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The Email Chronicles (Valuation - Fall 2011)

The emails for this class will be collected in this file. Have fun with them!


Subject: Welcome back!

I restrained myself from sending you emails all summer but the respite is over... the torture begins again (http://www.youtube.com/watch?v=7edeOEuXdMU) 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: Are social media companies really worth hundreds of billions (collectively)? What effect, if any, will the S&P downgrade have on valuations of businesses? 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:

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
The syllabus for the class is available and there is a google calendar for the class that you can get to by clicking on
For those of you already setting up your calendars, it lists when the quizzes will be held and when projects come due. There is a Facebook page for the class:
And Groupon coupons will be following shortly....

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
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...

The best book for the class is the Investment Valuation book - the second edition. (The first edition won't be as useful... Sorry!) You can get it at Amazon or wait and get it at the book store... In the interests of full disclosure, I have to tell you that the third edition of this book is coming out in about 6 months, too late for this class but early enough that some of you will be pissed off about having bought the second edition. My publisher will kill me for doing this, but the heck with that! I am putting the pdf version of the second edition online for you to download..
Download it now, unzip it and save the file. I plan to take it offline in exactly two weeks. (That way I can claim that it was accidental... and that I was just posting my very complicated 1200-page recipe for enchiladas, which requires you to first calculate the free cash flows and cost of capital for Chipotle first......By the way, destroy this email the minute you get it....) 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 second 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".

One final note. Over the last few months, I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad that you can download on the iTunes store:
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 September 7, 10.30-12 in KMEC 2-60).. I think we are going to have a lot of fun (at least, I am... ). Until next time...

Aswath Damodaran


Class has not even started and I am already being a pest... So, be it.. Anyway, I hope that those of you who have not been checking your email the entire summer (as if that is even possible) got a chance to check out my email from last week. If you have no idea what I am talking about (this seems to be an occupational hazard for some), you can check the beginnings of the email chronicles on this page:
In the email, I pointed you to the website for the class (http://people.stern.nyu.edu/adamodar/New_Home_Page/equity.html). In the last week, a young firm called CourseKit, founded by tech-savvy undergraduates from Wharton approached me and asked me whether I would be willing to try their creation for this class. Here is what they have done. They have pulled everything that is on the website for the class and put it into a format that is much smoother than mine, and added a social media component (think of it as a Facebook page embedded in the website for the class). I don't want to overwhelm you with more stuff (I already got you on Facebook, Twitter and my Blog) but give it a shot... You will be helping some entrepreneurs along the way:
Then, use the code FHGN2P and you should be able to add your name to the page. When I send emails, they will also show up on the page, as will everything I add to the class along the way. When I post on Facebook, I will try to make the same post here... Let's give it a shot and see how it goes.
Next Wednesday, we will start talking about the three biggest enemies of good valuations: bias, the search for certainty and complexity. As preparation for each of these, I did find some articles in the financial press that can get the conversation going:
On bias: Check out this blast from the past on Frank Quattrone, the investment banker to the dot com companies ((http://dealbook.nytimes.com/2011/08/30/a-lawsuit-blast-from-the-dot-com-past/) ), and then ask yourself whether things have changed much over the last decade.
On uncertainty: Read this post on why it is pointless to value social media companies because the future is so uncertain from a person who was also at the dot com party in the late 1990s.. (http://www.businessinsider.com/the-truth-about-linkedin-2011-5?op=1)
On complexity: Review this great article from the Sunday New York Times a couple of weeks ago about decision fatigue (http://www.nytimes.com/2011/08/21/magazine/do-you-suffer-from-decision-fatigue.html?pagewanted=all) and think of it in the context of valuation models.
All in all, I cannot wait to get going (though I know that you may not be quite ready...),, Until next time!

Aswath Damodaran


So, 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 2010) and then visit the SEC website (http:www.sec.gov) (for US listings) and download 10Q filings... If you can, also try to get to a Bloomberg terminal (find one, if you have never used one before) and print off the following pages for your company- BETA, DES (first 10 pages) and FA (income statement, cash flow and balance sheet numbers). If you have never used a Bloomberg, try the write-up I have on my site on using a Bloomberg:

3. The web cast for the first class is up. You can get to it by going to
Take a peek. I think it is of superior quality... When you open the link, you can watch either the video or the slides.

4. We have to make sure that these social media companies get off the ground, so that their valuations can be justified. I will be doing my part. In addition to the Facebook page for this class that many of you have joined, please do visit the coursekit page that I mentioned in my last email and add your name to that list as well:
Enter the code FHGN2P in the prompt box and you should be added.

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 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.

Aswath Damodaran

P.S: The book that cannot be named is available at http://www.stern.nyu.edu/~adamodar/pdfiles/valn2ed/wholeenchilada.zip


As you look for the most recent data, note that the most recent fiscal year for most companies will be 2010. However, don't stop there. Download the latest quarterly filing for the company (which should be through June 2011) and start constructing a trailing 12-month template. You can do that with the most recent annual report and the most recent quarterly report by doing the following:
Trailing 12-month = First 6 months of 2011 (from quarterly) + Number for 2010 (from annual) - First 6 months of 2010 (from quarterly)
Do this at least for the key numbers - revenues, operating income and net income. If the trailing 12-month net income is negative, you have met the threshold for a negative earnings company. If you are planning on valuing a privately owned business, get in touch with your contact in the business and ask for basic financial information: the income statement and the balance sheet and, if it is available, the statement of cash flows). If it is a business that adopts unorthodox accounting practices, try to get the best information that you can... but be careful...

I know that some of you are having trouble finding groups. Before I step in and try to find you a home, you should try posting your request for a group on the Facebook or Coursekit page for the class. The weblinks are listed below:
Facebook: http://www.facebook.com/groups/150753094980408/
Coursekit: coursekit.com (Remember to first enroll in the group using the code FHGN2P)
If you are still unattached by Monday, I will work on finding you a group. In the meantime, go ahead and think about the company that you would like to value. There is no reason to wait until you are part of a group.

One final note. I mentioned my iPad valuation app in class this morning. If you do have an iPad, you can get the app by going to
Unfortunately, we don't have an Android version yet, though an iPhone version should be coming out yet.

Until next time!

Aswath Damodaran



I had promised you in class on Wednesday that I would let you know when your final exam date was, as soon as I found out. Well I did find out, and without further fanfare here it is: December 16, 11.30-1.30. I know that it is a long ways off but I also know how much of a pain it is to make travel reservations close to Christmas.... On a different note, please do get your hands on lecture note packet #1 (you can either print it or download it to your kindle/ipad) before class on Monday. We will get to it towards the very end of the session. Finally, the shenanigans at Yahoo! provide for interesting theater: a dysfunctional board gets rid of an ineffective CEO that they hired, put their company up for sale and face the wrath of activist investors. For anyone who has not picked a company yet, there is a good choice.

Aswath Damodaran


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

Aswath Damodaran

Attachment: biastests.ppt

9/12/11 Hi!
Today's classes are up and running online. If you were unable to come to class today, please do check them out. I have also added my answers to the bias tests on the same page. If you notice, we did start on lecture packet 1 at the end of the class. So, if you have not printed it off yet, please do.
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 as an example, I thought you might find his current list of targeted companies interesting:
I am not suggesting that he is right about all of these companies being under valued, but he is certainly putting pressure on these companies to change. May be worth looking at one of these companies for your project.
Finally, I am attaching the link to the 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:
Until next time!
Aswath Damodaran

A few quick and perhaps unrelated notes.
1. Individuals without a group: I know that there are a few of you floating around, without a group to attach yourself together. If you are one of these people, please let me know. Also, make sure you check the Facebook page for the class (and post your standing if need be). To start the process, here are two people in a group looking for more:
- Ryan Pape
- Kiwon Joh
If it looks like there are enough people for me to do this, I will start an orphan list and put you up for adoption. (No guarantees that you will find a good home, though...)
2. Link: My ramblings on sports team valuations triggered a few emails linking back to this article by Malcolm Gladwell. It is a interesting read, just as we start an NFL season that almost did not start and look forward to an NBA season that might not start.
(Thanks to Randy Wellington and Fernando Castro-Caratini for bringing this to my attention... I will also post in on the Facebook page)
3. Pre-class test for tomorrow: Tomorrow, we will start on the nuts and bolts of DCF valuation by first establishing the consistency principle - your choice of discount rate should be consistent with how you estimate cash flows. If your cash flows are to equity investors (and thus after debt payments), you should discount the cash flows at the rate of return demanded by equity investors, i.e., the cost of equity. If your cash flows are from operating cash flows, i.e., before debt payments, your discount rate should be the weighted average of what your equity investors and lenders want, i.e., the cost of capital. The attached pre-test tries to bring this lesson home:

Give it your best shot before you come to class. (If you have no idea where to start, look at how First Boston estimated cash flows for Carborandum - are they to equity or the the entire business? Which discount rate makes the most sense, given how the cash flows were estimated?) Until next time!

Aswath Damodaran

Attachment: kennecott.ppt


We started 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

Since this is your first weekly challenge, I want to make sure that I don't freak you out:
1. There will be no grade attached to this weekly challenge. Thus, there is no payoff to doing this (other than developing a depth of understanding about valuation and perhaps a small benefit on the quizzes) and no cost to not doing it.
2. If you decide to try it out, give it your best shot.
3. Once you have completed it, log into the Blackboard site for the class and submit your answer. (Blackboard just keeps a running tab of how many people have submitted answers, not whether they are right or not.. ) You don't need to email me your answer.
4. On Sunday, I will put up the solution to the weekly challenge.
5. If the answer matches yours, give yourself a pat on the back and move on. If it does not, try to understand why the answers vary.
6. If you still don't get it, email me.
I know that you are busy, but I think this will cement your valuation principles. Good luck!

Attachment: wkch1.htm


The last email should have been titled the first weekly challenge (and not the newsletter; the newsletter will be this Friday). On a different note, I had promised you the latest sovereign CDS spreads. I have attached it to this email and put in online on the webcast page for the class... Have fun with the numbers.

Aswath Damodaran

Attachment: Sovereign CDS spreads (9/14/11)


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 online under webcasts for the class (or check yesterday's emails)
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:
I also have a follow-up paper on the "What if" series.. what if nothing is riskfree
The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where we stand:
Until next time!

Aswath Damodaran

Attachment: Country Default Spreads


The first weekly newsletter is attached to this email. If you cannot open the attachment, you will also find the newsletter online at the following url:
Browse through it quickly. It does not contain earth-shattering news but it will keep you on top of what's going on and what's coming up.

I also hope that you have had a chance to look at the first weekly challenge that I sent out on Wednesday. If you have not, you can find the weekly challenge by clicking below:
Please try it and post your response on the Blackboard site for the class... I will send the solution to you late on Sunday.

Until next time!

Aswath Damodaran

Attachment: Newsletter # 1


I hope you had a chance to work through the first weekly challenge. If you did, thank you.. If not, I am sure that you will be able to do the next one (or even try this one without looking at the solution)... I am attaching the solution to this email. Take a look at it. You can also get the solution by clicking on the link below:
The key assumption that reconciles the two is the assumption about how much debt you are assuming in your valuation. One of the problem with using market value weights to get your cost of capital is that the market value of equity can be very different from your estimated intrinsic value of equity. Keeping the market value debt ratio intact over time (which is what we tend to do in cost of capital calculations) will therefore give you a different value for equity than using an equity valuation model. if you want reconciliation between the values then, you have to use your estimated intrinsic value of equity to get weights for debt and equity in the cost of capital; since you need cost of capital to get intrinsic value, this will create circular reasoning. You can get around it in Excel by using the iteration function. If I lost you somewhere in this sequence, we will come back to it later in the class.

Aswath Damodaran

Attachment: Solution to weekly challenge # 1


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
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:
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:

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 September to come up with an equity risk premium of 6.39%.

Please try to update the implied premium, using today's numbers for the S&P 500 (easy), 10-year T.Bond rate (easy), growth rate in earnings for next five years (Try to find a number on Yahoo! Finance.. If you cannot, leave it at 6.95% ) and just leave the updated dividends and buybacks from the spreadsheet (since these were updated a month ago). Follow the instructions to get the updated equity risk premium. We will start with that concept in class on Wednesday.

Aswath Damodaran

Attachment: ERPAug11.xls



A couple of quick notes... First, I know that the discussion of ERP can get long and abstract and that there are lots of competing visions. I have a paper on equity risk premium, primarily directed for practitioners, that I update every year. Here is my 2011 update:
The weekly challenge for this week is also on equity risk premiums.
I have attached an excel spreadsheet with equity risk premiums going back to 1960 and interest rates in each period. The weekly challenge is to probe the relationship between the two.
Finally, I hope that you all are in groups and have companies picked out. In case, you are unattached, there is one group of three, looking for more members. If you are interested, please contact Sanjay Aiyar <sanjay.aiyar@gmail.com>.
Until next time!

Aswath Damodaran

Attachment: wkch2data.xls


Just a couple of quick notes before class today. The first relates to the strategy of buying companies in "crisis" emerging markets that have global exposure. Here is an interesting article on Greek shipping companies that you may want to consider adding to your portfolio, if you have a strong stomach:
On a different note, the buyback data that I use for my equity risk premiums comes from S&P. It is updated only once every quarter and the latest update just came in:
Click on it and read the news release. If you can, see if you can update the buyback numbers in the implied premium spreadsheet I sent you yesterday. Today's class will start with the implied premium spreadsheet. See you in class. Until next time!

Aswath Damodaran


Looks like today will be a big ERP day. The S&P 500 is down about 4% to 1120, the 10-year bond rate is down to 1.75%... If yesterday's risk premium was 7.15%, what do you think it is right now? Why not give it a shot with the ERP spreadsheet? Here is the spreadsheet, updated to include the buybacks for the most recent quarter.

Until next time!

Aswath Damodaran

Attachment: ERPmidSept11.xls


I am starting to sound like Buzz Lightyear, but the equity risk premium just hit 8% and is still moving... Is it time to be a contrarian and buy? Or should you go with the flow? I am afraid that you have to answer the question... but the prize for getting it right is huge...
On a more placid note, I have attached the link to the latest newsletter:
Hope you get a chance to read it.. Have a great weekend! Until next time!

Aswath Damodaran


Hope you had a chance to try the second weekly challenge. Even if you have not, take a look at the solution. The bottom line is that, based on the level of interest rates today, the equity risk premium is sky high (it should be about 3-4%). But, then again, history may be useless at this point in time.

Aswath Damodaran

Attachment: wkch2sol.xls


So, we are done with the discount rate part of the class. Reviewing and recapping what we did in class today, here are some suggestions:
1. Bottom up beta: I gave you my rationale for bottom up betas and why they beat regression betas every single time. I did put together a list of 10 questions that you may have about bottom up betas
Nothing earth shattering, but it may still be useful.
I also mentioned that I have bottom up betas for the US, Japan, Emerging Markets, Europe and Global. You can find them by going to the updated data section of my site:
If you want to estimate bottom up betas on your own, you should try Capital IQ or the Bloomberg terminals. It is very simple to screen and download the data on your own.

2. Cost of debt: The cost of debt is the rate at which you can borrow money at today. If your company has a bond rating, you should be able to find it online or on Bloomberg. If your company has no bond rating, you can use my synthetic rating spreadsheet, which I have attached to it.
If you want to update default spreads, try http://www.bondsonline.com and check on default spreads. Remember that it will cost you money.

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

I hope you get a chance to get started on your company this week. It will be a very good way to get prepared for the quiz next Monday. That quiz will cover the basics of DCF, the elements that go into discount rates (riskfree rates, betas, equity risk premiums, lambdas, country risk premiums) and cash flows that we will be covering in the next session. If you are reading the book that cannot be named, it is chapters 8-10....
Until next time!

Aswath Damodaran

Attachment: ratings.xls


Lot's of interesting stories in the news... and they all relate to valuation:
1. The subsidy trade off: Yesterday, we talked about the importance of separating subsidies from valuation. I argued that you should value a business as if it had no subsidies and then value the benefit of having the subsidy and set it off against the costs. Some companies, I argued, will be better off giving up the subsidy because they lose more than they gain. As if on cue, here is a story about First Solar. Please browse through it when you get a chance:
2. The Berkshire buyback: Berkshire Hathaway has announced its first stock buyback in history.
It is interesting because it comes with a twist. Berkshire will buy stock back only if the price to book ratio is less than 1.10. (Yesterday, the price to book rose from 1.03 prior to the announcement to 1.08...) It is in keeping with Buffett's argument that companies should not pay more than the intrinsic value of the stock. While this is not explicitly stated, I guess 1.10 times book value is what the intrinsic value of Berkshire Hathaway is....
3. Cash flow preview: We will turn to discussing cash flows in tomorrow's class. If you have picked a company already (what are you waiting for if you have not), try to bring the annual report or the latest filing (10K and 10Q) to class with you....
Until next time!

Aswath Damodaran


I know.. I know.. You have to quiz to prepare for and this is just a distraction. But I think that this weekly challenge will be a good way to prepare for the quiz. So, give it a shot when you get a chance:
To complete this challenge, you may (or may not) need the attached ratings spreadsheet.

If you still have time on your hands, here is some reading relating to today's class. I have a paper on the valuation effects of capitalizing leases:

Until next time!
Aswath Damodaran


Hope your week went well and that you are geared up to have a great weekend. I am taking my youngest son to the Yankee playoff game tomorrow. While I am at the game, I hope you get a chance to get caught up on your valuation stuff for the first quiz. Two very quick notes;
1. Weekly newsletter: The weekly newsletter is up and running online
Hope you get a chance to browse through it.
2. Blog post on cash: I know that I already flood with you with stuff to do and I normally would not punish you by asking you to read my blog posts but this one may be relevant to the first quiz:
Let me know what you think of it.
Until next time!

Aswath Damodaran


I know that this is a day early but since this may be useful as preparation for the quiz, I broke my rule. The key to converting the operating leases to debt is getting the synthetic rating for the company first, a bit of a problem since the leases when converted to debt will give rise to interest expenses, which will affect the rating. So, first take a look at the synthetic rating that I estimated for the company and then at the rest of the solution. The solution is at this link:
The synthetic rating is available at this link:
Until next time!

Aswath Damodaran


The quizzes are done and can be picked up on the 9th floor of KMEC. They are in front of the door in two piles: A- L and M-Z, in alphabetical order and face down (to provide a modicum of privacy). The standard caveats apply: (1) Please don't mess with the alphabetical order (2) Don't browse.
As I graded the quizzes, here are some general thoughts that I would like you take away for the rest of the class:
1. Risk and cash flows: I know I have said this before but it cannot be said often enough. The discount rate (or hurdle rate) you attach to a set of cash flows has to reflect the risk in those cash flows (and not the risk of the entity making the investment). That is why there is almost no rationale that can be offered for using Ulysses' cost of capital here. The justification that it is their share of the cash flows does not stand up. What if they entered into a joint venture to provide services to the government under a guaranteed contract? Their share of the cash flows would be close to risk free... So, please do think about and get comfortable with this concept. It is the bedrock of corporate finance and valuation and violated way too often.
2. Currency and discount rates: Currencies matter in discount rates for one reason and one reason alone. They affect the expected inflation. If you find yourself doing contortions on the other inputs (say betas), you are missing something. I know that some of you think I was being excessively tricky with the Portuguese operations, but this is something that firms that are breaking up are facing when selling their businesses.
3. Customer acquisition costs: If you want to try this out on a real company, use the Groupon prospectus and work through the amortization.

On the quiz itself, you can get the solution by going to this link:
You can get the distribution for the scores from this link:
Before you lose any sleep over this score, remember that it is only 10% and that you get one quiz to mess up on (if you take all three).

So, do pick up your quizzes when you get a chance. And remember that I do screw up. So, if I have made a mistake on the grading, bring the quiz in and I will fix it.... Until next time!

Aswath Damodaran


If you get a chance, browse through the slides on growth (and the chapter in the book - chapter 11- that goes with it). Here are some key take aways:
1. Historical growth: Historical growth is not a good predictor of future growth for most firms... And sector average growth rates are more predictable than growth rates for individual companies. You can get the historical growth rates by going to updated data on my website....
2. Analyst estimates of growth: Capital IQ, which you have access to at NYU, has analyst estimates of short term and long term earnings growth rates for any publicly traded firms that have analysts following them.
3. Fundamental growth: The key message is that growth has to be earned by firms. Firms that maintain the tough balance of reinvesting a long and reinvesting well at the same time can deliver quality growth.
Finally, here is the weekly challenge for this week... Have fun with it.
Until next time!

Aswath Damodaran


The latest newsletter is ready to go and is attached to this email and also online. Please take a look at it when you get a chance. I also hate to be a nag, but if you have not actually started on the valuation of your company, you should:
As starting points, if you want to use one of my excel spreadsheets, feel free to do so but make them your own (not black boxes). Here are some suggested starting points:
1. If you have a financial service firm, try http://www.stern.nyu.edu/~adamodar/pc/divginzu.xls
2. If you have a firm with a stable debt ratio and steady net profit margins, try http://www.stern.nyu.edu/~adamodar/pc/fcfeginzu.xls
3. If you have a firm with steady operating margins that may see debt ratios changing (if you are doubtful, go with this), try http://www.stern.nyu.edu/~adamodar/pc/fcffginzu.xls
4. If you feel that your valuation will work best only if you incorporate a lambda in your computation of cost o equity, try http://www.stern.nyu.edu/~adamodar/pc/fcffginzulambda.xls
4. If you have a firm that is losing money or expects to see changing profit margins and debt ratios, try http://www.stern.nyu.edu/~adamodar/pc/higrowth.xls
Note that the first time you input the numbers, you may get strange looking output but that is because one or more of your inputs is strange. So, take a closer look. Until next time!

Aswath Damodaran

Attachment: Newsletter # 4


Now that we are almost done with growth, I have a couple of added notes. First, if you are interested in probing the fundamentals of growth, try this paper:
Especially if you are uncertain about when to use what reinvestment rate and measure of return, it will help. Second, we will start tomorrow's class with how best to estimate growth for a young company. I have attached a very short chapter from my little book will provide enough background.
Finally, I hope you had a chance to work through this week's challenge. The solution should be at this link (and is also online):
Take a quick look at it, when you get a chance... Sorry, but I have to run. I got my wisdom teeth out on Friday and I already feel dumber... Until next time!

Aswath Damodaran

Attachment: younggrowth.pdf


I hope I was not too disjointed in class today. I do miss those wisdom teeth and I am getting tired of soup and oatmeal. Anyway, to the matters at hand. Please review today's lecture, especially the section on terminal value. Here are some added items that may help:
1. Reading: The chapter that covers the terminal value is chapter 12 in the book that cannot be named (you remember it, right?)

2. Terminal value and excess returns: The key point I wanted to emphasize and I may or may not have succeeded in this is that the key assumption in your terminal value computation is the excess return assumption (return on capital versus cost of capital). If you assume that the return on capital = cost of capital, then the growth rate ceases to affect value. In fact, I am sending a bonus weekly challenge (yippee...) so that you can see the effect:

3. Be ready for diversionary arguments: Those who do not like to do DCF valuations (and they are legion) use the terminal value to discredit it. In fact, here are the arguments that they use (and the counter arguments):
a. The terminal value is a high percent (80%, 90% or higher) of the DCF value.

So what? When you buy common stock, think of when you make money. You don't make it while you hold the stock (dividends are paltry) but when you sell the stock (in price appreciation). That is precisely what the terminal value reflects. In fact, if you buy a growth company, you may make all of your money from the price appreciation and the terminal value will be a higher proportion of overall value for a growth company.
b. You can make the terminal value change dramatically by changing the growth rate:

Only if you keep the cash flows fixed. See my earlier note on excess returns. If your reinvestment changes as your growth rate changes, terminal values will be bounded.
c. Nothing lasts forever:

True. But once you get past 30 or 40 years, your value converges quickly on a perpetual growth value. In other words, assuming that your firm will grow 2% a year for 40 years gives you a value very close to the value that you get if you assume that your firm will grow 2% a year forever.

So, be forearmed... Until next time!

Aswath Damodaran


If you have the time, please review the three ways that people deal with options in valuation (we did this towards the end of class... but I did zip through the section). I talked about the difficulties that we face in using conventional option pricing models to value management options. I do have a paper on the question of how to deal with employee options and restricted stock. You can get it by going to:

If you want to try your hand out at using the dilution-adjusted option pricing model, you can get the model by going to:

Finally, the weekly challenge for this week is on management options.
Wrestle with it, when you can.

Until next time!

Aswath Damodaran


Hope you have a fun weekend planned! I know that some of you are just turning your attention to the DCF valuation. I fully understand, because you do have other things to take care of. 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 over time
b. fcfeginzu.xls: if you are doing a FCFE valuation of a firm that has positive net income and you do not expect dramatic shifts in margins over time
c. divginzu.xls: for financial service firms
d. higrowth.xls: for any firm that is losing money or has shifting margins over time, even if it is not in high growth
You can find all four of these spreadsheets under spreadsheets on my website. There is also a video that goes with the fcffginzu.xls spreadsheet explaining how to use it. It also includes spreadsheets that will convert leases and R&D and value options (I am a full service operation).

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 today and your estimate of value per share.
4. Your DCF valuation will not be graded. I will review the valuation and send you back your own spreadsheet with my comments embedded in the spreadsheet. Some of the comments will be suggestions (which you are free to ignore) and some will be stronger than suggestions (and these should probablyy not be ignored).
5. If you don't get back your valuation within 48 hours of submitting it, please send me another email to let me know. My filtering program sometimes works in mysterious ways.
6. If you get done before October 28, 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... Also, the latest newsletter is attached and can be obtained online by going to:

Aswath Damodaran


Hope you had a chance to work through the weekly challenge. You can get the solution by going to:
if you did, here are the key issues in valuing management options:
1. Price to use: The standard in option pricing model is to use the current price. However, when you are doing an intrinsic valuation, you can come up with a value per share that is different from the price. If you valued consistency, you may feel that it is better to use your estimated value per share to value the options instead of the market price. That, of course, will create circularity in your valuation: you need the option value to get the value per share and the value per share to get the option value. In the excel spreadsheet, you can turn on the iteration box to make sure that the circularity works and does not create a problem.
2. Tax effect? When options get exercised, the firm is allowed to claim the difference between the actual price and the exercise price as a tax deduction. That is why I think it makes sense to multiply the value of the options by (1- tax rate) to get the after-tax value.
3. Accounting effects: Since accounting rules now require that you expense options when granted (not when exercised), the profits for all firms are already after option expenses. However, you still have to be careful. If you have a young firm that is granting lots of options right now, their option grants as a percent of revenues can be a high value. AS the firm matures and gets bigger, they may either stop granting options or the amount granted will be lower as a percent of revenues...
4. Warrant model: If you are wondering how I got the dilution adjusted stock price in the warrant model, I take the current stock price and multiply it by (Current stock price * Number of shares outstanding/ (Current stock price * Number of shares+ Current option price * Number of options)... This, of course, creates more circularity, which is part of the reason the option pricing model that I sent you a couple of days ago is set up with the iteration box checked off...

Bottom line: When companies grant equity based compensation to managers/employees/others, you and I as common stockholders pay for them... So, watch out.. Until next time!

Aswath Damodaran


I am glad that we finally got to value some companies (and the S&P 500 index) today. As I mentioned in class, I will try to stay above the fray during the class and focus on one or two key aspects in each valuation. In today's class, for instance, here were the key takeaways from each valuation (with the link to the spreadsheet that contains the valuation):
1. Con Ed (http://www.stern.nyu.edu/~adamodar/pc/eqegs/coned08.xls)
a. Before you use a stable growth model for a company, make sure that all of the other inputs reflect stable growth (payout or reinvestment, cost of capital and fundamental growth).
b. When you are done with your valuation, back out an implied growth rate from the market price to compare to your estimated growth
2. ABN Amro (http://www.stern.nyu.edu/~adamodar/pc/eqegs/amro03.xls)
a. Remember to adjust your return on equity (capital) when you get to your terminal value computation
3. Goldman Sachs (http://www.stern.nyu.edu/~adamodar/pc/eqegs/goldman.xls)
a. If your cost of equity and capital change over time, remember to use the compounded cost of equity (capital)
b. In stable growth, you should bring your return on equity or capital down to cost of equity and capital, but with exceptional firms, you can leave some excess returns forever.
4. Wells Fargo (http://www.stern.nyu.edu/~adamodar/pc/eqegs/WellsFargo08.xls)
a. Macro events can affect firm value. Make your best guess adjustments
5. Deutsche Bank (http://www.stern.nyu.edu/~adamodar/pc/eqegs/DBk09.xls)
a. When estimating cash flows for a financial service firm, you may have to get creative.
b. A developed market company with significant emerging market risk exposure should have a country risk premium adjustment
6. Tsingtao Breweries (http://www.stern.nyu.edu/~adamodar/pc/eqegs/Tsingtao.xls)
a. A DCF value already reflects expected dilution over time
b. Country risk premiums can change over time
Please check out the spreadsheets when you get a chance. Until next time!

Aswath Damodaran


I know that you have plenty to read without my making you read my blog posts, but I think this may help as you start valuing your companies. When you get a chance, visit:
See you in class! Until next time!

Aswath Damodaran


A lot more valuations in class today.. Hope it was not too overwhelming. Mea culpa on one of them. KRKA is not a Croatian company, it is a Slovenian one... and it is a pharmaceutical company.. not a tobacco company.. (Talk about being off on multiple dimensions...) I will value Adris Grupa, the Croatian tobacco company, later in the class but I got them mixed up. I am sorry... Anyway, here are the links to today's valuations with the key messages on each one:
1. Toyota
Key take away: With cyclical companies, you have to normalize. And I did screw up on this one too. The normalized operating income should be 16,607 billion not 1660.7 billion. 
2. Tube Investments
Key take away: Growth can destroy value and can keep destroying value for the long term with poor corporate governance
Key take away: The first principles of valuation don't change with small companies in small markets
4. Tata Group
Key take away: Companies within a group can vary widely in country risk exposure, growth value and cross holdings.
5. Amazon
Key take away: Valuing young growth companies is difficult and you will be wrong. But markets will mess up even more...
6. Sears
Key take away: With declining companies, you can have negative growth & negative reinvestment during the high growth period

On a different note, the latest weekly challenge is up and tests the proposition that you can use your estimated value of equity as the equity weight in the cost of capital... You can find it at
You will need the Daimler valuation which can be found at

Until next time!

Aswath Damodaran


I went back and took a look at the Toyota numbers and fixed the decimals that needed to be fixed. If you want to, you can replace the page in your lecture notes with the attached. Staying on the theme of lecture notes, please buy, print, download or steal a copy of packet 2 of the lecture notes before Monday's class. The bookstore should have it by tomorrow, but if not, print off at least the first 25 pages for class on Monday. Until next time!

Aswath Damodaran

Attachment: toyotapage.pdf


A couple of quick notes.
1. I do hope that your DCF valuations are progressing. I have received 8 so far and I have returned all of them. So, keep at it....
2. As you prepare for the quiz, here are some suggestions. This quiz is focused on a few key components of valuation:
a. Growth: Get comfortable with fundamental growth (when to use reinvestment rate vs retention ration, ROC vs ROE...) and with estimating and checking growth for young, growth companies.
b. Terminal value: Revisit the weekly challenge on terminal value (assuming you visited it in the first place. If not, acquaint yourself with it. (All past weekly challenges are on the webcast page for the class)
c. Loose Ends: Review the key loose ends that we covered in class - cash, cross holdings, other assets, debt and management options.
d. Valuation mechanics: Go through the DCF valuations that we did do in class and review the key lesson from each valuation.
In terms of chapters in the Investment Valuation book, it will cover chapters 11-16 and chapters 21-23. Don't try to read every chapter since that is a lot of stuff to cover but use the book to read up on concepts that you feel shaky on.
3. I have attached the newsletter for the week and you can get it also by clicking on
Until next time!

Aswath Damodaran

Attachment: Newsletter # 6


If you did have a chance to work through the weekly challenge, I have attached the solution (and included a link to download it, in case the attachment does not come through):
Until next time!

Aswath Damodaran

Attachement: Daimler with iterations


For those of you who have sent in your DCF valuations already, thank you! For those who have not, you still have until Friday. Four very quick notes:
1. Groupon IPO: The Groupon IPO is fascinating because it allows us to see all of the issues that go into any IPO in one event - the tendency on the part of companies to "put the best story" together and massage the numbers, the incentives of investment bankers in pricing these IPOs and the gaming of the IPO (in terms of shares offered up front). Here is the article from this morning's Wall Street Journal, in case you missed it:
In my memory, I have never seen a more mismanaged IPO... Should anyone get paid for managing this fiasco?

2. Confidence: I don't know whether you had a chance to read this article in the Sunday Magazine for the New York Times. It is by Kahnemann (a psychologist by training who is largely responsible, with his colleague Amos Tversky, in laying the foundations for what he calls behavioral finance. The topic he covers is confidence, with an assessment on how human beings become confident (often abandoning facts for narrative) and the consequences (not always good).
While this may seem a little far afield from valuation, it has large consequences... More on that later...

3. R&D investments: I did beat the drum about how not all R&D is created equal and that it is not the amount that you spend on R&D per se that determines you value, it is the quality of the R&D. This article makes the point more generally.

4. Quiz 2: Quiz 2 is day after tomorrow. It will cover only DCF valuation. So, you can skip any problem related to multiples on the quizzes.
Until next time!

Aswath Damodaran

P.S: Any of you who have a possible conflict with the quiz because of Diwali on Wednesday, please email me.


I know that you are busy reviewing the past quizzes and I know that the cross holdings problems are a pain in the neck. Figuring out what to add, what to subtract and what to leave alone is confusing. I don't know whether this will help or hurt but I did put together a note on cross holdings... Please take a look at it and take whatever you feel is useful out of it.
Until next time!

Aswath Damodaran


The quizzes are done and can be picked up on the 9th floor. As always, they are in alphabetical order and you can come by with any issues that you may have with the grading. The solution (with the grading template) is attached, as is the distribution. If you have trouble with the attachments, you can get them online at
Solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/EqQuiz2solFall11.xls
Distribution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/EqQuiz2Fall11distn.pdf

Aswath Damodaran


I can see that most of you have picked up your quizzes, but if you have not, they are still available outside the front door of the finance department. I have also received most of the DCF valuations for the class (about 75%) and I have returned all but those have come in since noon today. If you did send it in earlier and did not hear back from me, it is entirely possible that you missed the subject (My perfect DCF valuation). Just send it again... Two more quick notes:
1. Newsletter: The newsletter for this week is available online
It is also attached to this email.
2. Growth posts: I just posted a series of five posts on growth in high growth companies. While you may have heard much of what is in these posts in class already, you may still find them useful. Click on any of them and the links to the rest should be at the bottom
Blog post series on growth
Growth and Value: Thoughts on Google, Groupon and Green Mountain
Growth (Part 1): The Limits of Growth
Growth (Part 2): Scaling up Growth
Growth (Part 3): The Value of Growth
Growth (Part 4): Growth and Management Credibility
One final note. I skipped the weekly challenge this week, since you had your plate full with the quiz and the DCF valuation. We will return to it next week. Until next time!

Aswath Damodaran

Attachment: Newsletter # 7


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.

Model choice
Don't force your company into a model that it is not designed for. If you have a company where you expect changing profit margins (rising or falling), you are better off using the higrowth.xls spreadsheet (even if you don't expect high growth in revenues)
If your firm may be able to borrow money in the future, even if it does not right now, use a firm valuation model.
If you can estimate cash flows, don't use a dividend discount model.

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 6-7% here... That is because the current implied premium in the US is about 7% (October 2011). If you are using a premium of 5.2% (which was the premium in january 2011, you will over value your company by about 20%. 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. (Also sent a link)

- 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 and you do not want to set it lower 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.
Aswath Damodaran

Attachment: Valuation Post mortem


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

Incidentally, the use of screens to find cheap stocks goes back a long time. Ben Graham's book on security analysis has a list of 10 screens that he suggests will deliver cheap stocks. More recently, Joel Greenblatt wrote a book using a couple of well established screens that became a best seller:

We also talked about PEG ratios towards the end of class yesterday. If you want to see a typical use of PEG ratios, try this link:
Trust me.. You know enough to take this presentation apart. Go for it.

Until next time!

Aswath Damodaran


The mystery project is no longer a mystery. You can get the details by going to:
It is a fairly simple exercise. I have pulled together the data on about 130 items for the 130 largest market cap companies in the world. You obviously can use only the information you need but I would like you to find the five cheapest and most expensive companies, purely on a relative valuation basis. The project is due two weeks from today (November 16) in electronic format. Have fun with the data (and I really mean it). Until next time!

Aswath Damodaran


So, the investment bankers must be relieved. The Groupon IPO popped on the opening day.... And I have a follow up on the Groupon valuation on my site:
Got a chance to use Crystal Ball... Always makes me happy (Sick, I know... but so what?)

I also have the latest newsletter online. Please take a look at it, when you get a chance.
Until next time!

Aswath Damodaran


I know that you are busy with tons of stuff on your plate, but if you get a chance, read this article. It will be well worth your time:
And this story will bum my kids out:
Until next time!

Aswath Damodaran


First, I want to apologize for the webcast on Monday. I know that the audio is fine but there are no slides. It turns out that the AV department reset the camera for a live shoot on Friday and forgot to reconnect it before class. They have profusely apologized but they cannot recover the slides. So, you will have to make do with the audio and the slides that you have in pdf format. Second, I have attached a weekly challenge, though the chances that you will be able to give it a shot are remote:
It brings the point I made in class today about when DCF and relative valuations diverge and is really easy... Third, I hope you are working on your mystery project. Just a note of advice. Keep it simple. Especially with relative valuation, complexity comes with a hefty cost.
Until next time!

Aswath Damodaran


First, a couple of notes on private company valuation. I introduced the notion of total beta in class on Wednesday. In case you are interested, I do update the total betas by sector on my website at the start of each year. This is from the start of 2011:
Remember that the total beta can be used to get the cost of equity for a completely undiversified investors only. As investors get more diversified, the correlation of their portfolios with the market will rise and the total beta will move towards the market beta.
I have also attached the latest newsletter in this link:
Until next time!

Aswath Damodaran


I know that you are probably working on the mystery project and i hope this email helps clarify some issues:
1. Due date, format and submission: The due date is Wednesday, November 16, at 5 pm. Each group needs to submit one report and it can be done electronically. The format is simple: focus on your mission, picking the 5 cheapest and most expensive stocks and your "takeover" stock, explaining how you came to your decision (as briefly as possible). When submitting your report, enter "No mystery here" as your subject on the email.
2. Mission control: I know that I used multiple regressions and a few other statistical tools in making my relative valuation judgments. I would like you to do the same, but two notes of caution. First, the statistical tools are just tools. You have to make the final judgments. So, don't let the regressions pick stocks for you. Second, this is not a statistical exercise but an investment exercise. Put differently, don't make it the focus of the project to deliver a great looking regression with a high R-squared, if in the process you curtail your investment choices.
3. Outlier mania: Building on the last email, your best efforts at statistical analysis will be foiled by outliers. They do their thing: lower R-squareds and make your regressions look bad. You will be tempted to remove the outliers, but be careful what you do. if you eliminate just a couple of companies that are clearly off the charts (PE ratio of 5000...), you are on safe ground. If you find yourself eliminating 20 or 30 companies as outliers, I think you are undercutting your objective by eliminating those companies that would have emerged as your cheapest and most expensive companies.
4. Missing values: I know that there are missing values for quite a few companies on some of the variables. On a few of these variables (such as dividends), the missing values can be replaced with zeros but on many of them, they are really missing. Here again, you have to keep your overall mission in mind. You could, of course, use these variables in your regression/analysis and eliminate all companies that have missing values or your can replace these variables with close proxies that have no or fewer missing values. I think the latter makes more sense to do.
5. Relative, not intrinsic value: Remember that this is a relative valuation and not an intrinsic valuation exercise. So, avoid trying to do intrinsic values of companies or even coming up with inputs to intrinsic value; in fact, using any of the intrinsic value equations in the notes (PE = Payout ratio/ (Cost of equity-g) is really a stable growth dividend discount model value)will lead you down this path. This really should free you up in the following sense. In both DCF and relative value, the value of a company is a function of its cash flows from existing assets, expected growth rate, the quality of that growth and the risk. In DCF valuation, we have tight constraints in how we measure these; thus, risk is measured with a beta and captured in a cost of capital. In relative valuation, you have far greater freedom in how you define and measure these variables. Thus, you may decide to use return on equity (or capital) as a proxy for the quality of growth, the size of the company as a proxy for risk, the expected growth rate in revenues as your proxy for growth (please don't view these as recommendations, since I just picked them as examples).
So, let loose and have some fun with the data. The world will not end if you pick the wrong companies (and I don't even know what wrong is...)
Until next time!

Aswath Damodaran


As you know, the mystery project is due by 5 pm today. A couple of reminders. First, make sure that you put "No Mystery here" in the subject.. Second, If you can, please include a table on your cover page, listing the multiple (or multiples) you used to make your choices, your five cheapest and most expensive stocks (with company names, not symbols) and your buyout target. If you have already sent in your project without the summary, not a big deal. Until next time!

Aswath Damodaran


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

Looking over the mystery project, here are some of the overall impressions I have:
1. Multiple used: The two most widely used multiples were PE and EV/EBITDA. Here was the breakdown:
Multiple used Number of groups
Combination 11
Forward PE 3
PE 10
EV/Sales 1
Price to Book 1
There were 33 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 five groups that used combinations of multiples and figured out creative ways to reconcile their choices.

2. Regressions: Almost everyone followed the script and ran the regressions... One thing I did notice is that some of you chose to stick with all of the variables in the regression, even when there was no statistical significance. Sometimes, taking a variable out rather than leave it is the better choice. About 20% of the groups reported regressions with dummy variables for emerging markets, but the statistical significance of that variable was marginal. The reason may lie in the types of firms that are in this sample. These are the largest market cap firms and most of them are multinationals. The fact that they are incorporated in emerging markets may therefore not matter very much. 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. Here is the list of companies that came through as most under valued:
Company Number
BHP 18
Volkswagen 17
BMW 15
Samsung 15
Hyundai Motor 8

Note the Lukoil is on the list. Perhaps, a Putin dummy would have made sense. For most overvalued, here is the list of the top few:
Company Number
Amazon 25
VMWare 23
Baidu 15
Wal-Mart De Mexico 10
Before you get too excited, Amazon topped the list last year as well...

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. Hewlett Packard (5) was the most widely picked target. 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.
Thank you for the effort you put into this project. Have a happy thanksgiving! Until next time!

Aswath Damodaran


First, I hope you had a great thanksgiving and that you are sated with food (and perhaps with family...)Second, the latest newsletter is attached. Even if you have never been reading these newsletters, this week may be a good week to start because it will remind you of where we are in class and how close to the end we are.
Third, the third quiz is on Wednesday. It will cover relative valuation and private company valuation - all of packet 2. In terms of chapters in the book, it will cover chapter 17-20 and chapter 24. As you look at the past quizzes, you will notice a familiar pattern. Some of the older quizzes have option problems in them. Those are not in this quiz.... So, please do enjoy what's left of this weekend andI look forward to seeing back in class on Monday. Until next time!

Aswath Damodaran

Attachment: Newsletter # 10


I hope that you are working your way through the quiz material or are already done. I just want to clarify one point on which I have been guilty of sowing confusion and that relates to when should have a (1+g) in the numerator of your valuation equations (all of the multiples will have this issue). Here is the simple rule. If you are given next year's number (earnings, return on capital, margin etc.), you don't need a (1+g) in the numerator. If you are given the numbers for the most recent year, you do need a (1+g) in the numerator. Thus, if I tell you that the expected operating income or margin or return on capital next year is X, you don't need to put the (1+g) in the model. Until next time!

Aswath Damodaran


No.. no.. I am not done grading yet, but I wanted to get this to you early, before I leave for the airport. Next class, we will look at acquisition valuation and I would greatly appreciate it, if you could give the attached questions your best shot (It will make the class more productive and it really should take only about 15 minutes to do...)


Until next time!

Aswath Damodaran



Good news. I am done grading the quizzes. Bad news. I am at Gate C133 in Newark Airport, waiting for a flight. If you can make it here in the next 15 minutes, you can pick up your quiz. If not, I am sorry but Monday is it. The solution is posted online on the webcast page for the class. See you on Monday!

Aswath Damodaran


Hope you are having a good weekend. First things first... I have the newsletter for this week:

If you do get a chance to look at it, you will notice that you are approach deadline day for the project: a week from Monday. Just to help line up what you need to get done for the project, here is a to-do list:

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 (if you are using 5.20% still, check out the front page of my website for an updated premium from December 2011)
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
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.


4. Bringing it all together
4.1: Line up your intrinsic value per share (from the DCF model), the relative value per share (from the sector), the relative value per share (from the market regression) and the option based value per share (if it applies)
4.2: Compare to the market price now (not in January 2011 or September 2011)
4.3: Make your recommendation (buy, sell or hold)

5. Numbers to me!!!!
Fill in the attached excel spreadsheet when you have all the numbers for all of the people in your group and please get it to me by Sunday morning. (If you have someone who is holding up the group, just send me the rest of the numbers). Please do not modify the spreadsheet in any way.

6. Final Project write up
Write up your findings in a group report. The report should be brief and need not include the gory details of your DCF valuation. Just provide the basic conclusions, perhaps the key assumptions that you used in each phase of valuation. (There should be relatively little group work. So, you may not really need to get together for much more than basic organization of the report) The group report is due electronically by Monday, December 12, at 5 pm. A pdf or word format works best. You do not need to attach the raw data and excel spreadsheets). I am not a stickler for format but here are good examples of reports from previous semesters online.

And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters.

7. Celebrate, but remember that your final exam is a few days later.

Aswath Damodaran

Attachments: equity.xls, summary.xls


Sorry again about the delay but the quizzes are ready to be picked up. I have attached the solution and the distribution to this email. I have also attached the pre-class questions for class today. Please, please spend about 10 minutes looking over the questions before class. Until next time!

Aswath Damodaran

Attachments: Solution to Quiz, Distribution, Acquisition tests


I know that you have a lot to do this week, but I could not resist this article from this morning's Journal. It is tailor made for today's class.
Never heard of Swisher Hygiene before but the rest of the list is interesting... Until next time!

Aswath Damodaran


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 2011 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
Unfortunately, I don't have an update from right now (which is what you would want). So,take the market predictions with a grain of salt, since they are 11 months old and markets have gone up.

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.... I am also attaching it to this email.
If you do not have a money losing, indebted firm, you do not have to do option pricing....
Until next time!

Aswath Damodaran


I hope your valuations are approach fruition (or some other endgame, no matter how you decide to describe it). Three things I want to add on.
1. Summary sheet: I had sent this summary sheet with an email earlier this week, but it might have got lost in the blizzard of emails you have been getting this week. Please fill it out and send it to me before Sunday. If you can do it earlier, great... While I prefer the summary for the whole group, I will take a subset early than the group not at all. (I asked for the market price on December 12. Since none of you has a crystal ball, let's go with the price today). Please leave blank cells as blanks. Thus, if you don't have an option value, just leave it blank and don't enter NA....

2. Final project format: There are a few formatting constraints. The submission should be electronic and get to me by 5 pm on Monday. It can be in either Acrobat format or Word. I would prefer Acrobat, if you can do it. When you do submit the project, enter the following in the subject of the email: The Torture ends. Not only will this be descriptive of how you feel but it will help my system recognize that you are submitting.

3. Final newsletter: The last newsletter for the class is in the link. Take a look at it when you get a chance. It has the entire final exam for this semester in a secret spot. (You have to read every word of the newsletter to find it...)

Until next time!

Aswath Damodaran


I have 120 updates and I am sure that the rest will come in before midnight. At midnight, your carriages will turn to pumpkins... Just don't leave your glass slippers in the Kaufman Center... There are no princes or princesses there. Anyway, just a quick note about tomorrow. Once I have the updates, I will pull them together and do my usual review - ten most under valued, ten most over valued, percent under valued etc... I have a presentation that I will update on the train tomorrow on my way in and will try to make enough copies for everyone in class.. I will also send a pdf version before class. So, check your email at about 10 am. I also know that many of you have been taking this class online. But for tomorrow's class, please do try to make it to the class. I will work at making it memorable. So, see you in class tomorrow!

Aswath Damodaran


Cut it a little close, but got it ready... I have attached the presentation in the following link:
I hope to see you all in class. Until next time!

Aswath Damodaran