraction. If you want to read the blog post I have on the topic, try this link:

We then spent some time setting up the process of discounted cash flow valuation, arguing for consistency in discounting. If the cash flows that you are discounting are cash flows to equity, estimated either as dividends or as potential dividends, the discount rate should be the cost of equity. If the cash flows that you are discounting are pre-debt cash flows, i.e,, cash flows to the firm, the discount rate has to be the cost of capital. Done right, the value of equity should be equivalent with both approaches. Try the weekly challenge that I will send out on Wednesday, if you do not believe me. Next session, we will start with a discussion of risk free rate, a foundational number that will drive the rest of our calculations. I have attached a post class test for today, with the solution, but I think that four of the questions relate to risk free rates, which we have not covered yet. So, if you want to wait until Wednesday’s class, you might have an easier time. 

In this valuation of the week, I am revisiting a company that I have visited many times before. It is Tesla, In June 2019, I valued Tesla at about $190 and since the stock was trading at $180, I bought it for the first time. You can find the valuation and the post at this link:

On Thursday (January 30), I revalued Tesla again, and came up with a value of $427. If your question is whether value can change that much in a  short period, with a stock like Tesla, my answer is yes. Since the stock was selling for $640, I sold the stock and I did so reluctantly, partly because those profits will now be treated as ordinary income (not capital gains).

 In the post, I explained that I was selling even though the mood was euphoric, and the momentum entirely on the upside, and the market confirmed that by pushing the stock up to $780 today. Needless to say, I’ve heard from quite a few people (mostly Tesla fans) asking me whether I regretted selling too early. You may not not believe me, but I don’t. I have to play the game I came to play and that game is a value game, and if try to play a game that I am not very good at, I risk going down a slippery slope. As the old Wall Street adage goes, you can be a bull or a bear, but never a pig, and I am thankful that I had a good ride on Tesla and it is time for me to move on.

https://aswathdamodaran.blogspot.com/2020/01/an-ode-to-luck-revisiting-my-tesla.html 

If you get a chance, open the spreadsheet that I have my valuation of Tesla from last week:

Feel free to change what you think needs to be changed. The key levers are revenue growth, the target margin and the sales to invested capital. If you have been following Tesla (and have a point of view on the company), change the valuation to reflect your story. I know that some of you feel not quite ready to make big changes. So, make small ones. When you are done, go to this Google shared spreadsheet and enter what you found.(My numbers are already in there), 

https://docs.google.com/spreadsheets/d/13wH9MMB3jcozwL2LC1UVnuPLXpYw1eNqBM8EOjJMJZE/edit?usp=sharing 

We started the class with a discussion of risk free rates, exploring why risk free rates vary across currencies and what to do about really low or negative risk free rates. The blog post below captures my thoughts on negative risk free rates:

http://aswathdamodaran.blogspot.com/2016/03/negative-interest-rates-unreal.html 

We just started on the discussion of equity risk premiums but the contours of the discussion should be clear.

a. Historical equity risk premiums are not only backward looking but are noisy (have high standard errors). You can the historical return data for the US on my website by going to

Click on current data, and look to the top of the table of downloadable data items.

b. Country risk premiums: In the next session, we will start talking about country risk premium If you want my estimates of country risk premiums, check under updated data on my website. The direct link is below:

In class on Monday, we started with the claimholder consistency principle, arguing that there are two ways to value equity: discount cash flows to equity at the cost of equity or discount cash flows to the firm at the cost of capital and then subtracting out debt. Done right, I argued that you should get the same answer. I hope that you will have a chance to try the first weekly challenge. It starts simple but it will test you on your implicit assumptions about valuation. It does not have to be turned in to me and it will not be graded. I will post the solution on Sunday and you can check your answer out. Just another prod on the project. Please pick a company and find a group soon.

On the project front, please find a group and pick a company. If you have already done that, you can start on computing a risk free rate to use in your valuation, an easier task for some of you than others, but it will allow you to put into practice what we talked about in class yesterday. Also, please try to get access to S&P Capital IQ soon. I have again attached the pdf file that explains how.

A few quick notes. The first is that I did put up an in-practice webcast today. It is a very basic webcast on how to read a 10K, using P&G as my example. The links are below:

Downloadable video:  http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Reading10Knew.mp4 

YouTube Video:   https://youtu.be/UzUJzdn7c2w?list=PLUkh9m2BorqmRAGzJb5OIvTAKZZu9HWF- 

P&G 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/Reading10KPG.pdf

P&G Valuation (excel spreadsheet): http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls

I hope that you are enjoying your first weekend back at school. I will intrude with a couple of notes. 

1. Teaching Fellows/Review sessions: Just a reminder about the TFs for this class. There are two:

• Samuel Mackey, smm792@stern.nyu.edu
• Courtney Go, courtney.go@stern.nyu.edu 

I trust them to give you good advice and help, and they will have review sessions every Tuesday, starting February 11, from 12.30-1.30. The room is KMEC 3-110 and you can sign up in this Google shared spreadsheet:

2. Newsletter:  The second newsletter for the class is attached. As I said, there is usually not much news in these newsletters. Think of it more as a timeline for the class, telling you where we went last week and laying out our plans for the week ahead. If you get a chance, take a look at it. 

Have a great weekend! Until next time!

This week, we will continue with our discussion of discount rates by moving on to equity risk premiums. They are central not just to valuation but also to investing, since succinctly put, they represent the price of risk in the equity market. Specifically, I will take you through the process of estimating a forward-looking estimate of the equity risk premium and if you want to get a jump on this process, you may want to take a look at this spreadsheet:

http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb20.xlsx 

 I know that it looks complicated, but it is effectively computing an IRR for equities collectively, and using that IRR to back out an equity risk premium. 

For this week, I thought I would switch gears and value a very different company from last week’s hot mess which was Tesla. This week, I look at Aramco, a company that became the most valuable public company (in terms of market cap) over night, when it had its IPO last year. The place to start this valuation is with the Aramco IPO, a document written by bankers for bankers, and hence thoroughly boring:

https://www.saudiaramco.com/-/media/images/investors/saudi-aramco-prospectus-en.pdf?la=en&hash=8DE2DCD689D6E383BB8F4C393033D8964C9F5585 

You can follow up with two posts that I wrote at the time of the IPO:

1. http://aswathdamodaran.blogspot.com/2019/11/a-coming-out-party-for-worlds-most.html

2. http://aswathdamodaran.blogspot.com/2019/11/regime-change-and-value-follow-up-post.html 

The excel spreadsheets containing my valuation of Aramco is here:

Take a shot at valuing Aramco and when you are done, here is the Google shared spreadsheet:

Until next time!

I want to check to see where you are on the project. Assuming that you have picked a company, joined a group and downloaded the financials, I hope that you have estimated a risk free rate in the currency of your choice. Once you have that, please try the following:

1. Get a geographical breakdown of the countries/regions of the world that your company operates in. It should be in your annual report or financial disclosure forms somewhere. If you cannot, those are the breaks… just move on. You can only work with the information that you have.
2. Get the total equity risk premium and country risk premium for the countries/regions: If you want to do this yourself, the weekly challenge will give you a template. If you want to take a short cut and use my estimates of country risk premiums, that is fine too.
3. Get a weighted average of the country risk premiums: You can use revenue weights of the country/region to compute the weighted average. You can use my equity risk premium estimates, by country: http://www.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xlsx

Risk free Rates

Moving right along, it is time for the valuation of the week, and this week’s company bears no resemblance to your first two. It is Heineken, the Dutch brewer, with a worldwide brand name. The reason that I am focusing on the company is not because I like its product, but because this is a valuation that I did in September 2019, in Euros, when the risk free rate was negative in that currency. Begin by reading this post on negative interest rates from 2016:

http://aswathdamodaran.blogspot.com/2016/03/negative-interest-rates-unreal.html 

You can continue by reading this piece that provides the background for the company and my valuation:

You can download the historical data on the company here:

http://www.stern.nyu.edu/~adamodar/pc/blog/HeinekenHistory.xls 

You can download my valuation here;

http://www.stern.nyu.edu/~adamodar/pc/blog/Heineken2019.xlsx 

You are welcome to update the valuation to include the additional quarter of information that has come out, but not much has changed. Try playing with the risk free rate/stable growth rate combination, and I use the word “play” deliberately, since you are messing with first principles when you do so. When you are done, you can enter your number and an updated price into this Google shared spreadsheet:

https://docs.google.com/spreadsheets/d/1tSJbG5ZTkaBS2smQpAUn3AZFFIPamBj2NfhILSLjYho/edit?usp=sharing 

If nothing else, this will give you bragging rights, since 99% of people who do valuation for a living have not only never valued a company with negative risk free rates, but many in this group will claim it cannot be done. You can say it can and will be done.

First things first. By now, I hope that you are in a group and have picked a company. If you have, you should be able to complete two basic tasks related to discount rates, estimating risk free rates and equity risk premiums. Along the way, you have to get comfortable with how to estimate implied equity risk premiums, and to further you on that path, I posted a webcast on equity risk premiums last week. Take a look at it, when you get a chance. Finally, I posted my fourth data update for this year, and since it is about topics that we have been talking about in class, I thought it may help. You can find it here:

Finally, the second and third packets for the class (yes, there are three) are available to download on the webcast page for the class:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqUGspr20.htm 

1. Trailing 12-month numbers:  In the webcast for this week, I look at how to compute trailing 12 month earnings from a 10K and a 10Q: 

This week, we will build on the discussion of earnings from last week by first bringing in capital expenditures and working capital, and then moving on to the really messy task of estimating future growth & cash flows. Also, if you had a chance to work on the third weekly challenge, the solution is at the link below in two parts:

Even if you did not try the challenge, it may be worth reviewing. One final note. There are about 3 people in the class who are still looking for a group. If any of you have open slots in your group, please let me know.

I promised I would deliver, and here you go. The first quiz is coming up and I wanted to cover some logistical details.

1. Quiz location and timing: The quiz will be from 3.30-4 on Monday, March 2. There will be an extra room to take the quiz. Please see below for where you should go for the quiz:

A - H KMEC 2-60

I - Z Paulson

There will be class after the quiz. So, please come to Paulson, when you are done with your quiz.

I am sorry to get this to you so late on a Tuesday, but I shelved my original plan of valuing Kroger (Berkshire Hathaway’s latest investment addition) in favor of the news of the moment. Without doubt, that is the market collapse that we have seen in the last few days, in response to news about the Corona Virus. I had talked about this a little bit during class yesterday, but it was  only partly formed then, and I spent a portion of today to pull together a more complete assessment of how the virus is affecting S&P 500 value. Start with this reading:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/Valuationofweek/ViralMarketCrisis.html 

Follow up by downloading the spreadsheet I created to assess the impact on value drivers and value. 

http://www.stern.nyu.edu/~adamodar/pc/blog/S&PValueCorona.xlsx 

Change the numbers to reflect what you think about the virus and revalue the index. Once you are done, go to the Google shared spreadsheet and enter your numbers.

https://docs.google.com/spreadsheets/d/1uMao9YURI6NgtHAGFKGB23fsK_JYaDk0iETQb6sDNeU/edit?usp=sharing 

I would really like everyone to give this a shot. Honestly, it should not take more than 5 minutes, and if nothing else, you will get bragging rights that you have valued the Corona Virus. Just don’t catch it! 

I was going to remind you of the project and working on it, but if you are turning your attention to the quiz, you may be checking out the links I sent yesterday for the past quizzes and solutions. Since the link I sent yesterday included only a subset of the quizzes and stopped in 2016, I decided to update the files and create new links. Try these for all the quizzes through 2019, and remember to work backwards, since the earlier quizzes may have slightly different coverage:

Past quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1.pdf 

Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xlsx

I hope that you find some time to not just review the lecture notes, but work through the practice problems. In fact, it is the working through problems, using the lecture notes as a guide, that will provide the deepest learning. 

I have two valuation tools webcasts for this week. 

I know that you are busy and I have a guess about what you are working on. I have attached the newsletter, on the odd chance that you may want to take a look at it. Some final thoughts. Don’t drive yourself into a frenzy for the quiz. It is just a quiz, just 10% and if you do badly, you can make it go away. That said, it is better to do well than badly. So, good luck and see you in class on Monday (and don’t forget to go to the right room, at the right time):

I’ll keep this brief since you are probably busy preparing (if you say, “for what”, I think that you are in big trouble). A reminder again about tomorrow’s quiz and quiz seating. The quiz is in the first 30 minutes of class (from 3.30-4.00) and it is open-book, open-notes but no laptops or connectivity. The seating is as follows:

I hope that you are fully recovered from the quiz trauma. Come on! It was not that bad. When the quizzes are done, I will post the solutions and send out instructions on pick up. So, stay tuned! 

During the session, I continued with the discussion of growth, moving from fundamental growth to how to estimate growth when returns on capital and margins are changing. I then spent some time on the terminal value calculation, and the rules to follow with terminal value. Since this will make or break your valuation, I would encourage you to watch this section until you have it nailed down. I have a series of five posts on terminal value that you may or may not find useful. Here they are:

1. http://aswathdamodaran.blogspot.com/2016/11/myth-51-if-you-don-believe-in-forever.html 
2. http://aswathdamodaran.blogspot.com/2016/11/myth-52-as-g-rto-infinity-and-beyond.html
3. http://aswathdamodaran.blogspot.com/2016/11/myth-53-growth-is-good-more-growth-is.html
4. http://aswathdamodaran.blogspot.com/2016/11/myth-54-negative-growth-rates-forever.html
5. http://aswathdamodaran.blogspot.com/2016/11/myth-55-terminal-value-ate-my-dcf.html

They are not too painful to read. 

When Uber filed its prospectus in 2019 for its IPO, I jumped on the chance to read the prospectus and value it at the time:

Prospectus: https://www.sec.gov/Archives/edgar/data/1543151/000119312519103850/d647752ds1.htm 

Uber IPO post (with value link): http://aswathdamodaran.blogspot.com/2019/04/ubers-coming-out-party-personal.html

I valued the company at between $27-28 at the time, and the stock was initially offered at $45 before imploding in the weeks following. In October 2019, the stock was trending down and I revisited it in a more general post on 2019 IPOs lessons for public market investors:

My October 2019 valuation of Uber is available here:

In fact, I bought Uber at between $28 and $29, doubled my holding when the stock unlocked and dropped to $27 and have had a good run since. If you get a chance, download the Uber 2019 valuation, update the numbers and come up with your current value for Uber and then enter the numbers in Google shared spreadsheet:

In this session, we tied up our last few pieces of terminal value, with the emphasis that it is not growth that creates value, but excess returns. After briefly talking about choosing the right model to use to value your company, we started on the discussion of the loose ends in valuation by looking at how best to value cash and then moved on to the messier question of valuing cross holdings. We will continue to look at other loose ends next week. . The post class test and solution relate that terminal value section. I have also attached a weekly challenge built around terminal value, if you want to give it a shot. 

Attachments: Post class test and solution

In this week’s webcast, I look at the terminal value and how to run diagnostic checks on it to make sure that you have been internally consistent and grounded while estimating this number. 

Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/terminalvalue.mp4 

Sample DCF: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvalueDCF.xls 

Diagnostic Spreadsheet: http://www.stern.nyu.edu/~adamodar/pc/termvaluecheck.xls

In fact, you have everything you need to run a DCF valuation of your company. Just do it! 

Today we put the last loose ends to rest. First, we completed the discussion of cross holdings and why they are so difficult to deal with in valuation. Second, well looked at complex businesses and how to incorporate our concerns into value. Then, we went back and looked at defining debt. While we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Next, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. If you are still a little shaky on why stock-based compensation should not be added back as a non-cash expense, please read this post:

Again, I plead (beg, cajole) that you keep moving on your DCF. It is daunting if you just keep thinking about doing it. It is actually much easier to just do it. 

By now, you have probably heard that NYU has decided to move classes online starting with Wednesday’s class and going through at least the first week after the break (March 11, March 23 and March 25). I am still wrestling with the most effective way to do this. I could use Zoom and teach the classes live, but I have to check to see whether it can accommodate 250 people. One way or the other, we will get the classes in, do valuations of the week, talk about the events of the day and keep working on your valuation projects. Since next week was scheduled to be spring break, I was planning to give you a week off emails, and I will stick with that plan. More on this later today!

Finally, I know that today is usually the day I post a valuation of the week. Given the turmoil in the market, it is unlikely that any of you can get your heads wrapped around individual companies, but I decided to give a shot at valuing Zoom. You can find the financials and my valuation at the links below:

Online meeting market information: https://financesonline.com/video-web-conferencing-statistics/  (Note that this came out before the Corona Virus and reflects the expectations then)

Zoom’s prospectus: http://www.stern.nyu.edu/~adamodar/pc/blog/ZoomProspectus.pdf

Zoom’s updated financials: http://www.stern.nyu.edu/~adamodar/pc/blog/ZoomFinancialsMarch2020

I tried to value Zoom this morning ant it is very much of on the fly valuation. 

My valuation of Zoom: http://www.stern.nyu.edu/~adamodar/pc/blog/ZoomMarch2020.xlsx

If you have no time to check a spreadsheet out, try this picture that summarizes my Zoom valuation:

I think I have told a pretty optimistic story, especially on the revenue front. The entire online meeting market is only $6 billion this year, but was expected to grow to $20 billion by 2025 and I am assuming that the Corona virus scare will accelerate this shift. An investment in Zoom is as much a bet on how much of a shift there will be, as it is on Zoom dominating that market.

Once you have tried your hand at valuing Zoom, please input what you find in the shared Google spreadsheet:

In yesterday’s session, which was our first online class,  I argued that you need to start with a  business story, check to make sure it is possible, plausible and probable, convert the story into valuation inputs and let the valuation play out. If you are interested in this part of valuation or think you may have to work on your left or right brain, I have a book on stories and numbers (Narrative & Numbers, Columbia University Press) that you might like. I will see you online on March 23. If you were unable to watch the Zoom session, I made a YouTube version (somehow, the Zoom did not record) and you can see it here:

You can also find the slides and the post class test and solution at the usual spot:

I also know that some of you, who are exchange students, have been advised to go home for the rest of the semester and I think that is good advice. It is good to be around friends and family, when you are in a crisis (especially a health one). If you decide to go home, don’t worry. You can still track the class from home (and for all we know, everyone in the class may hav to do this anyway) and I will find a way to give your quizzes and a final exam that you can take at home. The project may be tricky, since it will require working (at least minimally) with a group, but you can still meet virtually.

Speaking of the project, I know that I have been nagging you about getting the intrinsic value portion of your project done soon, to allow for the feedback on March 29. You are welcome to use my data, spreadsheets and valuation tools webcasts along the way. If you are planning to get caught up during the break, I have added atools webcasts to help you on your way. This webcast looks at how to value employee options and bring them into your equity value.

Incidentally, if you find yourself lost among the host of spreadsheets on my site, go with the ones that have a ginzu in the name. They are the most comprehensive, and in an Orwellian this, the simple version of each of the spreadsheets usually is the one that works across most companies. 

For non-financial service companies: http://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzu2020.xlsx

For financial service companies; http://www.stern.nyu.edu/~adamodar/divginzu2020.xlsx

Most of all, just remember to stay safe and be good, and you will not hear from me until a week from Saturday.

Attachments: Post class test and solution

It’s only been a week, but it does seem a lifetime ago, since I talked to you last, and I hope that you and your loved ones are safe and in good health. Now that the class has been moved entirely online, I decided that it would be good to make sure that we had the logistics lined up, given that my end game is that you receive the same experience (or as close to it) as we can get, as you would have at Stern. Here is what I thought made the most sense, and I am willing to listen to suggestions:

1. Location and time differences: I know that you are scattered around the world, and I would like you to start by going to the link below and telling me where you are, what your time zone (- or +, relative to New York) and the name of the company that you have picked for your project. (Yes. I am still nagging you about that): https://docs.google.com/spreadsheets/d/1dzjBw1oddHy1kfM_mEBng6hlUq4nC064kqTus2bvpk4/edit?usp=sharing
2. Classes: We will meet on Zoom for our regular classes every Monday and Wednesday, from 3.30 pm-4.45 pm, NY time. The Zoom links are under NYU classes and Zoom is an easy platform to learn to work with. I would really, really like you to be online live for the classes. I know that some of you are in time zones, where being in class will be difficult, and a few of you might have broadband issues. I will record the Zoom session on my computer and create YouTube videos and downloadable audio files, if you miss a class. The advantage of the YouTube videos is that they adjust to your bandwidth, and you can even watch them on a smartphone, with cell service.
3. Office hours: I will hold an hour of office hours, on Zoom, where I will be at least on Zoom every Thursday from 12 pm - 1 pm, NY time, if you have questions.  If you have questions that you think can be resolved by email, please reach out to me. I will set aside an hour each day to answer emails. So, it is not an imposition.
4. Quizzes and Final exam: The quizzes will be on the scheduled dates (March 30 and April 20), and they will be taken online. They will still be open book, open notes, but you can use your laptop as well, and the only change that I will make (and I do it with a heavy heart) is that it will be multiple choice. The quiz will be accessible for 6 hours that day (to allow for different time zones) and will take one hour to do (once started). If you are qualified to get extra time, please let me know and I will set the time differently for you. The final exam will be on May 15 and will be available for 24 hours (NY time) and take 2 hours to do. 
5. Project: The project is going to require some lifting and I will help you as best as I can. I would prefer that you stay a group for the project and interact, but I would like you to work on your discounted cash flow valuation of your company. I updated the equity risk premiums and default spreads in my valuation spreadsheets to reflect the changed world we are in. I will obviously be available for questions on your company, which may be going through convulsions as you do your analysis. The final project report is still due on May 11, before the Zoom class that day.
6. TA review sessions: Sam Mackey and Courtney Go, the TAs for this class, will continue to have their scheduled office hours and review sessions, but they will be on Zoom.

I know that these are unsettling, scary times, but we will get through them, and perhaps even come out stronger, smarter and kinder on the other side. I have been posting weekly about how this is playing out in markets, and you can all find the first three below:

There will another one coming on 3/20.

2. Quiz 2: Your next quiz will be a week from Monday. While I will send you details about how to take the quiz online, and how it will be structured, you can (if you want) start working on past quiz 2s, keeping in mind that while the questions will look similar, the online quiz will be a multiple choice quiz, not an open ended one. I have attached links to past quizzes, quiz solutions and to a review webcast for the quiz:

I hope that you are safe and doing well. As we return from the spring break, we will be returning online and tomorrow’s class will be on Zoom from 3.30-4.45 pm, New York time.  

I know that this may be tough for some of you, given the time difference, but please attend if you can.If you cannot, the recordings will be on Zoom and I will also make a YouTube video for low bandwidth devices and settings.Those recordings and additional material will be on the webcast page for the class:

In tomorrow’s class, we will start on valuing companies, starting with a  valuation of the index as of January 1, 2020, and a discussion of what’s changed since, and then moving on to more difficult and messy cases. In the meantime, I am working on updating my equity risk premiums, since the last few weeks have upended them. More details to come soon! 

I hope that you are well and that you had a chance to review yesterd’s session, in case you were unable to attend. Unfortunately, the only place to find the recording is on NYU classes, under Zoom (look at past classes). My computer recording which I use to create the YouTube and audio files failed yesterday. I am sorry. In this week’s valuation of the week, I look back at a valuation I did last year, when Brexit was still up in the air in the UK and people were unsure about how it would play our, with as many as seven different options on Brexit, ranging from a No-deal Brexit to no Brexit at all. I tookeasyJet, a UK company that is particularly exposed to Brexit, because it gets so much of its revenues from the EU, which has stringent rules on who can or cannot fly between EU countries, and tried to value it under different scenarios. You can read my valuation thesis here:

In today’s class, we started on the dark side of valuation, where we value difficult-to-value companies. We started the valuaton of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. I argued that to to value a young company, you have to visualize what you see as success for it and work backwards to get the numbers by year, and adjust this valuation for the likelihood that the company will not make it. We then moved on to companies in transition and how you can arrive at two values for these companies: a status quo value and a changed-management value and how you have to take an expected value. 

One final note. Your second quiz is on Monday, March 30, and it will be online and multiple choice. You will be able to find the quiz by going to NYU classes and once you have found this class, by checking the menu items on the left. You should see tests and quizzes and if you click on that, you should see quiz 2 but only on Monday. My suggestion is that you check it out sometime in the next few days, so that you are not desperately looking on Monday. The quiz can be taken any time from 6 am, NY time, to 3 pm, NY time. Once you open the quiz, you have an hour to complete the five multiple choice questions. So, please don’t open the quiz until you are ready to take it. And you have to complete the quiz by 3 pm. So, start by or before 2 pm. The quiz is open book, open notes, open iPads and open computers.  I have put the review session for quiz 2 up online (on the webcast page for the class) with the presentation. The links are below:

Presentation: http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/valquiz2review.pdf
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz2review.mp4
You can also find all past quizzes with the solutions in the following links:
All past quiz 2s: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2.pdf 
Quiz 2 solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2sol.xlsx 

I will be having Zoom office hours tomorrow, from 2 pm - 3 pm, NY time, if you have any questions.  Finally, this may be piling on, but I also have a weekly challenge on management options, which you can consider to be review for the quiz as well.

First, a reminder that my first Zoom office hours will be at 2 pm, NY time (in about 15 minutes) and I will stay on for an hour, if you have any questions. I will have to check out at about 2.58 pm, NY time, since I have office hours for another class at 3 pm. I know that your project DCFs are not due until a week from tomorrow and you may be preparing for your quiz on Monday (March 30), but if you decide to work on your DCF and even turn it in early, here is some general guidance.

1. You will be turning in a spreadsheet, not a report.
2. Your submission will be individual, not as a group. Please remember to put “My Perfect DCF” in the subject and list your value and the current price in your email.
3. You are welcome to use any of my spreadsheets. The most forgiving and versatile of my spreadsheets is http://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzuCorona.xlsx. It has updated equity risk premiums, as of yesterday, for both the US and other countries, and it gives you a way of inputting the effect of the virus on this year’s earnings and revenues. 
4. Each of your valuations tells a story. Try to make it explicit and built it into your spreadsheet. In a prior email, I said that I was attaching an example of what I meant from my Snap valuation and I never did. It can be found in my post at the time of the Snap IPO:  http://aswathdamodaran.blogspot.com/2017/02/a-snap-story-valuing-snap-ahead-of-its.html 

 hope that you are well. I know that you are probably preparing for the quiz and I won’t disturb you. If you feel overwhelmed, set this email to the side and come back to it on Monday,  but I wanted to clarify a couple of points on which there seems to be confusion about your project valuation.. There are three choices that you can use in doing your valuation.

1. You do not have to use the spreadsheet that I sent you. You can build your own, but if you do, don’t make it so complicated that it is impossible to tell where numbers from. And no, you cannot use or adapt for use the investment banking spreadsheet from your last summer or job. I can almost guarantee you that it will violate at least three and probably more simple consistency rules, and it will trigger me. If you do build a spreadsheet.

2. You can use the spreadsheet that I sent you yesterday, with added features to capture the effect of the virus on risk premiums and earnings/revenues this year. In fact, this week’s valuation of the week takes you on a tour of that spreadsheet, using Boeing’s numbers to illustrate. You can find the YouTube link and the spreadsheet link below:

• YouTube: https://youtu.be/F9GfXJ-IrSA
• Spreadsheet: http://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzuCorona.xlsx

3. You can take my spreadsheet and adapt it, but if you do, please do not hard code numbers directly into the valuation. That will make it more difficult for me to decipher what is going on, and for you to change your mind, as you will later this semester. Instead, create extra rows or cells in the input sheet, and add your changes in there. (I give you an example during the video guide).

I hope you are safe and healthy this weekend, as as your loved ones. I know that you are working on preparing for the quiz, and have no time for small stuff, but I am attaching the newsletter for this week. If you get a chance, take a quick look. It does not contain earth shattering news or purple prose, but…. Two different notes:

1. I know that you are working on your DCFs, as evidenced by the emails that I have been receiving, and I am grateful. A few of you have already turned in your DCFs and I think I have returned those already. If you have not got it back, you may have missed putting “My Perfect DCF” in the subject. Try again.

2. We will be done with packet 1 soon. Please download the second and third packets of the notes when you get a chance. They are available at the top of the webcast page:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqUGspr20.htm

Attachments: Issue 8 (March 28)

For those of you who dropped in on my office hours today, I hope that you found it useful, and I did record it, if you want to watch a Zoom session with extended periods of quiet (when there were no questions). Tomorrow’s quiz should be available online from 6 am, NY time, to 3 pm, NY time, on NYU classes under tests and quizzes. You will take the quiz online (you have an hour to take it, unless you have permission for extra time, and I used the Moses Center list to add that time) and submit it online. It is five stand alone questions, with multiple choices, with no partial credit. It is open book, open notes and open laptops, but please stick to the honor code. I trust you to do so. I also understand that some of you are on the move (not necessarily because you want to, but because you have to). There is no simple mechanism for me to delay your quizzes. So, I will move the 10% to the third quiz and final, if you miss this quiz.

Once you are done with the quiz tomorrow,I hope that you have a chance to watch my Friday valuation tools webcast, especially if you are working on your DCF and struggling with what to do about the viral effects on the economy and your company. A few of the DCFs have been rolling in, and I have sent those back. I also know that some of you are struggling with personal and logistical challenges. So, please view the April 3 deadline for the DCF feedback as just a loose one, and if you feel you need more time, take the time and send me the DCF whenever you are done. I am not planning on gong anywhere.

This week, we will continue to roll through valuations, mostly on the dark side, finishing our discussion of emerging market companies tomorrow (tomorrow’s class will be only 45 minutes to reflect what I would have normally done on a quiz day, and I am a great believer in sticking with structure) and looking across different sectors (financial, commodity etc.) on Wednesday. I hope you get a chance to join in the Zoom live sessions, but if you do not or cannot, the recordings should still be accessible. Let me know if there is anything I can do to make your online lives easier and more productive! 

I am glad that the second quiz went smoothly for most of you. I have also changed the feedback time frame for you to get the feedback on the quiz right now. So, check out your grade and what you might have got wrong. Again, if you made a silly mistake and it cost you a couple of points, I am sorry, but the nature of these online quizzes is that there is no room for partial credit.

 If you had trouble, I am really sorry, but most of the troubles were out of my control. In the shortened session today, we looked at valuing emerging market companies and the challenges that you face, many of which are not unique to these companies. The first is country risk and the need for scalpels, not bludgeons, in incorporating this risk into value. The second is corporate governance, and whether to discount values of companies with weak corporate governance. The third is cross holdings, a particular problem with older, family controlled emerging market companies. Finally, we talked about truncation risk (from nationalization, terrorism and acts of God) and argued for using a post-DCF adjustment to value. You can find the Aramco valuations at the posts below. 

1. http://aswathdamodaran.blogspot.com/2019/11/a-coming-out-party-for-worlds-most.html
2. http://aswathdamodaran.blogspot.com/2019/11/regime-change-and-value-follow-up-post.html

 I was supposed to go to Tampa during spring break, with my sons (all three) and grandson (only one) for Yankee spring training, and those plans came to naught. I know that this is a time of fear and worry, and I wanted to ease up this week, with a valuation that may fill a void for sports fans, who have been watching reruns of great games from the past these last few weeks, instead of the NCAA tournament or spring training baseball.  This is a throwback in time, but it is a valuation and pricing that I did of the Los Angeles Clippers, when Steve Ballmer paid $2 billion for the team. I explain how I value the Clippers and how I would value any sports franchise in this post:

I am piling on now, and I am sorry. However, the clock is running and we do have stuff to get done. Two quick notes. First, next week, we will be starting on pricing and using multiples. One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post:
http://aswathdamodaran.blogspot.com/2013/06/a-tangled-web-of-values-enterprise.html
Then watch the webcast:
http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/multiplecalc.mp4
You can download the presentation:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/multiplecalc/multiplecalc.pdf 
And the spreadsheet that goes through the calculations:
http://www.stern.nyu.edu/~adamodar/pc/multiplecalculator.xls

Second, I know that some of you are waiting for your DCFs to be returned to you and I am truly sorry that it is taking me so long. I have a few things on my to do list that need to get done first, but I promise that I will try to get them back by the end of this weekend.  If you have not submitted your DCFs, you still have time.

Just a quick reminder to download or print off the first 25-30 pages at least for class:

To get your pricing cap on, I would suggest reading this blog post of mine:

I wrote in the aftermath of the Twitter IPO, but it could very have very well been written about Lyft. Hope you enjoy it. I am sorry about the delay in getting back your DCFs, but I was on grandpa duty the last three days looking after my 2-year old. Absolutely exhausted.

I know that you are done with valuation for the moment, but the beat goes on. In this week’s valuation of the week, I turn to Levi Strauss, which went public at about a year ago. You can start with the prospectus:

You can read my thoughts about the Levi Strauss IPO here:

And download the valuation of Levi Strauss IPO here:

Its been an eventful year, and Levi Strauss now trades at about $11-$12/share. If you are up for it, download the most recent annual report here:

https://s23.q4cdn.com/172692177/files/doc_financials/2019/ar/873914_007_BMK_WEB_V2-(1).pdf 

And update the valuation.  As someone who wears Levis 501s half the days of the year, I wear my biases openly.

Now that we are fully into the pricing game, let’s keep going. We continued our discussion of PE ratios by looking at the distributional characteristics of PE ratios as well as the drivers of PE, arguing that its determinants are growth, risk and payout/ROE.  Each multiple, we argued, has a driver and companion variable. We then moved on to application and how best to find comparable firms and control for differences. At this point, you have the tools you need to price just about any stock (or asset). Remember that you are paying to heed to the market, controlling for differences as much as you can and hoping that pricing divergences disappear over time. A cheap stock is one with a low PE, high growth, low risk and a high ROE and that becomes the foundation for screening for cheap stocks. If you want to read up more on screening, try this blog post:

http://aswathdamodaran.blogspot.com/2012/06/passive-value-investing-screening-for.html 

I am also attaching the weekly challenge for this week (on pricing). 

I know that many of you are still waiting for your DCFs and I am truly sorry for not returning them. I do have a really good reason. My son and daughter-in-law were expecting a baby on May 4, but Lily Marie Damodaran decided to come four weeks early (she is only just arrived in this picture). She is doing well, as is her mom, but my wife and I are looking after our two-year old grandson (Noah) and he is hell on wheels. I just put him to bed and I am far more exhausted than after teaching ten hours. We have him for the next four days, as my wife and granddaughter are in the hospital (a little scary in the midst of a pandemic). I will keep you posted.

Start with the webcast:
http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/multipleanalysis.mp4
Download the slides:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/multipleanalysis/multipleanalysis.pdf
Here is the raw data:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/multipleanalysis/banks2013rawdata.xlsx
And the descriptive statistics:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/multipleanalysis/bankdescriptives.xls

Second, I am wrestling with how best to deal with teaching just for this coming week, since I have to look after Noah, and he is not amenable to settling quietly while I talk. It will add to the entertainment value of the sessions, but will be a huge distraction.  I may have to use recorded sessions from last year, and if I do, I will set up extra office hours next week, so that you can ask questions. I will also move the third quiz from April 20 to April 27, so that you get more time to ask me questions. I am really sorry to make these last moment adjustments to the schedule. 

As I mentioned on Friday, I am sorry but I will have a tough time doing live classes this week. Instead, I have the recorded class I delivered last year for this session (the slides are almost equivalent… If there are differences, it is because they have been updated to this year’s numbers)

The session covers the fundamentals of pricing, and I don’t think it is too painful too watch. Since there will be no live Zoom session tomorrow from 3.30 pm - 4.45 pm, NY time, please watch the recorded session in whatever format you want (YouTube, Zoom recording or audio). I will follow up on the session tomorrow

I am sorry I could not be live with you but I hope that you had a chance to watch the recorded class from last year. The links are at the website, but I have also listed them below:

NYU Server: https://nyustern.mediasite.com/Mediasite/Play/cd38c4a370dc4e4d89ca8422d2d1c9451d

YouTube: https://youtu.be/dKJibZyK9oE

I am sorry again for teaching in absentia this week, but I will be back  next week, live and eager to go. I hope you had a chance to watch yesterday’s recorded session, and tomorrow’s session will also be a recorded session that you can watch online at the regular class time (3.30 pm - 4.45 pm, NY time). I will have an added office hour from 5 pm - 6 pm, NY time, tomorrow, if you have any questions, since I will be occupied during the regularly scheduled office hour. The meeting link for tomorrow’s office hour is:

While companies reporting bad numbers is not uncommon, what makde Kraft Heinz special is the pedigree of its lead investors, with Berkshire Hathaway owning 26% and 3G Capital (a Brazilian private equity group with an unmatched reputation for financial acumen and ruthless cost cutting. Investors who followed Buffett into the stock were not only shocked but claimed to be betrayed, that the oracle would mislead them. I wrote a post on why this unquestioning faith in Investment Gods is dangerous and delusional, and posted my valuation of Kraft Heinz. 

Blog post: http://aswathdamodaran.blogspot.com/2019/02/the-perils-of-investing-idol-worship.html

Valuation: http://www.stern.nyu.edu/~adamodar/pc/blog/KraftHeinz2019.xlsx

The financial information, including the most updated earnings report, can be found at this link:

I found the company close to correctly valued, with a value of $34.88, almost equal to the stock price of $34.23. The stock is currently trading at $28.45 and you can update the valuation, if you are so inclined.

I decided to skip the valuation tools webcast for this week and thought I would send you the material to review for the quiz, even though it has been postponed to April 27. To review for the quiz, you can use the following resources:

• Review webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz3review.mp4 
• Review slides: http://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz3review.pdf
• Past quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
• Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xlsx . As you work through the past quizzes, you will notice that some of the earlier quizzes cover real options and the value of voting/non-voting shares. You can ignore those questions.

Just a reminder that we will be starting on packet 3 next week. Please download the packet on the webpage for the class:

I also have the newsletter attached for this week and I am looking forward to seeing you live again on Monday.

I hope that your weekend is flying by, with one fun activity after another…. Me too.. Once the fun is over, this week will bring packet 3 into the picture, as we start tomorrow by talking about real options. If you have forgotten all about options, please very quickly review your notes on at least the payoff diagrams for options. Please remember to download packet 3. The direct link to the pdf file is below:

I will see you live tomorrow in class….

I know that today’s class was a grind and I am sorry, but it is necessary pain, to get to use option pricing in real options valuation. We started the session by looking at what makes options unique, the fact that they derive their value from an underlying asset and have limited losses and how to price options, using replication and arbitrage. We argued that to use option pricing models in real options, you have to first establish that there is an option (with a payoff diagram), then show that you have exclusivity and finally meet the requirements for replication and arbitrage. We used this insight to value a patent as an option, and showed how competition can make the optionality fade at most companies. The third quiz is on April 27 and it will cover packet 2 of your lecture notes. The quiz 3 links, in case you have lost them, are below:

I decided to go back in time to 2017 for this week’s pricing is of a Russian steel company, Severstal, because it helps illustrate the process of pricing and contrasts it with the intrinsic valuation, and may be helpful as you price your companies.  You can get the story of the pricing at this link:

You can see the  raw data for steel companies in this link, with an added worksheet for just the top 25 steel companies in market cap terms:

http://www.stern.nyu.edu/~adamodar/pc/blog/steel2017.xlsx 

I used this raw data to estimate median values and compared Severstal to those values in this link:

http://www.stern.nyu.edu/~adamodar/pc/blog/steelmultiples.xlsx 

Finally, I looked at the 25 largest steel companies and ran scatter plots and a regression. Even though you may not have the time to do this now, come back and take a look at it when you are working on your final project, if you get stuck on the pricing section.

If you were in the Zoom session, it came to an abrupt end, as my broadband connection dropped and I apologize for leaving you hanging. Luckily, we were at the end of the session. During the session, we continued with our discussion of real options by first noting how undeveloped reserves at natural resource companies taken on option characteristics. Thus, even at a $20 oil price, reserves that may cost $45 to extract a barrel of oil from don’t become worthless, since oil prices can and will change. We then looked at the option to expand, and how it involves two projects, one that you take today with a negative NPV with the right to take another in the future, which also has a negative NPV but comes with optionality. This is the feature that allows you to pay a premium for a company with a platform that can be exploited in the future. We also looked at the value of flexibility in terms of being able to walk away from mistakes (option to abandon) and financial flexibility (where you choose to remain under levered). In the last part of the class, I argued that equity in troubled and deeply distressed companies (like airlines) can take on the characteristics of an option, explaining why equity even in basket case companies can continue to have some value. 

It has also been brought to my attention that the document with the past quiz 3s was damaged, and I think I have it fixed now. You can find the material you need for quiz 3 in the following places:

• Review webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz3review.mp4 
• Review slides: http://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz3review.pdf
• Past quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
• Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xlsx 

Quiz 3 will be available to take on Monday, April 27, from 6 am to 3 pm, NY time. You will have an hour to finish the exam and it will be multiple choice. I will have office hours tomorrow and day after, and probably one more hour during the weekend, if you have questions. 

I won’t nag you about the project, though I will double up after the quiz. As you prepare for quiz 3, please keep your focus on packet 2, though remembering your intrinsic value basics can only help. 

• One recurring question that some of you have had is about my use of (1+g) in some problems and not using it in others. Here is the simple rule. If you are given next year's number (earnings, return on capital, margin etc.), you don't need a (1+g) in the numerator. If you are given the numbers for the most recent year, you do need a (1+g) in the numerator. Thus, if I tell you that the expected operating income or margin or return on capital next year is X, you don't need to put the (1+g) in the model. 
• On private company valuations, please go through when we use total betas to estimate cost of equity and when we don’t (hint: it depends on the buyer of the company and how diversified he or she is). 
• Some of the past quizzes have questions about voting/non-voting shares and options. Ignore those. They will be on the final exam, but not on this quiz.
• Quiz review: To review for the quiz, you can use the following resources:
• Review webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz3review.mp4 
• Review slides: http://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz3review.pdf
• Past quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
• Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xlsx 
• I know that the quiz pdf file had some issues with it and I think those issues are fixed now. 

If you feel like exploring valuing a patent as an option, I have a webcast on how to do it and here are the links:

Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/optiontodelay.mp4

Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/optiontodelay.pdf

Spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/productoption.xls

I have also added a weekly challenge related to options that you can try out. It is attached. 

As for the quiz, it will be available from 6 am - 4 pm, NY time on Monday (April 27). Since the quiz takes an hour, you will need to start at 3 pm. There will be class from 4 pm - 4.50 pm, NY time.  

The newsletter for the week is attached. As the clock winds down, deadlines are approaching. The third quiz will be on Monday (April 27). It will cover packet 2 (pricing, private company valuation and asset based valuation). So, keep that in mind as you review past quizzes. You can find them here:

Past quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf 

Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xlsx  

My suggestion, if you have limited time, is that you start with the most recent quizzes and work back since they will be more closely tied to the material for this quiz. The review session for the quiz is at the links below:

I will keep this short. I hope that your preparation for the quiz is going well. In case, you have last minute questions or just clarifications, I will have be around later today on Zoom. (Where else? It’s become my alternate universe…) The details are below:

By now, many of you (about 260, by my count, out of a class close to 300) should have received back your DCF valuation back. If you have not received yours back, please send it to me again. Rather than make myself into an all-knowing oracle (which I am not), t thought I would take you through the process I used to diagnose your DCF valuations. 

I am sorry if you found today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's sessions, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit. If you get a chance, take a look at a big M&A deal and see if you can break it down into its components. I did a post on the the InBev/SABMiller merger, when it happened:

I know that this has been an unsettling semester for many of you, both in terms of classes and life, and the last thing I want to do is to make your life more difficult. I know that I have been demanding of your time and that I nag you without stop, but I really, really want to make sure that you are able to get as much out of this class online, as you would have in person. That may not be doable, but I will be damned if I stop trying. That said, we are on the cusp of the last part of the class and I decided that it is time to talk about that which will not be mentioned, which is grades. With no further ado, here we go.

1. Sunk Costs:  We are collectively done with three quizzes and a case, and you should be able to check your score on NYU Classes in the grade book. As you look at your quiz grades, remember that your worst quiz score will be replaced by the average score on the remaining quizzes (already done) and the final (still to come). Thus, if you have 6,8 and 10 on your three quizzes, your worst quiz (6) will get replaced by your average score on the other two quizzes and the final. Since you have not done the final yet, I cannot give you the answer, but if you get 27/30 on the final, your percentage score across the two best quizzes and the final will be 90% ((8+10+27)/50). Your worst quiz will get marked up to a 9/10.
2. Quiz distributions: I sent out the quiz distributions on an email yesterday. Don’t read too much into these grades. They are only 10% apiece of your overall grade.
3. Pass option? I know that this semester, you have the option of taking this class pass/fail instead of for a grade. Some of you have emailed me about whether you should take this option and I cannot make that judgment for you. That said, I also am cutting some slack into the grading distribution to allow for the fact that it is more difficult, especially if you are not a finance person, to take this class online and that even if you are not doing well on the quizzes, it may not be reflective of the work you are putting into the class. Consequently, I will look at the final project to make a judgment on your final grade. Put simply, if you turn in a solid effort on the project and I believe that you are getting comfortable with valuation, I will put a floor on your grade. Whether that floor is a C, a B- or a B will rest on how you do on the final exam. You may still prefer a P to that grade, but to get the pass, you still need to do the final project. 
4. Multiple choice: I have wrestled with the multiple choice versus open ended question in writing the quizzes and exams. I don’t like multiple choice questions, because they don’t allow for nuance or partial credit. To compensate, though, you have more time, you can use your laptop and I have made each question a stand alone question, so that you don’t have carry over mistakes. With all that said, I know that some of you feel that the multiple choice format is putting you at a disadvantage. Talk to me in the next few days, if that is the case. If your concern is more at the margin, that a silly mistake on one question will cost you an A, leave that in my hands and trust me. I will figure out an equitable solution.

http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/equityoption.mp4
The financials for Jet India are contained in this sheet:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/DistressedEquity/jetindiaFA.pdf
The DCF valuation that you need to get your option model started is here:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/DistressedEquity/jetindiaDCF.xls
The value of Jet India's equity as an option is contained in this spreadsheet:
http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/DistressedEquity/jetindiaoption.xls
It is pretty straight forward and may be useful.

The countdown has begun. We have three sessions left in the class, nine days until the project is due and sixteen days until the final exam (but who’s keeping count, right?) The last newsletter is attached and while it contains no real news, it is a ritual that I go through each week. As you work on your project, please do enter your final numbers in the Google shared spreadsheet:

In my Thursday email, I also mentioned using my market regressions, but I just realized that I sent you the link to the January 2019 regressions, not the January 2020. I am sorry, and here is the right link:

http://www.stern.nyu.edu/~adamodar/New_Home_Page/datafile/MReg20.html 

As you look to the final, note that it will be accessible for 12 hours on May 15 and that it is a 2-hour final. More details on reviews, office hours and other specifics will come some time this week. 

Attachment: Post class test and solution

In today’s class, we completed the last strand of the class by focusing on the mechanics of value enhancement, and how they can help us assess the expected value of control. As a first step, you value your company twice, once with the status quo and once with improved management in place, yielding a value for control, and to make it an expectation, we multiply by the probability of change happening. The first is a function of how well managed a company is, with poorly managed companies offering more potential value to a control change. The second is determined by corporate governance, with stronger corporate governance and more activist investing increasing the probability of change. We then used this framework to assess the value of control in acquisitions, how the market price of a company can reflect the probability of management change, the value of voting rights in voting shares and the extent to which you would discount a minority holding in a private company. Finally, we looked at the magic bullets that consulting firms offer (from increasing growth to increasing a proprietary acronym like EVA and CFROI) and noted that done right, there is that there are no insights you get from these that you could not get from looking at a DCF and that focusing on these variables in compensation systems can lead to skewed results.

I hope that you are moving towards completion on your project. I am tracking your numbers on the Google shared spreadsheet, and if you have not entered them in already, please try to get your numbers in by Sunday (the earlier in the day, the better). (Your project is not due until the following day at 5 pm.) If you already have your numbers in there, and want to change them, you have until Sunday to do it, before I download to prepare for the last class:

I also sent out links to the final exam review and past finals in yesterday’s emails. If you are getting on a jump on preparing, here are a few suggestions:

1. In reviewing the material, start at the end and work backwards, with packet 3 getting your attention first. While it is a cumulative exam, these are the materials you have not already studied for a quiz.

2. In working through past exams, start with the most recent ones and work backwards, since I have changed the format a little.

3. I sent the wrong link for the slides for the review in yesterday’s email. Here is the right link:

Slides for final exam review: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valfinalreview.pdf 

I have office hours tomorrow (Friday from 1 pm - 2 pm), in case you have questions. Until next time!

I know that you are busy and I will keep this brief.

1. Please wrap up your pricing. As you work on the pricing, recognize that you cannot fight the data. Put simply, if no matter what you try, you cannot get any of the regressions to work, the message is that the pricing in the sector cannot be explained by the fundamentals on the ground today. That does not make pricing pointless but it can give you a pricing for your stock that is very different from your intrinsic value.

2. If your pricing and intrinsic value are very different, you have to choose which one you want to use for your final recommendation. DO NOT average the two. Bankers may do it, but it is very bad practice. When choosing, recognize that there is no right choice. It depends on faith (do you have faith in your DCF) and philosophy (are you a trader or an investor?). I will not second guess your recommendation. 

It is the final weekend of the class, and I wanted to remind you again to enter the numbers for your company, when you have them, into the Google shared spreadsheet:

In addition, please remember to fill out the course evaluations. The instructions are below. To be honest, I don’t know what the consequences are for forgetting, but why risk it? Just get it done!

The project is approaching its end and here are a few final reminders.

Thank you!

Thank you again for all your summaries. I really could not have done this without you, and you will see what I mean when you review the slides for the last class. They are at the link below:

http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valUGclose2020.pdf 

Please do try to be at the last class. All will be revealed…

There are three questions seems to be coming up on the real options problems and m afraid I have contributed to the confusion. So, here is some clarification:

3. How am I going to estimate N(d1) and N(d2)?

I will give you the cumulative normal distribution. You still should be able to estimate d1 and d2 on your calculator. While the distribution may not give you a precise N(d), I will accept the nearest number. Thus, if d =0.48, I will take N(.50) as your estimate.

I hope you are done, and are celebrating, social distancing as you do it. However, just in case you still care about grades, yours just went online. I know that this semester was a challenge. None of us signed up for an online class, and I am sure that you are all Zoomed out. And valuing a company in the midst of a full-blown market crisis is never easy. The good news is that if you can value a company in this environment, you can value it any setting. I appreciate your showing up for the online class and  the work you put into the class, and the patience you showed as I drowned you in emails, valuations of the week, weekly challenges and other torture devices. 

I know that some of you are graduating and I that  hope your "job" brings you as much joy as mine has to me. If you enjoy what you are doing, you will never have to work a day in your life. Well, at least, I have not. You have my email address for life and you can bounce off any questions, queries or issues that you have with corporate finance, valuation or the most valuable sports franchises in the world (the answer to the last is always the "Yankees").  If you are not graduating, I will see you around school. While I will not be teaching in the fall, I will be back teaching in the spring, and you can watch another class endure the duress of unending emails, non-stop nagging and everything else that goes with this class. I could tell you that I hated doing it, but I would be lying. And just in case, you need a valuation fix... here are some links: