Hi,
For those of you who were in my corporate finance class, the torture begins again (http://www.youtube.com/watch?v=7edeOEuXdMU). For those of you who are new to this experience, you will soon find out... 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 this class is that valuation is always timely (and always fun...) Just as examples: Is it time to buy or sell Facebook? Is Apple now the first bargain basement $ 400 billion company? What is the value added by the Kardashian sisters? If you have not visited my blog, I put my thoughts down on these issues (though I am still working on the Kardashian valuation) over the summer:
http://aswathdamodaran.blogspot.com/

1. Preclass work: 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

2. Syllabus & Calendar: The syllabus for the class is available on the website for the class and there is a google calendar for the class that you can get to by clicking on
https://www.google.com/calendar/embed?src=0af3iu00phbicujqhhel8gc8os%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.

3. Lecture notes: The first set of lecture notes for the class should be available in the bookstore by the start of next 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). 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. If you want to save paper, you can download the pdf file on you iPad, Android or Kindle and follow along...

4. Delivery choices: I hope to see you all in class for every session, but there are two supporting delivery mechanisms that I would like you to take advantage of:
a. Lore: I don't use Blackboard. Instead, I use a site called Lore that some you knew as Coursekit in the Corporate Finance class. You can find the link to the class by clicking below:
http://lore.com/Valuation-Spring-2013.1
You should be getting an invite to join the class on Lore. Please accept the invite, because your quiz scores will be recorded here and some of your assignments have to be submitted here.
b. 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). Once you have the app, use the link below:
https://itunesu.itunes.apple.com/audit/COJL8LZCE3 (Enroll code: KKY-C8B-D56)
I really like the set up and I think you may enjoy it too.

5. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store... If you are the law-abiding type, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. 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.. Or if you are budget and time constrained, try "The Little Book of Valuation". http://www.stern.nyu.edu/~adamodar/New_Home_Page/public.htm

6. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad or iPhone that you can download on the iTunes store: http://itunes.apple.com/us/app/uvalue/id440046276?mt=8
It comes with a money back guarantee... Sorry, no Android version yet... As for Blackberry, fuggedaboutit... Dead technology walking!!!!!!!! I am looking forward to seeing you in a few days (The first day of class is February 4, 2013, in KMEC 2-60).. I think we are going to have a lot of fun (at least, I am... ).

Until next time...

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/webcasteqspr13.htm
If you will be missing the class, the webcast for the class should be up by tomorrow evening. So, you should be able to catch up.

A couple of final requests before class tomorrow. First, if you have ignored my repeated nagging and have still not added yourself to the class list on http://www.lore.com, please add yourself now (If you have issues, email me...). 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!

Hi!
First, a quick note about today's class. During the session, I made clear 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 started on the first packet (intro to valuation) by giving you my reasons for doing valuation (to fight looming lemingitis) and starting on the discussion of widely held misconceptions about valuations.

With that out of the way, have you classified yourself yet? Are you a proud lemming, a "Yogi bear" lemming or a lemming with a life-vest? While you are pondering that life-changing question, I do have some points to make:
1. Please do find a group to nurture your valuation creativity, and a company to value soon. If you are ostracized, please let me know...

2. 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 2006) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings...

3. The web cast for the first class are up in all three forums (website, iTunes U and Lore). You can access it by going to:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr13.htm

4. 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

If you did not get the syllabus, project description and the valuation intro in class this morning, they are all available to print off from this site.

Just to restate what I said in class this morning, 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.

Attachment: Post class test & solution

Hi!
I hope you are working on finding a group and choosing a company..... In the meantime, life moves on. In yesterday's class, I mentioned that I would put up a valuation each week and that I would like to at check out the spreadsheet containing the valuation, make your own tweaks to the model and post on the shared Google spreadsheet. Well, the first valuation of the week is up and it the most-talked about company in the world: Apple. You can find it by going to the webcast page for the class:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr13.htm
If you scroll down past the first session, you will see my blog post on Apple and the excel spreadsheet

Hi!
Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. Since I mentioned Carl Icahn and Bill Ackman as hostile acquirers (catalysts), you may want to look at Herbalife, the company that Ackman has targeted as being over valued. See if you can get a list going of how he is trying to be the catalyst for the correction... and think about the dark side of this process.

Speaking about input fatigure, I am attaching the link to a New York Times piece on decision fatigue. It is a fun and interesting read. Please take a look at it, when you get a chance:
http://www.nytimes.com/2011/08/21/magazine/do-you-suffer-from-decision-fatigue.html?pagewanted=all
We ended the class today with the question of whether equity valued directly (by discounting cash flows to equity at the cost of equity) will yield the same value as equity valued indirectly (by valuing the firm and subtracting out debt). i know that we really have not delved into valuation in depth, but if you are up to it, try the first weekly challenge

When you are done, go into lore.com and submit your answer. I will give you mine on Sunday. Until next time!

Attachment: Weekly Challenge #1

Hi!
It is Thursday and it is time for another weekly tradition: the project update/nag. It is my (mostly futile) attempt to remind you of where you should be on your project and to make you feel guilty enough that you feel the urge to catch up. This week's job is easy, since we just started. So, only two questions this week:
(1) Have you found a group yet?
If not, please let me know as soon as you can. I will start the orphan list as soon as I hear from you. If you are a group of 3 or 4, looking for more members, please hold off on emailing me until the orphan list goes out. You may be able to find someone from that list.
(2) Have you chosen a company yet?
Please try to pick a theme as a group and a company, as an individual. Don't try for perfection and don't worry about picking the right or wrong company for two reasons. First, as I mentioned at the start of the class, any company can be valued, and the ones that are more difficult are the ones you will learn the most from. You can also pick private businesses, if you can find the financials on your own. Second, if you do pick a company that you do not like, you can always change later in the semester. It is more important that you pick a company and get started than it is to pick the perfect company.

On a different note, please do try the weekly challenge that I sent out in yesterday's email and submit the responses on Lore. I would love to see a healthy response rate to the first challenge, since it is often downhill from here... Premature graduation, as I noted, will rear its ugly head in late February and then I am sunk.

The TA for this class is Leonardo and his office hours are listed below:
"leonardo.boguszewski@stern.nyu.edu Boguszewski" <leonardo.boguszewski@stern.nyu.edu>: Monday 4.30-6.30
Please don't bug him about the grading on exams, quizzes or projects. I am completely responsible for those fiascoes and you will have to bring them to my attention.

On the lecture note front, I have some good news. It looks like the bookstore will get packet 1 finally in stock tomorrow. If they don't have it in, please let me know. I am sorry about the printing problems. I am inclined to blame Microsoft (and Powerpoint) for all my ills and this feeds into my conspiracy theory.

Hope you are digging your way out of the snow! I had some dreaded shoveling to do but I wanted to send this email out, before I decompress. The newsletter for the week is ready to go and is attached to this email. Please take a look at it when you get a chance. On a different count, I don't know whether you have been tracking the Dell buyout but one of Dell's stockholders, Southeastern Asset Management, challenged the buyout price. I am attaching the letter that they sent to Dell. Not only is it a good read on valuation but it also hoists Michael Dell on his own petard, using the words he used to claim success on his acquisitions/investments against him. Hope you enjoy it. Until next time!

Attachments: Newsletter #1, Southeastern Management's letter to Dell

For those of you who were able to try the weekly challenge, thank you. There was a 25% response rate, but I am sure it will pick up in the coming weeks. I have attached the solution, posted it on my webcast page for the class as well as on Lore and on iTunes U. Next week, we will pick up the pace, starting with riskfree rates in tomorrow's class and equity risk premiums on Monday. I am sure that you cannot wait. Until next time!

Attachment: Weekly challenge #1 solution

Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate.
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 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!

hope you had a chance to try to estimate the risk free rate in at least one challenging currency... Come on.. I am not asking for much, and you have the raw data. Anyway, moving right along, thank you for giving the Apple valuation your best shot. I think about half the class tried it and that is good. You can see the spread of valuations that people arrived at, by going to:

It is time to move on to the second valuation of the week. This week's company is also in the news right now: Dell. A management buyout exposes the soft underbelly of corporate governance and exposes all the potential conflicts of interest that one can think of. I have a post on this topic that you can read by going to:
http://aswathdamodaran.blogspot.com/2013/02/michael-dells-conflicted-buyout.html

I have also attached my valuation of Dell to this spreadsheet.

Once you have wrestled with the numbers, go to the shared Google spreadsheet and give me your estimates.
https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadGg3SDUxQkdzWUt5SEduY3A2OGZpZHc&usp=sharing#gid=0
Until next time!

Attachment: Dell MBO valuation

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 5.46%.

Please try to update the implied premium, using today's numbers for the S&P 500 (easy) and the 10-year T.Bond rate (easy). Leave everything else untouched including growth rate in earnings for next five years & 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 Wednesday.

Remember, no class on Monday. Until next time!

Attachment: Implied ERP for February 2013

I hope the week was a good (and productive one). Next week is a short week, since we have no class on Monday. Just to prod you (and harass you), I want to check on where you are on the project. Assuming that you have picked a company, joined a group and downloaded the financials, I had suggested after Monday's class that you estimate a riskfree rate in the currency that you will be doing the valuation in. If you have doubts about how to do this, the weekly challenge for this week will be a good way to test your understanding. It is online in the usual spots (webcast page, Lore and iTunes U) and is attached to this email.

By the way, if you do have a chance, give the Dell valuation a few minutes of your time as well....

Once you have a risk free rate, here are your next few steps:
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, them's the breaks...
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.

Finally, I hope you have had a chance of updating the implied equity risk premium spreadsheet that I sent you with Wednesday's email. All you have to do is update the S&P 500 and the US treasury bond rate and use the goal seek (instructions on spreadsheet). Until next time!

Attachment: Weekly Challenge #2

Hope you are having fun this weekend... Just a quick note. The weekly newsletter is attached.

Attachment: Newsletter #2

I realized right after I sent you the solution to the second weekly challenge that I have two versions of it floating around, one on the webcast page for the class and one for the lore/iTunes U/ email versions. One is for China and the other is for Peru. I am really, really sorry and have attached the weekly challenge/solution to the China challenge as well as the weekly challenge and solution for Peru. Until next time!

Attachments: Weekly challenge 2 simple- China & Weekly challenge 2 complex- Peru)
Solution (Simple & Complex)

It must have been quite a relief not to get an email from me for a whole day... but it is back to the torture. I just put up the valuation for this week and it is Heinz. I am sure that you know that Berkshire Hathaway (Warren Buffet) and a Brazilian investor group have bought Heinz, owner of some of the most venerated brand names in condiments.... The spreadsheet that I have put reflects Heinz as it stands today, and my estimate of value is about $54/share, about where the stock was before the deal but well below the deal price of $72. It is possible that the Brazilian group (which will have operating control of the firm after the deal) can change the firm to deliver more than $72. As you change the inputs, here is the interesting question to ask yourself. Does the fact that Buffet is part of the deal "bias" your valuation? Put differently, are your inputs and value biased up because you think that Buffet does not overpay? Note that there is nothing wrong with it, but worth thinking about...
New story: http://www.cnbc.com/id/100442835
My valuation: http://www.stern.nyu.edu/~adamodar/pc/blog/HeinzFeb13.xls
Heinz last annual report: http://www.stern.nyu.edu/~adamodar/pc/blog/HeinzAnnualReport2012.pdf
Heinz Bloomberg cheat sheet (I created this FA page on Bloomberg to get all the numbers I need for a company on one page): http://www.stern.nyu.edu/~adamodar/pc/blog/HeinzCheatSheet.pdf

As always, there is a Google shared spreadsheet that you can enter your numbers in. Just one request. The shared spreadsheet is set up so that you can input and edit your line of number, but it is easy to mess up the spreadsheet either intentionally or accidentally. So, please don't rename the spreadsheet (someone renamed the Apple valuation spreadsheet as the IBM valuation spreadsheet) or mess up with other people's numbers. And, by the way, if you are Silvio Berlusconi (his name showed up on the Apple valuation shared spreadsheet, with 100% revenue growth, 99% operating margin and a 1% cost of capital for Apple), you have better things to do than valuation (perhaps, a bunga bunga party...)
https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadFVhdkhPNlYtVlI3VmNHS3c1aFRHTkE&usp=sharing

Until next time!

By now, you are probably tired of equity risk premiums and I don't blame you. Today's session, though, was all about implied equity risk premiums and what causes them to change over time. Other things remaining equal, higher stock prices, higher cash flows and higher expected growth all push up the ERP, whereas a higher riskfree rate pushed the ERP down. If you get a chance, please play with the equity risk premium spreadsheet to check for yourself.
As for the inputs into the model, there is not much suspense. Here is where you can get them:
a. Level of the index: Almost everywhere
b. Cash flows on the index: For the S&P 500, I go to the source:
http://www.standardandpoors.com
Click on the S&P 500 and then on index announcements. The most recent release on the buybacks/dividends on the index should be there somewhere. The only problem is that S&P updates these numbers on December 15, March 15, June 15 and September 15. So, you will have to leave the numbers unchanged during those months where there are no updates.
You have a choice on which cash flows to use in computing your premium: Current (trailing 12 month), average over last 5 years, average over last 10 years.
c. Expected growth rate: The easy route is to do what we did in class and get the data from Yahoo! Finance, where you will find it in any company's Yahoo page (under analyst estimates at the bottom of the page ). The better way to get it is to find a Bloomberg terminal, find the index in question (S&P 500 in this case) and type in EE. You will get expected earnings at least for the next 2 years and you can extrapolate from there.
d. Riskfree rate: Use the ten-year default free rate in the currency in which your expected growth/cash flows are denominated. For the S&P 500, this would be the 10-year US treasury bond rate.
If you want to carry forward and compare the equity risk premium to the bond default spread, here are the places you can go to get those numbers:
a. For the bond default spreads, visit my favorite macro data source (FRED, the Federal Reserve data site in St. Louis)
http://research.stlouisfed.org/fred2/
Click on categories first, then on interest rates and then on corporate bond rates. Finally, click on Moody's. You will see Baa rates going back to 1919 (Isn't that awesome?) You have to subtract out the ten-year bond rate and if you want to get that, you should find that on FRED as well. There is a iPhone and iPad app for FRED that you should download. It is free and you can download directly into Excel...
b. For the cap rates, you should try this site:
http://www.realtyrates.com/commentaryg.html
I am sure that there are better sources, but most of them require you to pay money. I am cheap..

If after all of this, you still want to read more about equity risk premiums, here is the link to my magnum opus (or something opus), the annual update I do on equity risk premiums:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2027211
Download the paper and browse through it. You will see much that is familiar. (The 2013 edition should be out in the next two weeks)
As for betas, the key thing to recognize is that it is a means to an end: a way of adjusting for relative risk. So, keep your eyes on the prize and don't let your disdain for modern portfolio theory get in the way of adjusting for risk and estimating value.

Attachments: Post class test and solution

I hope that you are having a good start to the weekend. This week's newsletter does not have much news, since we had only one session. That session, though, did complete our discussion of equity risk premiums. I hate to plug this one more time, but please do take a look at the weekly challenge, since it relates to the equity risk premium discussion. Next week, we will finish our assessment of discount rates and start on cash flows. So, if you have not picked a company yet, please do. Until next time!

Attachment: Newsletter #3

I hope you had a chance to try the weekly challenge. If you did, you probably found it more an exercise in statistics than valuation and that is good. Statistics is a vastly under used tool in valuation. On a different note, we will complete our discussion of bottom up betas and discount rates this week and move on to cash flows. Until next time!

Attachment: Weekly challenge 2a solution

Today's class represented the final pieces of the discount rate puzzle. We began with a continued discussion of bottom up betas, focusing on defining comparable firms and expanding the sample. We continued with the cost of debt, starting with a definition of the cost of debt as a long term, current cost of borrowing and laying out a procedure for estimating this cost, even for firms that don't have traded bonds/ bond ratings. We also took a detour into estimating the cost of debt for firms that may receive subsidized debt from the government/ other entities. Finally, we looked at the costs of other hybrids and how to weight the different sources of capital to arrive at a cost of capital.

Attachment: Post class test & solution

Hi!
The last couple of days have been interesting ones for Italians in particular, and for global markets overall. First, the election in Italy delivered a deadlock:
http://www.bbc.co.uk/news/world-europe-21587123
The markets reacted adversely. I have attached the charts for the Italian CDS, the Italian 10-year government bond (in Euros) and the Italian equity index. Looks like the equity risk premium for Italy went up.
That, of course, perked my interest, since it is often in the midst of crisis that you get bargains in countries. So, I decided to value Fiat since it gets only 15.5% of its revenues in Italy now. The last annual report is for 2011 but the preliminary numbers for 2012 are available (in the cheat sheet). The equity risk premium that I had estimated for Italy at the start of the year was 8.43% (based on a default spread of 1.75% and a country risk premium of 2.63%). That default spread jumped to more than 3% yesterday. I increased the default spread to 3%, the country risk premium for Italy to 4.5% and the total equity risk premium for Italy to 10.3%. My estimate of the value is 3.83 Euros/shares, unfortunately lower than the market price of 4.01 Euros. So, no luck on Fiat. If you have any suggestions on other Italian companies that get the bulk of their revenues outside Italy, let me know. Better still, value the company and buy it yourself. Until next time!

Attachments: Italian CDS & Default Spreads, Fiat 2011 Annual Report, Fiat Financial Cheat Sheet , My valuation of Fiat

Hi!
Today's class looked at the getting the base year's earnings right and explored several issues:
1. To get updated numbers, you should be using either trailing 12 month numbers or complete the current year with forecasted numbers. In either case, your objective should be to get the most updated numbers you can for each input rather than be consistent about timing.
2. To clean up earnings, you have to correct accounting two biggest problems: the treatment of operating leases as operating (instead of financial) expenses and the categorization of R&D as operating (instead of capital) expenses. The biggest reason for making these corrections is to get a better sense of how much capital has been invested in the business and how much return this capital is generating.
3. While truly extraordinary items are easy to deal with, accounting ploys to move expenses into the extraordinary column may require some detective work. For those interested in forensic accounting, here are a couple of references on Amazon
4. If you are interested in exploring effective tax rates, I have attached the the updated averages that I have for effective tax rates for US companies, by sector in January 2013.
5. Finally, the definition of cap ex in valuation is much broader than the accounting measure of this number. It includes R&D (and like expenses) and acquisitions.
If you are really interested in nailing down the basics of cash flows (and preparing for the quiz next week), please try the post-class test (with solution) that is attached but really do try the weekly challenge for this week. It is a great exercise in tying up loose ends.

Attachments: Tax rates by sector, Post class test and solution

Oops.. Missed the Amazon links for forensic accounting:
http://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071703071/ref=pd_sim_b_8
http://www.amazon.com/Creative-Cash-Flow-Reporting-Sustainable/dp/0471469181/ref=pd_sim_b_2
There are denser books on the topics but those are for forensic accountants. These books work for the rest of us.

As the discussion shifts from discount rates to cash flows, the details start mounting and it is easy to get lost in abstractions. If you are interested in getting past abstractions, I have put together three webcasts for this week (and they are also on the valuation tools page that I linked to yesterday):
How to compute trailing 12 month earnings: http://dl.dropbox.com/u/24597893/Valuation/Trailing12month.mp4 (Uses Apple from late 20120
How to convert leases to debt: http://dl.dropbox.com/u/24597893/Valuation/Leases.mp4 (Uses Disney in 2012)
How to capitalize R&D: http://dl.dropbox.com/u/24597893/Valuation/R&D.mp4 (Uses Microsoft annual reports from 2012 & 2011)
They are all about 10-15 minutes each... and you can download the spreadsheets and annual reports by going to http://www.stern.nyu.edu/~adamodar/New_Home_Page/valuationtools.html

On a different note, in case you have not been able to find the past quiz 1s and solutions, I have attached the links below:
Quiz 1s: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1.pdf
Solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xls
Have a great weekend! Until next time!

Last week, we finished our discussion of discount rates, by looking at the cost of debt and capital. We then started on the estimation of cash flows, spending the bulk of our time talking about updating and cleaning up earnings. Next week, we will turn to the key question of how best to estimate growth and future earnings. The newsletter for the week is attached. Please do give the weekly challenge for this week (I have attached it to this email). It will be good preparation for the quiz. Until next time!

Attachments: Newsletter #4

I know that weekly challenge #3 was a grind, but for those who of you who persevered, my congratulations and thank you! I have attached the solution to the weekly challenge. I would suggest that even if you did not attempt the challenge that you take a look at it and the solution, as preparation for the first quiz. See you in class tomorrow! Until next time!

Attachments: Solution & Synthetic rating

Today's class covered a lot of topics, some related to cash flows and some related to growth. Let's start with the cash flow part first. I argued that capital expenditures should be defined broadly to include R&D and acquisitions, for consistency reasons. If you want to count the good stuff (growth) that comes from these investments, you have to also count the cost. To get from cash flow to the firm to cash flow to equity requires us to bring in cash flows to and from debt. While borrowing more can make your cash flows to equity higher, they also make your equity riskier, raising the cost of equity. The net effect of leverage on the value of equity can be positive, negative or neutral, depending on the firm and where it is in its borrowing cycle. On growth, we started with historic growth and quickly dispensed with the notion that it is a fact. Depending on how it is estimated (arithmetic vs geometric) and over what period, you can get different numbers. It is also thrown off when a company's earnings go from negative to positive and generally becomes lower as companies get larger. While you can use analyst forecasts of growth, they have historically not done much better than time series forecasts, perhaps because analysts wear multiple hats.

One final point. As you work through the past quizzes, you will notice a lot of problems that deal with country risk and cost of equity. You will notice that in some of these questions, the answer uses the weighted equity risk premium approach, where you compute the equity risk premium for the risky country or countries, and multiply by the beta. In others, I use the more elaborate lambda approach, with lambda estimated by dividing the proportion of revenues in the country (for the company) by the proportion of the average company in the market.
Cost of equity = Risk free rate + Beta (Mature market premium + Country risk premium(s)); the equity risk premium can be a weighted average across multiple countries.
Cost of equity = Risk free rate + Beta * Mature market premium + Lambda(s) * Country risk premium(s)
Which one should you use? If you are given the data on what the average company makes in an emerging market, I am nudging you towards using a lambda approach. If that is not given, use the more conventional beta approach.

As for the quiz, it is in the first 30 minutes of Wednesday's class. There will be class after the quiz. So, please hang around, if you finish early. IF YOU WILL NOT BE MAKING THE QUIZ, I NEED TO KNOW BEFORE 10.30 ON WEDNESDAY MORNING. If you are, it is open-book, open-notes but no laptops. You can use your iPads but no connectivity... I have attached the post-class test and solution. Until next time!

Attachments: Post class test and solution

I had promised you a review for the first quiz. You can find it by going to:
http://dl.dropbox.com/u/24597893/Valuation/valquiz1review.mp4

The presentation for the review is attached. I hope the webcast helps... I will also post it tomorrow on Lore and iTunes U.

Attachment: Review presentation

I won't ask you how the first quiz went because that may evoke the wrong response. The good news is that it is over.

If you were able to hang in there mentally and physically, we did complete our discussion of growth by looking at the fundamentals that drive growth. Starting with a very simple algebraic proof that growth in earnings has to come either from new investments or improved efficiency, we looked at how best to estimate growth in three measures of earnings: earnings per share, net income and operating income. With each measure of earnings, the estimation of growth boiled down to answering three questions: (1) How much is this company reinvesting to generating for future growth? (2) How well is it reinvesting? (3) How much growth is added or lost by changes in returns on existing investments? We closed the discussion by looking at how to estimate growth for money losing companies or companies where margins are expected to change significantly over time. In that context, we looked at forecasting operating income for a young growth company, with small revenues and operating losses. While we will look at full fledged valuations, where these parameters all come into play, I have attached an excel spreadsheet where you can play with the key drivers of growth and see the effect on the expected growth rate.

The weekly challenge for this week revolves around fundamental growth. Try it, if you get a chance. I have also attached the post class test and solution for today's class. Hope you get a chance

Attachments: Post class test and solution

Sorry about the second email in two minutes but the quizzes are done and can be picked up on the 9th floor just outside the front door to the finance department. Please don't get the quizzes out of alphabetical order. The solution is attached, as is the distribution of the scores.

Attachments: Solution and distribution

I noticed that most of you have picked up your quizzes. I will leave them out until Monday but please do pick them up, if you have not already. You are probably in no mood for more valuation, but if you are, I would spend some time estimating the "secret number" in valuation: the return on invested capital and/or return on equity. Here are the steps:
1. Start by getting the current year's operating income and net income. Do all of the things we talked about last week including
- removing any one time charges or income
- update the numbers to make them current
- see if you can find out the interest income earned on cash and multiply by (1-tax rate). If you cannot find it, just multiply last year's cash balance by the treasury bill rate during the year.
Your preliminary estimate of income will be:
After-tax operating income = Operating income (1- Effective tax rate)
Net Income from non-cash assets = Net Income - Interest income from cash (1- tax rate)

2. Go to the balance sheet for the prior year (if you are doing trailing 12 months, go to the same quarter of the previous year)
- Get the shareholders' equity (this can be negative for some firms)
- Add up the interest bearing debt on the balance sheet (short term and long term debt)
- Get the cash balance
Your preliminary estimate of invested capital
Invested capital = Shareholders equity + Total Debt - Cash
Your preliminary estimate of book value of equity in non-cash assets will be
Book equity from non-cash assets = Book equity - Cash

3. Adjust for leases & R&D
- Adjust the operating income and net income for leases & R&D
- Adjust the book debt for the PV of operating leases
- Adjust the book equity for unamortized R&D
Recompute your invested capital

4. Compute your ROE, non-cash ROE and ROIC
ROE = Net Income/ BV of equity
Non-cash ROE = Net Income from non-cash assets/ Book equity from non-cash assets
ROIC or ROC = After-tax operating income/ Invested Capital

You may get strange looking numbers. For instance, for some firms with large cash balances, your ROIC can be astronomical or negative. For young, growth firms, the ROIC and ROE can be negative. Don't freak out. You still have the power to override these numbers, when you make your forecasts for the future. In other words, what you really care about is ROE and ROIC on future new investments and you are not bound to use last year's numbers. If you are looking at industry averages for these numbers, they are on my website under updated data.

We also talked about items like goodwill and restructuring charges that can throw you off. If you are interested, here is the sleep-provoking paper of mine on ROE and ROIC that I talked about:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1105499

Until next time!

Two very quick notes. First, the newsletter for the week is attached. Second, the second packet is ready to download online. As with the first, I know the pdf file may create a problem. So, I have put the powerpoint version up, for download. You can find it by going to:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr13.htm
Look to the top of the page. The bookstore should also have a combined packet that includes packets 2 and 3 on their shelves right now, if you want to skip downloading and printing on your own.

Attachment: Newsletter #5

Hi!
The heart of today's class was the discussion of terminal value. We began by ruling out using multiples to get terminal values, at least in the context of intrinsic value. To keep terminal values in check, you have to follow four basic rules/principles:
1. Constrain your terminal growth rate to be less than or equal to your riskfree rate (which is a proxy for long term growth in the economy)
2. Don't wait too long to put your company into stable growth (and try not to push past 10 years)
3. The key input in your terminal value computation is your return on capital (and excess return assumption). If your return on capital = cost of capital, your terminal growth rate does not add any value.
4. Give your company the characteristics of a stable growth company in terms of excess returns and cost of capital.
As for which model is right for you, use a firm valuation model if you believe that debt ratios will change over time or are not sure and reserve the dividend discount model for desperate times (when you lack the inputs to compute cash flows).
I have attached the post class test & solution for today's class. Until next time!

Attachments: Post class test and solution

Today's class was about the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Third, we looked at other assets and argued that you should never double count assets. We closed by looking at complex companies by first focusing on how to measuring complexity and then how to incorporate that complexity into valuation. I have attached the post class test and solution.

On a different note, please do get a jump on the DCF valuation of your firm. The valuation is due the Friday of the week that you return from the break... for your feedback. I have also attached the weekly challenge for this week, though this is little chance that you will be able to do it, on spring break. I will give a longer window than usual for submissions, and not send you the solution until March 24. Finally, there will be no weekly newsletter this week. In fact, I will leave you to your own devices for the next 10 days and hope that you enjoy your spring break. Until next time!

Attachments: Post class test and solution

Hi!
Now that spring break is over, the attached newsletter will serve as a reminder of where we are in the class and where we will be going next. As an added reminder, there is a weekly challenge online (on terminal value) from before the spring break that you can try, to see if any of the stuff that we talked about before the break stuck... I have attached the weekly challenge as well and you can submit online on lore.com as usual.

Attachments: Newsletter #6, Weekly Challenge #4a

Today, we put the two final loose ends to rest. First, 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. Second, 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.
We then started on our first valuation, Con Ed, using a stable growth dividend discount model. To qualify to be valued with this model, we argued that a company had to meet three criteria: have a high payout ratio, have a fundamental growth rate less than that of the economy (or the risk free rate) and a beta close to one. We then valued 3M both before and after the 2008 crisis to show the impact that macro variables can have on intrinsic value. We moved on to value the S&P 500 using a dividend discount model and an augmented dividend discount model, with the latter suggesting that today's index level is defensible. We closed with a valuation of Amazon, using the valuation as a vehicle to talk about ways in which high growth companies can be valued. If you are interested in downloading the excel spreadsheets with these valuations, you can get them here:
http://people.stern.nyu.edu/adamodar/New_Home_Page/covalsFall2012.htm
I have also attached the post class tests/solutions for today! Until next time!

Attachments: Post class test and solution

I know that you are working on your own company valuations but this week's valuation is of the S&P 500. The rise in US stock prices over the last few weeks has given rise to the usual questions: Have stocks gone up too much, too fast? Are they over bought (I really, really hate that term...)? Are we headed for a correction?
As I mentioned in class, I am not a market timer but I do think that the tools that we have developed for valuing individual companies can be used to assess the entire market. I have attached my valuation of the S&P 500 as of today. It is actually a very simple valuation and if you have a chance, please take a look at it. You can change the cash flows, growth rate, risk free rate and the ERP. When you are done, you can enter your numbers into the shared Google spreadsheet:
https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadE9BcXhpcmVHWVZpaE1wcmdMbDdJVXc&usp=sharing
Until next time!

Attachment: Valuing the S&P 500 - March 26, 2013

In today's class, we completed our discussion 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. We then moved on to valuing mature companies, arguing that you need to value many of them twice: once with existing management in place (status quo) and once with new and revamped management. We closed the life cycle part by looking at declining companies (where growth and reinvestment can be negative) and distressed companies (where you have to adjust the value for the likelihood and consequences of default).
With emerging markets, we focused on a few key issues. The first is that country risk needs a scalpel, not a bludgeon. The second is that corporate governance is a problem but that your cash flows already reflect the problem. A related point was the complexity and cross holdings that you see in family group companies can make valuing these companies difficult. We closed with a short discussion of nationalization risk: you should deal with it outside of the DCF valuation by bringing in a probability of nationalization and the consequences.
Overall, we are approaching the end of the DCF section of this class. If you have not printed off packet 2 of the lecture notes, please do so or buy the packet at the bookstore (you will get packets 2 & 3 consolidated). We will be getting to it next week. I have also attached the weekly challenge for this week and the post class test and solution. Until next time!

Attachments: Post class test and solution, Weekly challenge # 5

Now that you have had the requisite period to mourn, celebrate or not care about quiz 1, you should be turning your attention to the DCF valuation. Anyway, I thought I would lend a helping hand:
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 (and return on capital) over time
b. fcffsimpleginzu.xls or higrowth.xls: if you are doing a FCFF valuation for a money losing firm or want to allow your margins to change over time.
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 and leverage over time
d. divginzu.xls: for financial service firms
You can find all four of these under spreadsheets on my website.

Let me clarify, though, what I would like to get from you when you turn 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 on the day of your valuation 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 April 5, go ahead and send your valuation in early.
So, don't freak out about this deadline. It is more feedback on your valuation than judgment day

As you work on your perfect DCF valuations, employee options that your company has granted and continues to grant may be a source of imperfection. I know that we went through the mechanics in class. First, value the outstanding options, using an option pricing model. Second, subtract the value of the options from the equity value that you estimated in a DCF. Third, divide the remaining value by the number of shares outstanding (the actual number, not the diluted number). The mechanics of doing this can be tricky and that is why this week's weekly challenge is built around options. After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below:
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/Employeeoptions.mp4
Cisco 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/cisco10K.pdf
Spreadsheet for options: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/ciscooptions.xls
I hope you get a chance to watch the webcast and that you find it useful. Enjoy the weather... Until next time!

Attachment: Cisco options spreadsheet

Finally, we have a spring weekend... Hope you are enjoying it. Just in case you get bored, the newsletter for the week is attached... and please don't forget to get packet 2 either from the bookstore or online.

Attachment: Newsletter #7

Next week, we will put discounted cash flow to rest (and with it, packet 1). In fact, the final topic that we will address tomorrow is the contrast between price and value, which will be a good platform for the next phase of this class, where we will talk about relative value. We will start on packet 2 on Wednesday by first defining the ingredients that go into relative valuation and the four steps in deconstructing a multiple. That will become the rubric that we use to discuss PE ratios, book value multiples, EBITDA multiples and revenue multiples in the sessions that follow.
If you did try weekly challenge #5, thank you. I have attached the solution, with the spreadsheet that I used for the option pricing. If you did not, you can still try it and check out the solution. In the meantime, though, please keep working on your DCF valuations... Until next time!

Attachments: Weekly challenge #5 solution

So, we are finally done with DCF valuation, though the principles will be reused in other parts of the class. We started today's session by looking at financial service companies, which have gone from being easy to value (just discount the dividends) to being a pain in the neck to value. I suggested using the reinvestment in regulatory capital to compute potential dividends and FCFE. We then looked at cyclical and commodity companies, where the standard adjustment is to use normalized earnings over a cycle (economic or commodity price) to value companies but adding on simulations built around the commodity price can enrich the analysis.
We ended the session by drawing a line between value and price. The message is that there knowing one or the other alone is dangerous: understanding value without understanding price is a recipe for frustration, whereas understanding price without understanding value can lead to whiplash. Incorporating margin of safety, what if analysis and probabilistic valuation can all make you a better investor, if you are a value investor, and understanding intrinsic value will make you a better trader, if you are a pricer.
Attached is the post class test and solution for today. Until next time!

Attachment: Post class test and solution

I know that you are working on your DCF valuations, but if you are a sports fan, you might find this week's valuation assignment interesting. I have attached the links to the Forbes lists of the most valuable sports franchises in the world:
- Value of MLB teams (Forbes, 3/2013)
- Value of NBA teams (Forbes, 2/2013)
- Value of NFL teams (Forbes, 8/2012)
- Most valuable soccer teams (Forbes, April 2012)

I have an excel spreadsheet that contains all of these numbers, to make them easier to work with: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/weeklyvaluations/sportsteams/sportsteamvals.xls
I have some questions in the attached document.
Hope you enjoy working with these numbers (and I hope your team is high on the list). Until next time!

Attachment: Sports franchise valuation issues/ questions

If you were not in class yesterday, you are probably wondering (or perhaps not) where the class webcast links are. Bad news.. the technology failed and the webcast did not get made of the class. Good news... I decided to recreate the class in my office. You can find the homemade webcast here:
http://dl.dropbox.com/u/24597893/ValSpr13/valsession15.mp4
It covers lecture note packet 2, pages 1-22 and the preclass test is attached.
In the class, we started on relative valuation by first positing about why relative valuation was more popular and widely used than discounted cash flow valuation: it is easier to sell, easier to defend and mistakes are more easily explained away. However, to use multiples right, I suggested a four step process. The first step is definitional, making sure that the multiple is consistently defined and uniformly estimated. We used PE ratios and EV/EBITDA multiples to show the importance of consistency in calculations. WE then looked at the cross sectional distribution of multiples, noting the asymmetric distribution skews averages upwards. We ended by setting up a simple process for breaking down a multiple and finding the variables that determine it: start with a simple DCF model and do the algebra.
On your DCF valuations, I have not returned any valuations since yesterday. I will start reviewing them and getting them back to you this weekend. Until next time!

Attachment: Start of the class test, Post class test and solution

1. Past Quiz 2s
2. Solution to Past Quiz 1s

First, a reminder that the review session is up and running (and can be accessed on the webcast page for the class). Second, the newsletter for the week is attached to this email, in case you have the time to read it. Third, I put together a little guide to dealing with cross holdings that may or may not be helpful... You be the judge. Until next time!

Attachment: Newsletter #8

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 5.8% (January 2013) or 5.5% (March 2013). If you are using a premium of 4% or 4.5%, 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.

- 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:

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. Until next time!

Attachment: Valuation post mortem

The quizzes are ready to be picked up. The solution and grading template are both attached and copies are next to your quiz. The distribution of scores for the quiz is attached. Until next time!

Attachments: Solution as well as the distribution of grades for the class.

You probably read the story today about the turnover at the top of JC Penney:
http://online.wsj.com/article/SB10001424127887324504704578412440293890624.html?mod=WSJ_hp_LEFTWhatsNewsCollection
The stock price plummeted today and I thought it would be a good time to see if Penney looks cheap, relative to other department stores. I have attached an excel spreadsheet with 8 department store companies and tried to compute just about every multiple known to man from PE to EV/Sales. The problem is that most of the multiples yield NMF for Penney, because it is losing money (negative earnings, negative EBIT, negative EBITDA). There are two groups of multiples where you can get numbers for Penney - revenue and book value - and it looks cheap, purely on the numbers. However, is Penney really cheap? I will leave you to make that judgment, using the rest of the data in the spreadsheet. Until next time!

Attachments: Data on multiples for department stores in April 2013

In today's class, we extended our analysis of multiples by looking at enterprise value multiples: EV/Invested Capital, EV/EBITDA and EV/Sales. In particular, we noted that the drivers for EV multiples are analogs of the equity multiples: growth in operating income replacing growth in net income, reinvestment rates replacing payout ratios, ROC replacing ROE and cost of capital replacing cost of equity.
I suggested a simple way to find the companion variable (the key driver) for a multiple. With an equity multiple, you can get this variable by dividing the net income by the denominator of the multiple. With an enterprise value, you divide after-tax operating income by the denominator of the multiple. With the EV/Sales ratio, this yields the after-tax operating margin as the determining variable. We used that measure to evaluate the value of a brand name, by comparing the pricing of Coca Cola with its current operating margin with its value with a generic margin.
Finally, I am attaching the post class test/solution for today as well as the weekly challenge for this week. I will post the latter on Lore, if you want to try it. Until next time!

Attachments: Post class test and solution

As promised (or threatened), the mystery project is ready for you. It is a group project, due a week from today (Friday, April 26 at 5 pm). The assignment is a pretty straightforward one, and the write up should be brief and to the point. Be creative, use statistics as a tool and don't be afraid to be different.... I have attached the project description and the data that you will need (it is also online on the webcast page for the class and under the main menu for the class... will also be posted on Lore and iTunes U)

Attachments: The mystery project, Data for mystery project

Looking like a much nicer day than yesterday. If you are short of reading for the weekend, the newsletter is attached. It is filled with strange and wondrous thoughts (NOT). As an aside, the weekly challenge is still up for grabs. Please try it when you get a chance... and the mystery project was posted yesterday. Until next time!

Attachment: Newsletter #9

The solution to the weekly challenge on relative valuation (with JC Penney). If you were not able to submit your answer on Lore, that was my fault (I forgot to turn submissions on..) Anyway, I am attaching both the challenge and the solution to this email. This week, in class, we will continue and complete our discussion of relative valuation and then make a short detour into asset based valuation - liquidation valuation and sum of the parts valuation. We will then start on the valuation of privately owned businesses. Until next time!

Attachment: Solution to weekly challenge 7a

In today's class, we closed the book on relative valuation by first talking about how to do relative valuation in sectors filled with unstable or young companies by either using proxies to capture what investors in that sector are pricing in or using forward values for revenues/earnings. We then extended relative valuation from looking at companies in a sector to companies across the entire market, using a market regression. We finished by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. 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
Towards the end of the class, we started on the discussion of asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation, and we will continue next session. Finally, the third packet is available to be printed off online. (If you bought the second packet in the book store, it already includes packet 3... So, you are all set). Post class test and solution is attached. Until next time!

Attachments: Post class test and solution

At the start of the class, we tied up a loose end on sum of the parts valuation, taking United Technology through both a relative and a DCF sum-of-the-parts valuation. We then turned to private valuation. Private company valuation is almost an art form, at least in the way in which it is practiced, filled with 'arbitrary" discounts on value. In today's session, we brought private company valuation into the DCF framework, though we did note that the discount rate for a private business valuation can reflect the buyer's diversification status and that the value itself may have to be adjusted for illiquidity and key person losses. The key, though, is that motive matters in private company valuation and the same private company can have different values to different buyers.
I have attached the post class test and solution for this week, as well as the weekly challenge.

Attachment: Post class test and solution

I hope that you are getting a chance to enjoy the weather today, even if it means lugging your laptop to the park. Anyway, the newsletter for the week is attached. Also, please give the weekly challenge a try (it is a very easy one).

Attachments: Newsletter #10

In today's class, we put the finishing touches on private company valuation by looking at valuing IPOs. In particular, the question of what happens to the proceeds from an offering can affect value per share, and the offering price itself is subject to the dynamics of the issuance process, with investment bankers more likely to under price than over price offerings. We then started on the mechanics of option pricing by looking at replicating and arbitrage. In particular, we argued that while real options add a premium to DCF valuation, they should be used sparingly and only if you pass the three tests: Is there an option embedded? Does the option have significant economic value? Can you use an option pricing model. I am attaching the post class test & solution for today.

Attachments: Post class test and solution

In keeping with our discussion of IPOs in class yesterday, I decided to do a valuation of Seaworld. It is worth noting that Blackstone bought Seaworld from Anheuser Busch a few years ago and is now looking to exit the investment. In fact, it is amazing how many little pieces of the IPO pie go to Blackstone. However, a side effect of the Blackstone acquisition is that Seaworld is still heavily burdened with debt and a big chunk of the IPO proceeds will go to pay down existing debt. I have built in this debt pay down and what I think are fairly optimistic assumptions about revenue growth, operating margin and reinvestment and come up with a value of only $15.56. The stock was taken public at $27 and the price jumped to more than $33 on the offering date. So, investors are a lot more optimistic about Seaworld than I am. Here are the links:
Background to the offering: http://dealbook.nytimes.com/2013/04/18/seaworld-prices-i-p-o-at-top-of-range
Prospectus for the IPO: http://www.stern.nyu.edu/~adamodar/pc/blog/seaworldprospectus.pdf
News on the actual offering date: http://money.cnn.com/2013/04/19/investing/seaworld-ipo/index.html
Blackstone's many slices of the IPO pie: http://blogs.wsj.com/moneybeat/2013/04/22/the-many-ways-blackstone-made-money-on-seaworlds-ipo
I have attached my valuation. If you care to, this is a good way to get your hands dirty doing an IPO valuation. The prospectus is long but the key parts are fairly straight forward. So, give it a shot and if you want to, enter your value in the shared Google spreadsheet:
https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadEVLbHExLTRpT2VEVkE3N19KcEZKcFE&usp=sharing

Attachments: Valuation of Seaworld

In today's session, we tried applying (with mixed results) option pricing to value a patent and undeveloped natural resource reserves. With a patent, we argued that the fact that a patent is not viable today does not imply that the patent is not valuable. Valued as an option, patents have values in excess of their discounted cash flow value, though the magnitude of the premium can be a function of how competitive the market place is. With undeveloped reserves, we are on more solid ground arguing that companies have to weigh the benefits of developing the reserve against the benefits of waiting. The option premium makes undeveloped reserves more valuable, with the premium being a function of how volatile oil prices are. I have attached a simple option pricing model that I use to value patents and one for natural resource options. I also have attached the post class test & solution.

Attachments: Natural Resource option, Patent option, Post class test and solution

Absolutely no chance that you will try this tonight, but if you do get a chance, please give it a shot! It my help you on the third quiz, since it relates to private company/IPO valuation.

Attachment: Weekly challenge #9

I won't ask you whether you are enjoying the weekend, because I risk provoking a violent response. The newsletter for the week is attached. See you in class on Monday!

Attachment: Newsletter #11

If you have tried to access the quiz review webcast (not the class webcasts), you probably have noticed that the webcasts don't load. Here is why. The links are posted on Dropbox, because server space at Stern in limited. However, Dropbox has a bandwidth constraint, where if your public files downloads exceed 200 GB a day, your account gets suspended for three days. Turns out that the limit was hit yesterday and no more downloads will be allowed for three days. I am looking for an alternate file sharing site but they all have constraints. I have moved just the quiz review webcast to the Stern server and you can get it by clicking below:
http://www.stern.nyu.edu/~adamodar/podcasts/valquiz3review.mp4

You can also access the quiz review webcasts on Lore or on iTunes U
http://www.lore.com
You should already be logged into the class and the webcasts are accessible.

Remember that this does not affect any of the class webcasts, since they are housed on the Stern server. That server has had some isssues, off and on, but the webcasts should be accessible. I am sorry and I am working on fixing the problem.

I am sorry but I forgot to email you the solution to weekly challenge #9. Since some of you may have worked through it, in preparation for the quiz, I have attached it. See you in class later today! Until next time!

Attachment: Solution

The quizzes are done. I have attached the solution and the distribution. You know what to do.

Attachments: Solution and distribution of grades

I am sorry. That quiz turned out to be harder than I anticipated. In fact, to show you how badly I misjudged it, I was considering rewriting the second problem because I thought it was too easy. It has been quite a while since I have given a quiz where no one gets a ten, but this one had no perfect scores and a handful of 9.5s. Hopefully, for some of you it was your outlier and gets replaced with the average on the other quizzes. If you did miss one of the other quizzes, I am afraid that the luck of the draw worked against you on this one, but the final can still bail you out.

In today's class, we looked at two more investment options: the options to expand into new markets or products and the option to abandon. We then considered the value of financial flexibility as an option, though modeling and valuing it can be messy. Using the framework, though, we estimated that the value of financial flexibility will be greater for capital constrained firms in uncertain businesses with large positive excess returns. That, in turn, may explain why these firms will choose to stay under levered.

Attachments: Post class test and solution

After yesterday's class, you are probably zoned out but exciting things are happening at Apple. I just posted this on my blog:
http://aswathdamodaran.blogspot.com/2013/04/apple-calm-after-storm.html
Basically, I used the information in the latest 10Q to revalue the company. Since many of you are trying to revalue your companies with new information, you may or may not find it useful.
Latest 10Q: http://www.stern.nyu.edu/~adamodar/pc/blog/Apple10QApr2013
While I have attached my latest valuation of Apple, I also have attached the optimal capital structure spreadsheet for Apple which looks at their debt capacity (and it is huge). I hope you get a chance to browse through this stuff.

Attachments: Updated valuation of Apple (April 2013), Optimal capital structure for Apple (April 2013)

In today's class, we continued with our examination of equity in trouble, debt-laden companies. Given that the equity in these companies takes on the characteristics of an option, we teased out three implications:
1. The equity in these companies will be valued as out-of-the-money options are and not as conventional stocks. Thus, they will retain their value, even in the face of daunting debt, and will become more valuable as the risk in the business increases and with longer term debt.
2. Letting equity investors in deeply distressed companies make investment decision can lead to perverse consequences: risky, negative NPV projects may be attractive to these investors, because the transfer of wealth from lenders overcomes the drop in value from the negative NPV.\
3. Acquisitions of companies in other businesses, if not funded with additional debt or accompanied by a renegotiation of interest rates on existing debt, can make equity investors in the acquiring company worse, even if the acquisition is at fair value.
The bottom line on options: they are everywhere, most of them are worth nothing or very little and only a few can be valued with option pricing models.

We then turned to acquisitions, by first documenting the sorry history of acquisitions, at least for acquiring company stockholders. Not only does the stock price for acquiring firms drop, on average, on the acquisition date but there is little evidence of better stock price performance or improvements in profitability in the longer term. I am attaching the post class test and solution for today's class.

Attachments: Post class test and solution

I know that it has been a few days since you got your mystery project back, but looking over your analyses, here are some of the overall impressions I have:
1. Multiple used: The two most widely used multiples were PE and EV/EBITDA. There were 17 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 three groups that used combinations of multiples and figured out creative ways to reconcile their choices. There were also a few groups that ran the regression within each sector and picked under and over valued companies on that basis.

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. Five groups 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. As I checked through the lists, I was struck by how little commonality there was across the lists. Each of you had your own idiosyncratic list, which tells me that there are no clearly under or over valued companies that stick out, across all approaches and multiples. Good to know, but perhaps not surprising.

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. The most widely picked candidate was General Motors. 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

I will be sending out a to do list on your project shortly. So stay tuned.

As promised, here is your to-do list on the rest of the project. It is a long email but I hope it helps.

1. DCF Valuation
1.1. Consider feedback you got on your original DCF valuation and respond, but only if you want to.
1.2. Update macro numbers - riskfree rate to today's rate and equity risk premium
1.3. Update company financials. If a new quarterly report has come out, compute new trailing 12-month numbers
1.4. Review your final valuation for consistency

2. Relative valuation
2.1. Collect a list of comparable firms (stick with the sector and don't be too selective. You will get a chance to control for differences later) and raw data on firms (market cap, EV, earnings, revenues, risk measures, expected growth)
(You can this data from Bloomberg or Cap IQ. The latter is a little more user friendly)
2.2. Pick a multiple to use. There may be an interative process, where you use the regression results from 2.4 to make a better choice here)
2.3. Compare your company's pricing (based on a multiple) to the average and median for the sector. Make a relative valuation judgment based upon entirely subjective analysis.
2.4. Run a regression across the sector companies. (Be careful with how many independent variables you use. As a rule of thumb, you can add one more independent variable for every 10 observations. Thus, if you have only 22 firms in your list, stick with only two.)
2.5. Use the regression to make a judgment on your company and whether it is under or over valued. (If you are using an EV multiple, estimate the relative value per share. This will require adding cash and subtracting out debt from EV to get to equity value and then dividing by the number of shares)
2.6. Use the market regression on my website to estimate the value per share for your firm.

3. Option valuation (Wednesday's class)
3.1. Check to see if your company qualifies for an option pricing model. It will have to be a money losing company with significant debt obligations (a market debt to capital ratio that exceeds 50%).
3.2. If yes, do the following:
3.2.1: Use your DCF value for the operating assets of the firm (not the equity value) as the S in the option pricing model
3.2.2: Use the book value of debt (not the market value) as the K in the option pricing model
3.2.3: Check your 10K for a footnote that specifies when your debt comes due. Use a weighted-maturity, with the weights reflecting the debt due each year. (You don't have to worry about duration)
3.2.4: Go to updated data on my website and check towards the bottom of the page for the industry average standard deviations, Use the standard deviation in firm value (not equity value) as the standard deviation in the option pricing model.
3.2.5: The value of equity that you get from this model is your option pricing estimate of value for equity.
I have attached an excel spreadsheet that should help in this effort.

Attachments: Valuing equity as an option spreadsheet

I was going to post this on Wednesday but did not think it would be a good idea, after the quiz. Anyway, if you feel like trying your hand out at option pricing (think of it as review for the final exam), give it a shot. It is on Lore, if you want to submit your answers.

Attachment: Weekly challenge #10 solution

Quick note. The newsletter for the week is attached. Hope you get a chance to read it. For those already looking ahead to next week, there are two final exams scheduled for the class:
Wednesday, 1.30-3.30, KMEC 2-60
Friday, 1-3, KMEC 2-60
At some point early next week, I will ask you to choose. So, you have some time still to make the judgment.

Attachment: Newsletter #12

In today's session, as promised, I will take you through a series of seven tests on acquisitions. I am absolutely confident that you will get every test right, but I wanted to get it to you ahead of time, so that you have a chance to think about the right answer. It won't take more than 10 minutes to do. So, please try.

Attachment: Acquisiton tests

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 deal and see if you can break it down into its components. Post class test and solution are attached. I am also including the solution to the weekly challenge for last week on patent valuation.

Attachments: Post class test and solution

As you work through the relative valuation section, a few questions that seem to be recurring:
1. Sample size: There is a trade off between sample size and finding companies that look more like yours. If you are doing a subjective comparison - comparing your company's PE with the PE ratio of comparables, controlling for differences with a story, you want a small sample of companies that look like yours. If you are doing a regression, you should try to get a larger sample, even if it means bringing in firms that may not look like yours. You can control for differences in the regression. And one more thing. Don't fight the data. If a regression does not work, it does not. Remember that you get to make the ultimate judgment and you can decide that given your company and its peers, the best estimate of relative value is just the average PE for the sector.

2. Market regressions: The updated market regressions from the start of 2013 are on my website under updated data. Look to the bottom of the page (and at the first link in the first column, not the archives). Here is the direct link
http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/MReg13.html

3. Option valuation
If you are one of those unlucky people who has been saddled with the money-losing company, here is one more cross to bear. If your firm owes a lot (my rule of thumb is a market debt to capital ratio that exceeds 50%), you can value the equity in your firm as an option... Before you jump out of the window, let me hasten to add that it is not as bad as it sounds. Here are the inputs you need to the option pricing model:
1. S = Value that you attached to your firm (not equity) in your DCF valuation. I would make this a conservative estimate (use low or no growth) to reflect the fact this is liquidation value.
2. K = Face value of all of the outstanding interest- bearing debt in your firm. If you can, add the expected coupon or interest payments to this number. Thus, if you have a 10 year, 8% loan for $ 100 million, your face value would be 100 + 10 * (.08*100) = 180 million
3. t = Weighted average duration of the debt ( I know... I know.. Duration is a pain in the neck to estimate... You can use maturity) There should be a table in your financial statements telling you how much debt comes due by year (there will be a thereafter... just make that a year beyond your last year) Take a face-value weighted average of when the debt comes due.
4. Standard deviation in firm value = Use the bottom up estimate for the sector that you can download off my site. Go to updated data and look towards the bottom of the page.
5. Riskfree rate - Find the treasury bond rate that corresponds to your option life
If you want to download a spreadsheet that does the calculation for you, you can find one under spreadsheets on my site....If you do not have a money losing, indebted firm, you do not have to do option pricing....

In today's class, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don't) and why there is a minority discount in private company transactions. We closed by taking a brief look at why consulting firms/banks come up with their proprietary measures of value creation and how they all draw from the same base. I have attached the post class test and solution.

Attachments: Post class test and solution

I know that this is a busy weekend and I won't be a nag (Actually, I will, but this is the obligatory "I will not nag you" email). As you nail the numbers down for your companies, please send me the summary numbers as soon as you have them. I will take them until Sunday night, but if you get done earlier, you don't have to wait. I am attaching the summary spreadsheet.

Attachment: Summary spreadsheet