Hi!
I am sure that you are finding that break is passing by way too fast, but the semester is almost upon us and I want to welcome you to the Valuation class. One of the best things about teaching a valuation class is that valuation is always timely. Is Facebook worth $ 100 billion or is that a pipe dream? Did Kim Kardashian's short lived marriage add or detract from her value? Anyway, I know that some of you are worried about the class but relax! If you can add, subtract, divide and multiply, you are pretty much home free... If you want to get a jump on the class, you can go to the class web site
http://www.stern.nyu.edu/~adamodar/New_Home_Page/equity.html
The syllabus for the class is available and there is a google calendar for the class that you can get to by clicking on
https://www.google.com/calendar/embed?src=n2j2kmgf2jg4p0411ef40rb5ek%40group.calendar.google.com&ctz=America/New_York
For those of you already setting up your calendars, it lists when the quizzes will be held and when projects come due.
I don't use Blackboard but I have an alternative that I am trying out, from coursekit.com. It has all of the useful stuff from Blackboard (capacity to check your grade, online submission of assignments etc.) but in a format that also includes a more open interface and a social media connection:
http://www.coursekit.com
(Though my face is on the front page, I have no financial stake in the company though I would really like its founders to succeed.) You will shortly be getting an invite to join in the site with a code. Please do join in!!!
The first set of lecture notes for the class should be available in the bookstore by mid-week. If you want to save some money, they can also be printed off online (if you want to save some paper, you can print two slides per page and double sided). You can even download it to your iPad or Kindle. To get to the lecture notes, you can try
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqlect.htm
Please download and print only the first packet on discounted cashflow valuation. I will be updating the other two packets (yes, there are three...) to make them more timely.....
The best book for the class is my Investment Valuation book, but don't buy it. Strange advice, right? But here is why. I just finished the third edition and it is at the printer and I would rather that you not spend $100 on a second edition that will be obsolete in a couple of months. For the moment, go to this link (Don't ask questions... just do it!)
http://www.stern.nyu.edu/~adamodar/pdfiles/valn2ed/wholeenchilada.zip
Act surprised and I will preserve plausible deniability. Alternatively, you can use "Damodaran on Valuation" - again, make sure that you are getting the second edition.
http://www.amazon.com/gp/product/0471751219/ref=pd_lpo_k2_dp_sr_1?pf_rd_p=486539851&pf_rd_s=lpo-top-stripe-1&pf_rd_t=201&pf_rd_i=1118004779&pf_rd_m=ATVPDKIKX0DER&pf_rd_r=0ZMYX1FQW1RH5YTEXC01
Or, as a third choice, you can try The Dark Side of Valuation, again the second edition, if you are interested in hard to value companies.
http://www.amazon.com/Dark-Side-Valuation-Distressed-Businesses/dp/0137126891/ref=pd_sim_b_13
Or, if you really don't like to read, try this
http://www.amazon.com/Little-Book-Valuation-Company-Profits/dp/1118004779
I am looking forward to seeing you in a couple of weeks.. I think we are going to have a lot of fun (or at least I am...). Until next time...

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
The countdown continues and only a week before the first class. I hope you had a chance to look at the first email I sent about a week ago. What email? If you did not see it, you can see it by going to the link below:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqemail.html
Please review the information in the email... I also noted in that email that I am planning to use coursekit.com as my substitute for Blackboard. I had sent out an invitation for you to join the coursekit roster. Unlike Blackboard, only those who accept the invitation can be on the Coursekit roster. Since it will make my life a lot easier if you do get on the roster, please accept the second invitation that I plan to send out in the next few minutes. It should take only a couple of clicks. Thank you and I look forward to seeing you next week! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Just a weekend before class starts.. So, enjoy it (though it looks messy out there). Just a few reminders for those who have not been checking their emails (or just ignoring what they say) for the last few weeks:
1. Coursekit registration: If you have not done so already, please go to http://www.coursekit.com and register for the class. The code is ATNSM5.
2. Class location/time: Class is from 1.30 to 2.50 in KMEC 2-60, Mondays and Wednesdays. We don't have class on February 20, March 12 and March 14. The last class is on May 7. The Google calendar has all of the details:
https://www.google.com/calendar/embed?src=n2j2kmgf2jg4p0411ef40rb5ek%40group.calendar.google.com&ctz=America/New_York
3. What you need to get for the class: The only required material is the lecture note packet. While we will be three packets, only one the first one is available (at the bookstore and online, on the website for the class).
http://www.stern.nyu.edu/~adamodar/New_Home_Page/equity.html
4. What you need to do before Monday's class: Just show up... Don't party too hard, get some sleep and I will see you on Monday.
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Depressing thought but it is time to get back to work. Just a few last notes before tomorrow's class. I will be handing out the syllabus, the project description and the lecture notes for the first two sessions in class tomorrow. If you cannot wait, the pdf versions of the handouts are online on the webcast page for the class (might as well visit it to see what's coming)::
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr12.htm
Lecture note packet 1 will become necessary by the second session. So, please buy it, print it or download it as soon as you can.

A couple of final requests before class tomorrow. First, I know that I sound like a nag, but please do visit the http://www.coursekit.com page and register in the class. I thank the 60% who have already registered. Second, I don't know whether you have name plates (you know what I am talking about.. those placards that you set in the table with your name on them....) but if you do, please bring them to class with you. The lecture note packet 1 will be necessary toward the end of the second session. So, please do buy it, print it or download it still).

Really looking forward to tomorrow! Until then!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Hope you are having a good day... We ended Monday's class with a riff on how much bias affects valuation. In most "valuations", analysts start with an assessment of value and work backwards to justify that number. Reminds me a little bit of Alice in Wonderland, when Alice is at the Queen's court and the Queen says "Verdict first, trial afterwards". While some of the bias can be attributed to the preconceptions about the company that we bring into my valuation (as is the case with my trying to value Microsoft), much of it is thrust upon analysts by their circumstances. Put differently, if your compensation/reward/upside is a function of whether you come up with a high or a low value, your valuation will reflect this.
Attached is a list of a dozen valuation scenarios. With each one, here is what I would like you to think about:
1. Given the scenario, which direction do you see bias cutting? (Is it pushing your value higher, lower or will it have no effect)?
2. As a bonus, think of the devices that you will use (consciously or otherwise) to justify this valuation? (As an example, you may decide to increase your growth rate if you want to increase value or raise your discount rate if you want to lower value... you may even attach post valuation premiums (for control, synergy etc.) or discounts (illiquidity)..
My point is not to suggest that analysts are craven and dishonest individuals, but that human beings have an infinite capacity for self-delusion... We can convince ourselves that we are not biased (and that other people are...) Continuing with the preview theme, we will look at the different valuation approaches, in big picture terms, tomorrow before starting on the first steps in intrinsic/DCf valuation. Please remember to bring lecture note packet 1 with you to class.

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Bias tests

Hi!
The newsletter for the week is ready and you can get to it by clicking on the link below:
http://people.stern.nyu.edu/adamodar/New_Home_Page/newslet/eqnews1.htm
Also, please keep working on the first weekly challenge. You have about 48 hours before the solution hits. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
A few quick and perhaps unrelated notes. First, there is still time to get your weekly challenge solution in... I will post my solution around 6 pm, just before kickoff for the Super Bowl. Tomorrow, we will start on the nuts and bolts of DCF valuation by first establishing the consistency principle - your choice of discount rate should be consistent with how you estimate cash flows. If your cash flows are to equity investors (and thus after debt payments), you should discount the cash flows at the rate of return demanded by equity investors, i.e., the cost of equity. If your cash flows are from operating cash flows, i.e., before debt payments, your discount rate should be the weighted average of what your equity investors and lenders want, i.e., the cost of capital. The attached pre-test tries to bring this lesson home. Give it your best shot before you come to class. (If you have no idea where to start, look at how First Boston estimated cash flows for Carborandum - are they to equity or the the entire business? Which discount rate makes the most sense, given how the cash flows were estimated?) Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Kennecott numbers

Hi!
I hope that the discussion of riskfree rates a left you fairly clear about what to do next. In case, you are still confused, this is the next step in the process:

1. Pick a company (in case you have not already).

2. Determine a currency that you will value the company in. Once you have decided on the currency, find a riskfree rate in that currency. If your company is a US or European company, you just got lucky. Either take the easy way out and use the US T.Bond rate as the dollar riskfree rate and the German 10-year bond rate as the Euro riskfree rate, or adjust them for the default risk you see in each sovereign.
If you are valuing a company in an emerging market in the local currency (be brave), your job is a little more complicated.
2a. Get the longest term government bond rate you can get in the local currency. Try the Bloomberg terminals. If that does not work, get online and search... If that does not work, switch to a different currency.
2b. Get the local currency rating for the country by going to the moody's web site: http://www.moodys.com (Look under sovereign ratings).
2c. Estimate the default spread given the rating by downloading the country default spread spreadsheet that I have attached to this email. If you prefer to get CDS spreads, use the current CDS spreads that I have as an attachment (I will post both under the webcast page fand on the coursekit page as well)
2d. Riskless Rate = Government bond rate - Default Spread given rating

I have a paper on riskfree rates that elaborates on the discussion in class today. It is really not a painful read, if you can spare the time. You can get to it by going to:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1317436
I also have a follow-up paper on the "What if" series.. what if nothing is riskfree
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1648164
Finally, I did a post on my blog specifically on the question of the risk free rate right now being low and the implications for valuaton:
http://aswathdamodaran.blogspot.com/2011/09/risk-free-rates-and-value-dealing-with.html

The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where they stand:
http://www.hl.com/email/pdf/FW_Sep2011.pdf
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: CDS spreads, Sovereign default spreads

Hi!
Tomorrow, we will start our discussion of risk premiums and look at different ways of estimating these premiums. As a prelude, please take a few minutes (I swear... it will take you just 3 minutes to do) and work through the pre-test for the class. I think it will help launch the discussion in class.

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Risk premium test

Hi!
That time of the week again.. The second weekly challenge builds on the theme of country risk premiums that we talked about in class today. The usual rules apply.
1. Try out the weekly challenge - the sooner, the better.
2. Go to Coursekit.com, click on CALENDAR and click on the second weekly challenge
3. Submit your solution before Sunday at noon.
4. I will put up my solution by 6 pm.
5. Check your solution against mine and see if we agree. If we don't, check your answer. If your answer is right, then mine must be wrong. Let me know why.
6. Repeat this process again next week.
Until next time!

Attachment: Weekly challenge # 2

Hi!
We are little more than halfway through 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
http://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html
Scroll down and look towards the top of the table of downloadable data items.

b. Country risk premium: The last few months should be a reminder of why country risk is not diversifiable. As you see markets are volatile around the world, I think you have a rationale for a country risk premium. You can get default spreads for country bonds on my site under updated data. If you are interested in assessing and measuring country risk, to get from default spreads to equity risk premiums, you need two more numbers. The first is the standard deviation for the equity market in the country that you are trying to estimate the premium for. Try the Bloomberg terminal. Find the equity index for the country in question (Bovespa for Brazil, Merval for Argentina etc.) and type in HVT. This should give you the annualized standard deviation in the index - change the default to weekly and use the 100-week standard deviation. Do the same for the country bond in question. The two standard deviations should yield the relative volatility. If you have trouble finding either number, just multiply the default spread by 1.5 to get a rough measure of the country risk premium.
As for other sites that look at country risk, here is one that you may want to look at. It is the site maintained by Professor Campbell Harvey at Duke who does very good work on country risk:
http://www.duke.edu/~charvey/Country_risk/couindex.htm
If you want my estimates of country risk premiums, check under updated data on my website. (See website above)

c. Company risk exposure to country risk: My concept of lambdas for countries is a work in progress. I have a paper on the topic that you can read, if you are so inclined:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889388

d. Implied equity risk premiums: I am attaching the excel spreadsheet that will allow you to compute implied equity risk premiums. I am using the numbers that I used at the start of February to come up with an equity risk premium of 6.02%.

Please try to update the implied premium, using today's numbers for the S&P 500 (easy), 10-year T.Bond rate (easy), growth rate in earnings for next five years (Try to find a number on Yahoo! Finance.. If you cannot, leave it at7.18% ) and just leave the updated dividends and buybacks from the spreadsheet (since these were updated a month ago). Follow the instructions to get the updated equity risk premium. We will explore it further in class on Monday.
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: ERP test

Hi!
Hope your week went well. The latest newsletter is up:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews2.htm

Browse through it, when you get a chance. And don't forget to try the weekly challenge and submit your solution on Coursekit:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/wkch/wkch2.htm

Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Last call for the second weekly challenge. I know that the deadline was set at 12 pm, but I have changed it to 6 pm.. So, that excuse is gone.. Give it a shot and submit on Coursekit. I have also attached the pre-class test for tomorrow. It has two parts to it: the first is the implied equity risk premium spreadsheet that I sent out on Thursday and the second is a set of "what ifs" I would like you to try out on the spreadsheet. Holding all else constant, please look at what happens to the premium if
a. The S&P 500 increases by 10%? Decreases by 10%?
b. You switch from the average cash yield over the last 10 years to trailing 12 month yield?
c. The expected growth rate in earnings increases to 10% (for the next 5 years)? Drops to 5% for the next 5 years?
d. The risk free rate increases to 5%? Drops to 1%?
See you in class tomorrow! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: ERPtest.xls

Hi!
For those of you who tried the second weekly challenge, thank you! For those of you who did not get a chance, there is always next week. The solution is in this link:
http://www.stern.nyu.edu/~adamodar/pc/wkch/wkch2.xls
Please do try the implied premium spreadsheet pre-class test before tomorrow! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
In tomorrow's class, we will finish our discussion of betas and consider how the pieces come together in the cost of equity. We will also move on to the cost of debt. There are a few things you can try that will ease your transition:
1. Print off the beta page for your company, if you have access to a Bloomberg terminal, or at least look up the betas estimated for your company on a variety of services: Yahoo!, Morningstar etc.
2. If you can take a look at the annual report for your company, determine what business or businesses you see your company in and don't define business too narrowly.
3. Work through the pre-class test for tomorrow... (Don't make me beg....)
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Beta and cost of capital pre-class test

Hi!
So, we are done with the discount rate part of the class. Reviewing and recapping what we did in class today, here are some suggestions:

1. Bottom up beta: I gave you my rationale for bottom up betas and why they beat regression betas every single time. I did put together a list of 10 questions that you may have about bottom up betas
http://people.stern.nyu.edu/adamodar/New_Home_Page/TenQs/TenQsBottomupBetas.htm
Nothing earth shattering, but it may still be useful.
I also mentioned that I have bottom up betas for the US, Japan, Emerging Markets, Europe and Global. You can find them by going to the updated data section of my site:
http://people.stern.nyu.edu/adamodar/New_Home_Page/data.html
If you want to estimate bottom up betas on your own, you should try Capital IQ or the Bloomberg terminals. It is very simple to screen and download the data on your own.

2. Cost of debt: The cost of debt is the rate at which you can borrow money at today. If your company has a bond rating, you should be able to find it online or on one of the ratings agency websites. If your company has no bond rating, you can use my synthetic rating spreadsheet, which you can find here: http://www.stern.nyu.edu/~adamodar/pc/ratings.xls
If you want to update default spreads, try http://www.bondsonline.com and check on default spreads. Remember that it will cost you money.

3. Estimating market value weights: The market value of equity for publicly traded firms should be simple to compute. Just remember to count all shares outstanding of all types to get to market cap. To convert book value of debt to market value, treat it like a bond and value it.

One final parting attachment: the weekly challenge for this week is up and it covers implied equity risk premiums and how they may vary as a function of macro economic variables. Have fun with it!

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Weekly challenge & data addendum

Hi!
Hope you have great things planned for the weekend, but I would like you to squeeze in three tasks for the valuation class somewhere in there. First, the newsletter for the week is up and running:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews3.htm

Second, if you check the newsletter, you should see a timeline of where you should be on the project. Please take a look to see how far behind or ahead you are of the pace....At this stage, you should have the pieces in place to compute the cost of capital for your company. I would go ahead and do it.

Third, I posted a valuation of Facebook on my blog.
http://aswathdamodaran.blogspot.com/2012/02/ipo-of-decade-my-valuation-of-facebook.html
I know that you are getting more than your share of my views on valuation in my class, but I would like you to go to the post, download the spreadsheet that I used to value Facebook and make your own best estimates. Once you have your value, go to the google spreadsheet that is referenced in the post and put up your numbers. I hope to see all of your valuations on that page by next week. (It should take about 5 minutes to do...)
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Very quick note to remind you again that the weekly challenge deadline has been moved to Tuesday at noon (Submit on Coursekit, if you get a chance to do it)
http://coursekit.com/app#course/b40.3301.damodaran/calendar
and that I am waiting to see your Facebook valuations on the Google spreadsheet
http://aswathdamodaran.blogspot.com/2012/02/ipo-of-decade-my-valuation-of-facebook.html
.... Have fun! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
In tomorrow's class, we will turn to cash flows and one of the issues that we will wrestle with is accounting inconsistency. In fact, we will talk about two prominent examples of accounting illogic: operating lease commitments and R& D expenses. If you have the annual report or 10K for your company, it would help if you could find the lease commitment table for your company in the footnotes. (It is possible that you may not find it, if your company has no leases or for some non-US companies). In addition, check your income statement to see if your company has R&D expenses and if it does, see if you can collect a time series (5-10 years) of the expense. I know that the weekly challenge for this week is a little daunting (especially if your statistics is rusty), but you can use Excel to answer the basic questions and you still have about an hour to get your submission in. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I am attaching the solution to this week's challenge. Again, thank you for trying, if you did, and there is always next week, if you did not. I am also attaching the pre-class test for tomorrow. Please give it a shot before class.

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: Weekly challenge 2a solution, Cash flow pre-class test

Hi!
We did cover two important adjustments to operating income - operating leases and R&D.Pursuant to that discussion, here are my thoughts:
1. Operating Leases: The core problem here is that lease commitments are contractually set, tax deductible and there are consequences to failure. Thus, they meet all of the characteristics of financial expenses (rather than operating expenses, which is where they are categorized now). We went through the process of capitalizing leases, but I noted the existence of a paper I have on the topic (I know... I know.. Who has time to read these papers? But if you do...)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1390280
It not only explains the process in more (even excruciating) detail but maps out the effect on every input in valuation (from levered betas, to reinvestment rates to return on capital to the final value per share).
2. R&D: Again, let me start with the rationale. A company invests in R&D expecting to get benefits over future years, rather than the current one. That again, meets the criteria for cap ex (rather than operating expenses, which is where we find it now). I could send you another paper to read, but you are probably sick of reading. Instead, I am attaching the excel spreadsheet that you can use to convert R&D into a capital expense.

Getting from operating income to cash flows is not always as easy as it looks. We focused on that transition with the following items coming up along the way:
a. Accounting malfeasance: As I noted in class, recognizing when accounting statements contain fraud has become a business by itself. Forensic accounting is designed to capture early signals of fraud (if there is one area of accounting that I may consider doing in an afterlife, this would be it...) I have a few suggestions for books, if you are interested. The first is by Howard Schilit who just sold his forensic accounting practice for $ 50 million. It is called Financial Shenanigans and the Amazon url is
http://www.amazon.com/exec/obidos/tg/detail/-/0071386262/qid=1076606632/sr=2-1/002-2407243-0189656?v=glance&s=books
The other is by Terry Smith, who used to work for an accounting firm in the UK, until he decided to expose the seedy underbelly of accounting...
http://www.amazon.com/exec/obidos/ASIN/0712675949/qid=1076606899/sr=2-1/ref=sr_2_1/002-2407243-0189656
Needless to say, you need to have a firm grasp of basic accounting before you get into creative accounting... Did you sell your accounting text book back to the bookstore?
b. Tax rates: I noted that most companies have effective tax rates lower than their marginal tax rates. I mentioned the phenomenon of trapped cash. If you get a chance, check out the blog post I have on the topic:
http://aswathdamodaran.blogspot.com/2011/08/trapped-cash-measurement-and.html
c. Weekly challenge: I have a weekly challenge revolving around earnings and cash flows. As an added incentive, it will be excellent prep work for your quiz, which is a week from today.

If you want to look at past quizzes, go to the website for the class, click on past exams and quizzes and click on quiz 1.

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I know that leases and R&D are messy concepts because you are redoing the financial statements of a company to reflect the truth. As you are making the conversions, remember why you ultimately want expenses to be correctly categorized. It is not just to preserve consistency but to get a clearer sense of how much a business is reinvesting and how well it is reinvesting. In pursuit of this mission, do try the weekly challenge that I sent you yesterday. Please submit your answers on Coursekit. If you have trouble with your submission, I have set up an alternate route. Send your solution to me by email, with "Weekly challenge solution" as the subject (it goes into a smart mailbox, so it has to match exactly). On the R&D note, I don't know whether you were following the Groupon saga from last summer, where the company was trying to argue that its customer acquisition costs were capital expenditures. Their rationale was that the customers that they acquired were their long term assets. I wrote a blog post on this that you may (or may not) find interesting:
http://aswathdamodaran.blogspot.com/2011/06/from-revenues-to-earnings-operating.html
Browse through it when you get a chance. One final thing. I do have a couple of groups of three that are looking for additional members. If you are flying solo or are an orphan and would like to join a group, please let me know. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
The latest newsletter is attached. Please browse through it, when you get a chance. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Weekly newsletter # 4

Hi!
As we look ahead to tomorrow's class, here is what is coming. We are going to mop up the last loose ends with cash flows: capital expenditures, working capital and cash flows to debt. and then move on to talking about growth The messiest issues with cash flow estimation relate to leases and R&D and I was a little disappointed that more of you did not try out the weekly challenge. You still have a couple of hours, if you want to try, and you can email me your solutions with the subject, "Weekly challenge solution". In advance of tomorrow's class, I have included the pre-class test for tomorrow's class.

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Pre-class test for growth

Hi!
Quickly reviewing today's class, here are the high or low points. First, net capital expenditures should be defined expansively to include both acquisitions and R&D (or similar expenses). This will push up your reinvestment number and make your cash flows more negative, but it will allow for higher growth expectations. Second, the working capital we reference in valuation is the difference between non-cash current assets and non-debt current liabilities. We eliminate cash from working capital because it is not a wasting asset and debt from current liabilities because we count all interest bearing debt in the cost of capital. Third, the cash flows to equity can be pushed up by using more debt in funding your reinvestment but that higher debt will also push your beta and cost of equity. The net effect can be positive, negative or neutral, depending on whether the firm is under, over or correctly levered today. Finally, we talked about two unreliable ways of estimating growth: historical growth because it is not a very good predictor of future growth and analyst estimates of growth, which don't seem to have much information in them.

As far as the first quiz goes, it will cover everything we did through today though, in my infinite compassion, I let it slip that there would be no questions on growth. The relevant chapters in Investment Valuation are chapters 7-10, with a couple of the earlier chapters (1,2) thrown into the mix. Please try the practice first quizzes. They should cover roughly the same material as the previous quizzes, except for the growth question. In some of the earlier quizzes, you will notice a market risk premium of 5.5% popping up in the solutions, even though none may be given in the problem. That was the historical risk premium at the time and I assumed that those taking the test would be able to look it up. I have learned my lesson and have provided the risk premium in the problem on more recent quizzes. As for company risk exposure to country risk, you will notice that I have used lambdas in some problems and not in others. Here is what I would like you to do. If there is enough information to estimate lambdas, I would like you to try to estimate lambdas and costs of equity. if there is insufficient information, you can use one of the other approaches (adding the entire country risk premium to the cost of equity or multiplying it by the beta).

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I told you that it would be faster than you thought but your quizzes are done and can be picked up outside the front door to the finance department (9th floor of KMEC). Look to your right. They are in alphabetical order, face down. Please take your quiz and leave the rest undisturbed. If you did well, congratulations! If you did not do as well as you wanted, don't freak out. It is only the first quiz and you have plenty of time to recover. I have attached the solution and the distribution to this email. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I know that you are in absolutely no mood for valuation, but just in case, here is the fourth weekly challenge. As always, the solution will be up on Sunday.

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Weekly challenge # 4

Hi!
I hope you have had a chance to pick up your quiz. I am attaching the newsletter for the week. I know that this is going to look like this is piling on but I realize that this is your last weekend before the spring break. It is also a chance to get started or even done with your DCF valuation. To help you get started, here are a few guidelines/suggestions:

1. Model building versus Model borrowing: This is not a modeling class and I am fine with you borrowing and adapting my models. If you decide to build your own model, keep it simple. Please do not use investment banking valuation models that you may have borrowed from a prior, current or summer job. Not only do they add detail, where you need none, but they often have fundamental mistakes built into them.

2. Which model should I use? First, go through the slides from a couple of sessions ago where we developed a roadmap for picking the right model. Once you have decided whether you want to use dividends, FCFE or FCFF, here is my suggestion. For companies where operating margins are not likely to change dramatically, use one of the ginzu models on my website. They are versatile and will do a lot a great deal of your dirty work (capitalizing R&D, converting leases to debt, taking care of management options) for you. For companies where margins are likely to change over time or companies with negative earnings, use the higrowth.xls spreadsheet (even if you do not expect high growth). In particular, stick with the following choices:
a. fcffginzu.xls: if you are doing a FCFF valuation of a firm that has positive operating income and you do not expect dramatic shifts in margins over time
b. fcffginzulambda.xls: If you are doing a FCFF valuation and think you will be estimating a lambda for your company.
c. fcfeginzu.xls: if you are doing a FCFE valuation of a firm that has positive net income and you do not expect dramatic shifts in margins over time
d. divginzu.xls: for financial service firms
e. higrowth.xls: for any firm that is losing money or has shifting margins over time, even if it is not in high growth. (This is more common than you think. Even money making firms may see their margins change over time). In fact, if you are doubtful about margins, stay with this model. It is the most general one.

You can find all of these spreadsheets under spreadsheets on my website. There is also a video that goes with the fcffginzu.xls spreadsheet explaining how to use it. It also includes spreadsheets that will convert leases and R&D and value options (I am a full service operation). If you do get done with your valuation, here are the guidelines on turning it in.

1. Each of you can turn in your valuation individually. You do not have to submit as a group.
2. All I want is a base case valuation of your firm. It will be easiest if you submit the excel spreadsheet containing your valuation and include your assumptions page in the same spreadsheet.
3. There is no hard copy required and you can submit your DCF valuation spreadsheet electronically. But please do the following:
In the subject enter: "My perfect DCF Valuation". Do not deviate from the script or my filtering program will dump your email into my general email pile.
In the email text, specify the name of the company that you are valuing (yes, there are people who have submitted valuations of unnamed companies), the price per share that the stock is trading at today and your estimate of value per share.
4. Your DCF valuation will not be graded. I will review the valuation and send you back your own spreadsheet with my comments embedded in the spreadsheet. Some of the comments will be suggestions (which you are free to ignore) and some will be stronger than suggestions (and these should probablyy not be ignored).
5. If you don't get back your valuation within 48 hours of submitting it, please send me another email to let me know. My filtering program sometimes works in mysterious ways.
6. If you get done before March 26 (the official due date), go ahead and send your valuation in early.
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Newsletter # 5

Hi!
I did not nag you this week on the weekly challenge, because I knew that you were in no mood for it. I have attached the solution for those of you who did try... and thank you... Tomorrow, we will spend time on what I think is the most critical part of any valuation - the terminal value. If you can, please take a look at the pre-class test that I have attached to this email. As always, we will start with this test. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: Weekly challenge solution, pre-class test for terminal value

Hi!
I know that you are already slipping into Spring break mode but before you completely slip away, a few thoughts:
1. Pre-class test for tomorrow: We will continue with the discussion of the loose ends in valuation today with cross holdings, complexity, debt and options all on the agenda. Please give the attached pre-class test a shot.
2. DCF valuation: I hate to be a nag, but please do get at least an initial DCF valuation for your company before you leave for the break.
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Pre-class test on loose ends

Hi,
There is zero chance that you will pay heed to this email but no harm sending it... As you take off for different parts of the world, here is a list of things to do to complete your DCF valuation.
1. Pick a company
2. Collect financial information on the company (10Q, 10K annual report, news stories...)
3. Estimate key inputs to DCF valuation
a. Discount rate
- Bottom up beta for the company
- Riskfree rate in the currency
- Equity risk premium (including country risk premium)
- Lambda, if necessary
b. Cash flow
- Earnings in most recent period (Operating and net income)
- Effective tax rate
- Capital expenditures (including acquisitions)
- Depreciation
- Capitalize leases, if necessary
- Capitalize R&D,if necessary
c. Growth rate
- Historical growth rate
- Analyst estimates (if available)
- Fundamental growth rate
* Return on equity or capital
* Reinvestment rate
d. Terminal value
- How long a growth period..
- Growth rate forever
- Excess returns in stable growth
4. Pick a DCF model
- Dividends
- FCFE
- FCFF
5. Loose ends
- Cash and marketable securities
- Cross holdings (and minority interest)
- Any other assets?
- Management options
5. Put the numbers into either one of my ginzu models or your own.
6. Estimate the value per share
7. Compare to market price
8. If necessary, revisit the inputs and reestimate value
9. Send your valuation model to me by emai, with "My Perfect DCF valuation" in the subject head
10. If you don't hear back within 24 hours, email me a reminder.

And oh, by the way, I did post a new weekly challenge on terminal value to the webcast page for the class.
http://www.stern.nyu.edu/~adamodar/New_Home_Page/wkch/wkch4a.htm
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I kept my promise, right? No emails for nine days. Anyway, no rest for the wicked and I plan to make up for lost time:
1. Pre-class test for tomorrow: Tomorrow, we will put the closing touched on dealing with options and start valuing companies. I have attached the pre-class test for tomorrow to this email.

2. Lecture note packet 2: Sometime next week, we will begin on lecture note packet 2. So, if you have not already bought or printed off a copy, it is time. The packet is available at the bookstore (for a price) and on the webcast page for this class (for free).

3. Weekly challenge solution: On the off chance that you did try the weekly challenge that I sent out so hopefully last week, I have now put links to the solution online (on the webcast page):
http://www.stern.nyu.edu/~adamodar/pc/wkch/wkch4asol.xls
Hope you get a chance to look at it. Until tomorrow!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Pre-class test for DCF valuations

Hi!
So, finally we get to some valuations. I know that you are busy but the best way to get a handle on valuation is to try it out yourself. All of the valuations that we did in class today are online and you can get them by clicking on the links below:
Con Ed valuation
http://www.stern.nyu.edu/~adamodar/pc/eqegs/coned08.xls

ABN Amro: A Two-stage Dividend Discount Model Valuation
http://www.stern.nyu.edu/~adamodar/pc/eqegs/amro03.xls

Goldman Sachs: A Three-Stage Dividend Discount Model Valuation
http://www.stern.nyu.edu/~adamodar/pc/eqegs/goldman.xls

Deutsche Bank: A FCFE model for a bank
http://www.stern.nyu.edu/~adamodar/pc/eqegs/DBk09.xls

S&P 500: A Dividend Discount Model Valuation
http://www.stern.nyu.edu/~adamodar/pc/eqegs/sp500.xls

S&P 500: Dividends augmented with buybacks
http://www.stern.nyu.edu/~adamodar/pc/eqegs/sp500fcf.xls

S&P 500: Dividends augmented with buybacks, fundamental growth
http://www.stern.nyu.edu/~adamodar/pc/eqegs/sp500fcfwithfundgr.xls

On a different note, there was an error on slide 225, where I broke the value down into growth components on the equation for the stable growth (Thank you, Carson!) and I have fixed the error and attached the slide. You can print it off if you want or make the change by hand. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Hope you had a chance to try out some of the valuations from yesterday and that you are working diligently on your DCF valuation. Anyway, just in case you have more time on your hands, I have attached the pre-class test for tomorrow. We will keep going forward with more DCF valuations. So, I hope to see you in class. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Second pre class test on DCF valuations

Hi!
I know we went through a lot of valuations in class today. If you want to access the spreadsheets that contain these valuations, try this link:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/covals.htm
In particular, look at how the negative FCFE in the early years affect the value of Tsingtao Breweries, how the value of Tube Investments changes as ROC changes and the valuation of Amazon from 2000.

I know that you are busy with your DCF valuations but if you get a chance, try the attached weekly challenge. It is truly a 5 minute exercise. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: Weekly challenge # 6, Daimler spreadsheet

Hi!
As you work your way through your DCF valuation, a very quick note. The latest newsletter is ready to read:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews7.htm

If you have some time on your hands and are fascinated by equity risk premiums, I did finish my 2012 update on the topic. You can find it by going to:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2027211

I also have put a compressed version on my blog
http://aswathdamodaran.blogspot.com/2012/03/equity-risk-premiums-2012-edition.html

Hope you have a great weekend! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
On the really remote possibility that you did try the weekly challenge this week (I know I skipped the management options one and went to the Daimler circular reasoning one), I have attached the solution to the challenge. More important, I have the pre class test for tomorrow's class attached to this email. Please take a look at it, if you get a chance. Finally, keep those DCFs coming... Remember that I am not grading them, just providing feedback...

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: Preclass test for Relative Valuation I, Daimler Circular spreadsheet

Don't forget. We start on packet 2 tomorrow. It is available online on the webcast page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr12.htm
It should also be in the bookstore. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

By now, you should have received back your DCF valuation back. If you have not, please send it again to me. 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.
Input page checks
Step 1: Currency check: What currency is this company being valued in and is the riskfree rate consistent with that currency?
Right now, if you are valuing a company in US dollars, I would expect to see a riskfree rate of about 3.5% here.. though some of you used 30-year bonds rates which would give you a slightly higher value). if you are valuing your company in pesos or rubles, I would expect to see a higher riskfree rate, (Watch out for the tricky ones.. a Mexican company being valued in US dollars or a Russian company in Euros.. Your riskfree rates should revert back to 3.5%, if this is the case)
Step 2: ERP check: Is the equity risk premium being used consistent with where the market is right now and where this company has its operations?
If you are analyzing a company with operations only in developed markets, I would expect to see a number of about 5.5-6% here... That is because the current implied premium in the US is about 6% (january 2012) or 5.52% (March 2012). If you are using a premium of 4.56% (which was the premium in january 2010, you will over value your company. If your company is exposed to emerging market risk, I would expect to see something added to the mature market premium. While I begin with the presumption that where your company is incorporated is a significant factor in this decision, it should not be the only one in this decision. Coca Cola and Nestle should have some emerging market risk built into them.
Step 3: Units check: Are the inputs in consistent units?
Scan the input page. All inputs should be in the same units - thousands, millions, billions whatever... What you are looking are units with far too many digits to make sense. (Check the number of shares. It is the input that is most often at variance with the rest, usually because you use a different source for it than the financial statements)
Step 4: Normalization check: If earnings are being normalized, what is the normalized value relative to the current value? If reinvestment numbers are off, should they have been normalized as well?
In some cases, we normalize earnings by looking at historical average earnings or industry average margins. While this is perfectly defensible, you want to make sure that the normalization is working properly. Thus, if earnings of $ 3 million are being replaced with earnings of $ 3 billion, you want to make sure that this company has generated earnings like these in the past. You may also want to consider an alternative which is to allow margins to change gradually over time rather than replace current with normalized earnings.
As a follow up, check the reinvestment rate for the firm. If it a weird number (900%, -100% etc.), it may be because something strange happened in the base year (a huge acquisition, a dramatic drop in working capital). A better choice may be to average over time.
Output page checks:
a. High Growth Period.
Start by checking the length of the growth period and the cash flows during the growth period. In particular,
- Compare the FCFF (or FCFE) to the EBIT (1-t) (or Net Income). Especially if you are forecasting cap ex, working capital and depreciation independently, compute an implied reinvestment rate
Implied Reinvestment Rate = 1 - FCFF/ (EBIT (1-t) or 1 - FCFE/ Net Income
Thus, if you have after-tax operating income of 100 and FCFF of 95, your implied reinvestment rate is 5%
- Look at the expected growth rate over the period. Does it jive with your reinvestment rate? (If you see a high growth rate with a low reinvestment rate, the only way you can justify it is by calling on efficiency growth. For that argument to make sense, your current return on capital has to be a low number... See the attached excel spreadsheet that computes efficiency growth.

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

- If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital:
Imputed Return on Capital = Expected EBIT (1-t)/ (Base Year Capital Invested + Sum of all reinvestment through year t-1)
If you see this number taking off through the roof or dropping towards zero, your reinvestment assumptions are unreasonable.
b. Terminal value
Start by checking to make sure your growth rate forever does not exceed your riskfree rate. Then follow up by
- Examining your reinvestment rate in your terminal year, using the same formula we used in high growth
- Backing out your implied return on capital (ROC = g/ Reinvestment Rate)
- Checking against your cost of capital in stable growth (you don't want to get more than 5% higher than the cost of capital and you do not want to set it lower than the cost of capital forever)
I have a spreadsheet that can help in this diagnostic:
http://www.stern.nyu.edu/~adamodar/pc/impliedROCROE.xls

One common error to watch out for is estimates of terminal value that use the cash flow in the final year, grow it out at the stable growth rate. That locks in your reinvestment rate from your last high growth year forever.
c. Cost of capital
As a general rule, your cost of capital should be consistent with your growth assumptions. Thus, you should expect to see betas move towards the stable range (0.8-1.2) and your debt ratios to rise towards industry average. Thus, your cost of capital in stable growth should be different from the cost of capital in high growth.
d. Final value of equity
Check for danger signs, including
- Cash and cross holdings becoming a huge percentage of value
- Options either being ignored or being a huge number

Market Price
As a final sanity check, look at the current market price. If your value is not even in the ballpark, go back and repeat all of the earlier steps...

Try it out with your own DCF valuation and then offer to do it for a friend... Then, take your toolkit on the road. Pick up a valuation done by an investment bank or equity research analyst and see if you can diagnose any problems in them. You are well on your way to being a valuation guru.
I have also attached a full set of diagnostic questions that you can consider in the context of valuation to this email.
Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: DCF post mortem

Hi!
In class today, we talked about looking for stocks that are cheap and ways to adjust for risk, growth and return on equity. There are a number of sites online where you can screen stocks, based on criteria you pick. Here is one from Yahoo! Finance. It has risk, growth and PE but unfortunately has only profit margins rather than return on equity:
http://screen.yahoo.com/stocks.html
Try it out. It is not a magic bullet, but it may provide a list of interesting companies that you might want to take another look at.

Incidentally, the use of screens to find cheap stocks goes back a long time. Ben Graham's book on security analysis has a list of 10 screens that he suggests will deliver cheap stocks. More recently, Joel Greenblatt wrote a book using a couple of well established screens that became a best seller:
http://www.amazon.com/Little-Book-Beats-Market-ebook/dp/B000YIUWFQ/ref=dp_kinw_strp_1?ie=UTF8&m=AG56TWVU5XWC2

Finally, no weekly challenge for this week, as you get ready for quiz 2. It will cover the rest of discounted cash flow valuation (not covered by quiz 1): growth rates, terminal value, loose ends etc...

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I hope you have started working on the material for the next quiz. It is not complicated material but there are lots of details that you can get lost on. Here are the topics that are fair game:
a. Estimating growth: Look especially at the variants on fundamental growth - operating income, earnings per share and net income. Also, try to get comfortable with the notion of efficiency growth and how to estimate growth and cash flows for a high growth firm (look at Sirius and Amazon in the lecture notes).
b. Terminal value: Since this is where the big errors in valuation happen, you should think about the drivers of terminal value and be able to look past the growth rate at the link to excess returns (Try that weekly challenge again).
c. Loose ends: in this area, you have to be able to value cash and marketble securities (when would you discount them and when would you attach a premium), cross holdings and other assets. Also, look at how complexity can be measured and valued and how best to deal with management options (dilution approach, treasury stock and options). I won't expect you to value the options (using an option pricing model) but I would be expect you to know how to use the option value.
d. The valuations; You should be able to finish an entire valuation, with all the quirks involved.
In terms of chapters, we will cover chapters 11,12, 13,14,15 and 16 as well as the chapters on valuing financial service companies and young companies.

I had also promised you my Exxon Mobil simulation results. I have attached the page to this email and you can get the next newsletter by clicking below:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews8.htm

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
The quizzes are ready to be picked up. They are in the usual spot (on the 9th floor of the finance department just outside the front door. I have attached the solution and the distribution to this email. As always, the cross holdings question stumped many of you (It always does, a testimonial to how much damage it creates in valuations).
If you do get a chance, please review the solution to quiz 2. Many of you did get close but the best case solution, since you were given the costs of capital for the businesses that the two companies were in, rather than the cost of capital for the companies, was to value the companies independently and value the equity in Gateaux as the sum of the stand alone value for the company + 60% of the value of the subsidiary. There is a second best solution where you can value the consolidated company (though you are using a food company cost of capital to discount cash flows to a retail business then) and then subtract out 40% of the value of the subsidiary as minority interest. I gave 3.5/4 points to the latter solution, with the half point reflecting the error in the discount rate mismatching.
And one more thing. I am sure that you will detest me for doing this, but I will put up your mystery project later today and send you an email when it is ready. Sorry to pile on.... but...
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: Solution and distribution of grades

Hi!
Your mystery project is available to download. It is kind of fun to do (sounds sick... I know)
http://www.stern.nyu.edu/~adamodar/New_Home_Page/MystProject.htm
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Since I know that you have lots on your plate right now and that you may need the time to work on your mystery project, I will skip the weekly challenge for this week (unless you want to derive the intrinsic value equation for PEGY ratios...) So, until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
First, the newsletter for the week is ready and you can get it by going to
http://www.stern.nyu.edu/~adamodar/newslet/eqnews9.htm
Second, please do take a look at the mystery project when you get a chance. At least, look at the data that is available. Even better, compute the multiples for all the companies. Best of all, start looking for your mismatched (cheap) companies. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!

I know that you are busy with the mystery project. So, I will make this quick. The third packet is now ready to download and print off... Please print it off and bring it to class next Monday... I have asked for copies for the bookstore as well and it should be there by early next week.

It is amazing how widespread relative valuation is. I found this site recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
http://www.rulesofthumbs.com/
And the site below has valuation spreadsheets as well as a valuation blog..
http://www.valuecruncher.com/
Finally, here is a fun article on how relative valuation is used in hotel valuation (It can be based on how much a can of soda at the hotel costs... I am not kidding)
http://www.hvs.com/Bookstore/HotelValuationTechniques.pdf

Finally, we talked about valuing brand name in class yesterday. If you are interested in valuing brand names and other intangibles, I do have a paper on the topic that you may or may not find useful:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1374562
Hope you enjoy it. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
As we delve into private company valuation, there are a couple of key take aways. The first is the use of a total beta, not appropriate in all cases, but useful as a limiting case. Just as I report betas by sector, I also report total betas by sector:
http://www.stern.nyu.edu/~adamodar/pc/datasets/totalbeta.xls
Take a look at the dataset. It will provide some interesting perspectives on cost of equity for private companies in different businesses.

I have also also attached the weekly challenge for this week. Give it a shot!

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Weekly challenge # 8

Ola (Thought I would mix it up a little),
Since we are approaching the dreaded due date, I decided to put down specifics on submission.
1. When is the project due? By 5 pm, Monday, April 16, 2012

2. How should it be submitted?
Please submit your mystery project as an electronic document, with one submission per group. You can use either a pdf or a word format for the text and attach only those excel spreadsheets that you feel are absolutely necessary. (Please do not send me the original data file or the gory inside details of your number crunching)
When you email me the file, please put "Mystery project submission" in the subject...

3. What should be on the cover page?
The names of everyone in your group, in alphabetical order as well as the following:
a. The multiple of multiples you used to make your selections (PE, PBV, EV/EBITDA etc...)
b. Your five most under and over valued companies
c. The company you would invest in as an activist investor.
(If you can also put your information into the attached excel spreadsheet, I will be eternally grateful)

4. What should be in the report?
a. How you chose the multiple that you did...
b. How you used that multiple to assess companies... (If you used a regression, this would be the place you show it)
c. How you arrived at your most under and over valued companies
d. How you picked the one company that you would invest in as an activist investor
I am not a stickler for formatting... Be creative and bold...

Please keep it brief and to the point.
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I won't get in the way of you doing your mystery project but I just wanted to let you know that the newsletter for the week is up and running:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews10.htm
Hope you get a chance to look at it.

On a different note, I decided to bypass the Facebook acquisition of Instagram and talk about Google's really weird stock dividend/split announcement on my blog:
http://aswathdamodaran.blogspot.com/2012/04/google-splits-its-stock-and-spits-on.html
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
I know that there is almost no chance that you tried the weekly challenge this week, but I have the attached the solution, just in case you did or decide to in the future. In tomorrow's class, we will be starting on lecture note packet 3 and real options. If your option pricing mechanics a little rusty, I will do a quick review in class tomorrow but you can help yourself by reading chapter 5 in the book. Please remember to email me your mystery projects by tomorrow, using "Mystery Project submission" in the subject for the email and sending one pdf file for the report. It is a group project and please list your group member names (in alphabetical order) on the first page. If you can also fill out the summary findings in the spreadsheet that I sent you (which I am reattaching, I would be grateful).

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: Weekly challenge # 8 solution

Hi!
In today's class, we spent a great deal of time talking about illiquidity in the context of a private company valuation. In the last 5 years, we have learned that illiquidity is an issue with public companies as well. In fact, I have a paper on the topic that you may (or may not) find interesting.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1729408
And thank you for getting your mystery project to me. I will try to get back to you as soon as I can. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu
http://www.damodaran.com

Hi!
I think that I have returned all of the mystery projects back. If you have not received yours, first please check with your teammates ( I tried to Reply All to get everyone on the list but a few did not have all of the group members ccd and I did forget on a few). There should be an attachment to the email, with your file and my comments on it. The grade is on the first page.

Looking over the mystery project, here are some of the overall impressions I have:
1. Multiple used: The two most widely used multiples were PE and EV/EBITDA. Here was the breakdown:
Multiple Used by

EV/Sales 4
Combination 4
Price/Book 4
PE 4
EV/EBITDA 2
There were 18 groups overall. In making your choices, the following factors seemed to come into play: (a) the regression R-squared (higher R-squared) (b) differences in accounting standards across markets (led people to choose Revenue or EBITDA over EPS) (c) Number of firms that you would lose in the sample (steered away from multiples that cost you too many firms). I think that these are all legitimate factors. A few groups mentioned that they were using equity multiples because they were equity investors. I don't think that is necessarily the case. Equity investors can use EV multiples and back into a value for equity... There were four groups that used combinations of multiples and figured out creative ways to reconcile their choices.

2. Regressions: Almost everyone followed the script and ran the regressions... One thing I did notice is that some of you chose to stick with all of the variables in the regression, even when there was no statistical significance. Sometimes, taking a variable out rather than leave it is the better choice. About 20% of the groups reported regressions with dummy variables for emerging markets, but the statistical significance of that variable was marginal. The reason may lie in the types of firms that are in this sample. These are the largest market cap firms and most of them are multinationals. The fact that they are incorporated in emerging markets may therefore not matter very much. One group ran the regressions by sector or used sector dummies. While this makes sense, you have to be careful to make sure that you have enough data within each sector to sustain the regression. (The simple rule of thumb is that you can have one independent variable for every 15 observations. Thus, if your sample size is 35, you can have at the most 2 independent variables.)

3. Recommendations: When picking under and over valued companies, what matters is the percentage and not the absolute difference. In other words, a company that trades at a PE of 10 with a predicted PE of 15, is more undervalued that a company that trades at a PE of 40 with a predicted PE of 50. Here is the list of companies that came through as most under valued:
Company Number of groups
GM 11
Statoil 6
Hutchison Whampoa 5
Hyundai Motors 4
Kumba Iron 4

Note the Lukoil is on the list. Perhaps, a Putin dummy would have made sense. For most overvalued, here is the list of the top few:

Company Number of groups
VMWare 10
Amazon 7
AT&T 5
Formosa Petrochemicals 5
Kinder Morgan 4

4. LBO candidate: A good target for a leveraged buyout will be under valued, under levered, easy to takeover and badly managed. Almost all of you focused on finding an under valued company (which is good), an under levered company (makes sense) and a company easy to takeover (low takeover defenses), but the search on the fourth dimension (bad management) was all over the place. Some of you were looking for companies with high margins and others with stable cash flows. Samsung was the only company that made it onto at least 3 groups, showing you how diverse your choices were. As a general rule, control requires inputs that you can change and that indicates a firm with below-average margins. There was almost no overlap between the groups with no company being picked more that twice. I have a paper on LBOs that fleshes out what you may want to look for in a LBO candidate. f you get a chance, please browse through it.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1162862
The company chosen for a private equity buy out by the most groups was Freeport McMoran.
Thank you for the effort you put into this project. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu
http://www.damodaran.com

Hi!
Hope that you have a great weekend planned (though I have probably ruined it for some of you...). Anyway, the newsletter for the week is attached:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews11.htm
Hope you get a chance to read it and see you Monday. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu
http://www.damodaran.com