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The Email Chronicles (Valuation - Fall 2014)

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

Email content

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: Is Uber worth $17 billion and what about Airbnb? Is the market in a bubble, as Robert Shiller claims it is, or can even Nobel prize winners be lazy when it comes to using market short cuts? 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:

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
The syllabus for the class is here: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/eqsyllfall14.pdf

2. Syllabus & Calendar: 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. The final exam is scheduled for December 12 from 1-3. So, you can make your plane reservations to go home right after!

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
Please download and print only the first packet on discounted cashflow valuation. If you have trouble printing the pdf file, try the powerpoint file instead If you want to save paper, you can download the pdf file on you iPad, Android or Kindle and follow along...

4. 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".

5. 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:
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.. I think we are going to have a lot of fun (at least, I am...

6. Online reach: As you probably know (if you were in my corporate finance class), I have tried over the last few years to provide multiple ways to access the class. So, you will shortly be getting a second email from me (if this one gets through) inviting you to to join the Lore grouping for this class and offering you a way to also add this class on to your Apple devices on iTunes U. I know that this may be over kill, since you will be physically in the class, but I think you will find it useful.

I am looking forward to seeing you on Sept 3 - Wednesday at 10.30 at KMEC 2-60 to be precise.. I think we are going to have a lot of fun (or at least I am). Until next time!

Aswath Damodaran


I hope that you are wending your way back to New York from wherever you were this summer and are enjoying your last week of freedom. As we move towards opening day, I would like to draw your attention to the digital footprint for this class (I don't even know what that means, but it sounds good). Specifically, while I want to see all of you every Monday and Wednesday in class, starting September 3, there are other ways that I hope to use to keep you connected and involved. While I do not overwhelm you with the details, and you can pick and choose your poison, here are some choices for you to stay up to date with the class:

1. iTunes U course: I will be putting the class on iTunes U. Not only will all the webcasts be accessible from the site, but I will post all of the material for the class on there as well. If you have an Apple device (iPhone, iPad), joining the class is easy. You should first go the App store and download iTunes U for the iPad/iPhone. It is free. After you have downloaded the app, you can do it in one of two ways.
a. Click on this link: https://itunes.apple.com/us/course/id906122088 (try doing this from an Apple device, if you have one).
b. Since it is a open class, it should show up on your iTunes U bookshelf on your Apple device.
You will get a notification (which you can turn off, if you want) every time I post something to the class.If you are unlucky enough to have an Android device (phone or tablet), you can still access iTunes U but it will take a little more work. You have to first download the the Tunespace app (https://play.google.com/store/apps/details?id=de.twokit.tunespace&hl=en). You can then access the iTunes U course. I think it is worth the trouble. The lectures and lecture notes look/sound better on a tablet than they do on the computer.

2. Lore class: I will also be putting the class online through a service called Lore (that some of you might remember from the corporate finance class).
I will be sending you an invite in a little while to the site. Please accept the invitation, if you want to follow along on that site. I will be posting the lectures and materials here as well, but if you are going to follow on the iTunes U site, you can skip this.

3. NYU Classes: I am not particularly fond of closed systems (Blackboard, NYU classes) but you should be able to find the valuation class on NYU classes. Not only will the webcasts and material be on this site, but this is the place where you should be able to see your quiz grades and to submit weekly challenges (more on that later).

4. Google Drive: I will be using Google drive every week to put up a shared spreadsheet, where you can put up your valuations of the company that I will use as my valuation of the week (Again, more on that latter).

Could you take the class without any of these add ons? Absolutely, but try them, if you can. They are fun to work with! Until next time!


I hope that you are back in school and that you are at least gradually making the transition to the different rhythms of class. Just in case you have not been reading your emails for the last few weeks, a few things to get up to speed:

1. Previous emails: This is the third email for the class (and class has not even started). If you have no idea what the first two emails were about, you can find out by clicking below:
Please read the second email for details about getting online connections to the class. I had promised you an invite to the Lore class and it will be coming right after this email!

2. Lecture notes: As I noted in my prior emails, the lecture notes for the class are available. You can get the first packet by clicking on the link below:
If you have trouble with the pdf file, you can try the powerpoint file. It is also available at the bookstore (really). You will not need the packet until next week.

3. Capital IQ access: As a Stern student, one of the few privileges you get is access to Capital IQ, an incredibly comprehensive dataset that includes rich information on market, accounting and corporate governance data on about 41,000+ publicly traded companies. At some point in the class, you will need access to Capital IQ. So, at the risk of jumping the gun, please do this as soon as you can (how about right now?).

4. Corporate Finance class: As I scan the class list, I notice many familiar names from the corporate finance class and I look forward to seeing you again. I also noticed a few new names and I look forward to seeing you for the first time. I don't require that you remember your corporate finance in every detail, but it does give you a leg up in valuation, if you start with a good corporate finance base. Just in case you feel that your corporate finance basics are shaky, I have just put online a compressed corporate finance class that you may (or may not) find useful to review the material:
It is also available on YouTube as a playlist:
Finally, if you prefer iTunes U, here is the link:

4. Class on Wednesday: I will see you in the revamped KMEC 2-60. While I think that the school spent way too much money (they always do), they did a pretty good job with this room. I think we will have fun with the room. In fact, after Paulson, it will feel cozy. I will also bring physical copies of the syllabus, project description and the lecture notes for the first two sessions. I know that some of you will be missing the class, and if you are, you can download the pdf versions of these three documents by going to:
The webcasts of the sessions will show up about an hour after class tomorrow. So, you can catch up! Until next time!


First, a quick note about today's class. During the session, I told you that that this was a class about valuation in all of its many forms – different approaches (intrinsic, relative & contingent claim), different forums (for acquisitions, value enhancement, investing) and across different types of businesses (private & public, small and large, developed & emerging market). After spending some time laying out the script for the class (quizzes, exams, weekly tortures), I started on the 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:
• Please do find a group to nurture your valuation creativity, and a company to value soon. If you are ostracized, please let me know...
• 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 2012) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings. (You can pick any publicly traded company anywhere in the world to value. The non-US company that you value can have ADRs (but does not have to have ADRs) listed in the US but you still have to value it in the local currency and local market. You can even analyze a private company, if you can take responsibility for collecting the information.)
• The web cast for the first class are up and running. You can access it by going to:
The links to iTunes U and Lore have not been posted yet, since I don't have the downloadable video file link yet.
• 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.

As I emphasized in class this morning, you learn valuation by doing and the first valuation of the week is up and running. It is my valuation of Alibaba and I would encourage you to make it yours. If you don't know much about Alibaba, start with this article from the Economist (which while dated captures the spirit of Alibaba):
Then, visit Alibaba's main merchandising site, Taobao.com. (http://www.taobao.com/market/global/index_new.php) You will see what I meant when I talked about chaos:
You can read my blog post about Alibaba here:
You can get the prospectus filed by Alibaba in May 2014 and the updated one from the end of August here:
May 2014: http://www.stern.nyu.edu/~adamodar/pc/blog/AlibabaProspectus.pdf
August 2014: http://www.stern.nyu.edu/~adamodar/pc/blog/AlibabaProspectusAug14.pdf
My valuations for Alibaba in May 2014 and the updated one from today are here:
May 2014: http://www.stern.nyu.edu/~adamodar/pc/blog/AlibabaIPO.xls
September 2014: http://www.stern.nyu.edu/~adamodar/pc/blog/AlibabaIPOSept14.xls
Download the latter, and change the numbers you don't like (The key three inputs are revenue growth, a target margin and a sales/capital ratio) Once you have your estimate of value, please go to the google shared spreadsheet and enter your value:
It will be fun to see how close or far we are from the offering price, which will be set in about 12 days.

Sorry about the length of this email, but there will be more to come (I promise!). Until next time!

Attachments: Post-class test and solution.

9/4/14 A few quick notes:
1. I hope that you have found a group and if not, that you are working on finding one. I do have two orphans on the list and if any of you need or would like one or two additions to your group, please let me know. Please do pick a company soon. Rather than torture yourself with making the "right'' choice, recognize that you can always switch companies later (it really is no big deal) and that it is better to choose quickly and start working on a company than it is to no pick a company at all. Just to clarify, there does not have to be an overriding theme for your group and you can work with private businesses (if you can get the information on these businesses).
2. If you are interested in Alibaba, please do take a look at my blog post and valuation and then try to do your own version. It does not have to be submitted to me, but when you are done with your valuation, go to the Google shared spreadsheet and enter your numbers into that spreadsheet. I will not grade you or hold it against you, if you choose not to do the valuation. I understand that you have other things on your plate right now.
3. If you were not at the first class, or were just trying to take a look at the webcast, you have probably noticed that only the streaming link is available. Stern switched to a new technology provider for webcasts this semester and some of the wrinkles are still being ironed out. I should have the podcast available soon and will keep you posted.
That is about all for the moment. Until next time!

I hope that the first week of classes went well. I am back to bug you on three counts:
1. Capital IQ: I had mentioned that you have access to Capital IQ and should use it. I do have the follow-up on how exactly you get this access. The email that I received is reproduced below:
The enrollment period for Fall CapitalIQ accounts is currently underway. If you are planning to have your MBA students use Capital IQ this semester, please let your students know they have from now until Sept 28th to request Fall semester accounts by filling out the Capital IQ form on their Career Account www.stern.nyu.edu/careeraccount. Please note that even if students will need Capital IQ for projects later on in the semester, they will need to request access during this official enrollment period at the beginning of the semester. For non-MBA Stern students, there are 10 Capital IQ terminals on campus that don’t require a Capital IQ account. They are located in the undergrad lab (L-100) and on the fifth floor graduate student computers near the Office of Career Development (LMC 5-100).

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

3. YellowDig: This semester, I plan to try out new educational technologies each week. I know that I have already drowned you with a lot of choices when it comes to technology, but you are welcome to try some of the technologies with me. This week, I am trying out YellowDig.com. This is a start-up that tries to bring social media in a sophisticated way to the classroom. The company has been able to sign up students across about fifty universities (including Wharton and other business schools) and I plan to put the class sessions up on the site, as we go through the class. You can post interesting links, comment on the sessions or on other posts and carry on conversations about the class with other students in the fifty universities. So, go on to the website (Yellowdig.com) and register and you should be off to the races.

4. Alibaba: Alibaba just valued itself at around $162.7 billion. One more reason for you to try to value Alibaba on your own. My value (which was $157.7 billion) has been up online since Tuesday. What's your estimate?

Have a great weekend! Until next time!


It is tough to write a newsletter when there is no news to write about, but that did not stop me. Give the newsletter a quick look (it won't take more than a few minutes). In the meantime, I think I have found matches for all the orphans who have contacted me so far. So, if you are still up for adoption and would like to me play match maker, please let me know. Have a great weekend and you will hear from me again tomorrow!

Attachment: Newsletter # 1 (September 6)


I hope you had a great weekend. In the coming week, we will be spending time on what I call the philosophical foundations of valuation. For those of you who were expecting numbers and models, this may come as a surprise, but that's my job, right? To keep you off balance. In fact, in preparation for the class tomorrow, I would like you to do two things (it will take you about 15 minutes overall and I would really appreciate you spending the time before the class):
1. Narratives versus Numbers: Are you a story person or a numbers person? Are you more comfortable with business pitches or with excel spreadsheets? I will argue that you need both skills to be able to do valuation well, i.e., be able to use both your left and your right brains. If you already have a clear sense of what your strengths and inclinations are, great. Make note of it. If not, I know that there are lots of tests for whether you are left or right brained, and I am not sure whether this is the best one, but it is quick. Please try to take it and come in with your results:
I will ask for a show of hands during class tomorrow.

2. Bias, Uncertainty and Complexity: In tomorrow's class, we will also consider what I call the Bermuda Triangle of valuation, with bias, uncertainty and complexity being the three sides. Just as planes and ships were rumored to have disappeared into the actual Bermuda triangle, good sense disappears in the valuation Bermuda triangle. In preparation for the class tomorrow (we will start class with this pre-class test), please take the attached test. Again, don't worry about your experience or lack thereof in valuation. This is common sense.
After we deal with these issues, we will set the table in terms of the different approaches to valuation. We will start with the most basic input into DCF valuation, the risk free rate, on Wednesday. Fun, fun and more fun! Until next time!

Attachment: Valuation bias: A test


Today's class started with an examination of left and right brains and how a good valuation requires them to work together. While you may be a little mystified about how exactly you will be connecting stories to numbers, it will come and you find this blog post on the topic useful:
If you have more time on your hands, please read this one as well that I had on Bill Gurley's narrative on Uber (as well as the links to my original valuation and Gurley's response to that valuation). By valuation standards, I think it is not a particularly boring read.

We also started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. We also spent some time on the Bermuda triangle of valuation, where bias, uncertainty and complexity make valuations go off the tracks. We then moved on to talk about two of the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, and relative valuation, where you value an asset based on the pricing of similar assets . 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 fatigue, 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:

One final note before I leave you to your own devices. I just posted my updated Alibaba valuation online, with my read on how the bankers arrived at their estimated price:
Feel free to keep valuing Alibaba (I updated the revenue numbers from last week... Found a trailing 12-month value that is more accurate).

Finally, as will be the case with every session of this class, there is a post-class test (with a solution). I have also attached the answers to the bias test that we started the class with. By the time, I got to scenario 7, I am sure that you lost track of what we were finding.

Attachments: Bias test solutions, Post-class test and solution.

9/9/14 The valuation of the week is ready to go. It is of a company that many of you might not be familiar with. So, start with the back story:
Then, download the key financials:
Annual Report: http://www.stern.nyu.edu/~adamodar/pc/blog/ArcaAnnualReport2013.pdf

Quarterly Report: Arca: Quarterly Report (Second Quarter 2014): http://www.stern.nyu.edu/~adamodar/pc/blog/ArcaQuarterlyReport2014.pdf
Bloomberg financial summary: http://www.stern.nyu.edu/~adamodar/pc/blog/ArcaBloomberg2014.pdf
Once you have those, you can check my valuation:
My valuation: http://www.stern.nyu.edu/~adamodar/pc/blog/ArcaValuation2014.xls
It may be a little overwhelming. So, take a look at the picture instead:
The part of the valuation that I would like you to pay the most attention to, because it is a precursor to what is coming in these next three sessions is the cost of capital. Here is a little explanation:
Finally, if you can try your hand at the spreadsheet, go ahead, and then input your values into the shared Google spreadsheet:
That is about it.

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. We then laid the foundations for valuation and how your viewpoint on what you are valuing (equity or business) can alter how you estimate cash flows and view risk. 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. You can check out the Economist (look at the tables towards the end of the publication and at the long term interest rate). You can also try this site for long term local currency government bond rates:
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). Estimate the default spread given the rating by downloading the country default spread spreadsheet that you can find at the link below
2c. 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 and 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:
I also have a follow-up paper on the "What if" series.. what if nothing is riskfree
Finally, I did a post on my blog specifically on the question of the risk free rate being low and the implications for valuaton:

The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where they stand:
The post class test and solution are also attached. The first weekly challenge will follow in a separate email.

Attachments: Post-class test and solution, CDS Spreads, ratings & other riskfree rate stuff: September 2014


By now, I hope that you have found a group and picked a company. If you have not, please do so soon! If you have picked a company, your assignment for the week is to get a risk free in the currency of your choice. We started on this discussion yesterday in class, and my valuation tools webcast will take you through the process. It will be easier in some currencies than others, but it is a process well worth mastering. I have reattached a handout that I sent yesterday with more details on what it contains and how you can use it to get a risk free rate. So, here is your guided tour:
1. The first two pages are government bond rates in the local currencies for about 50 countries. My source, as I mentioned yesterday, is Trading Economics:
The current rate is the Actual in the second column.

2. The third page is the Emerging Market bond box that shows up in the Financial Times each weekday. The key to reading this table is to recognize that these are dollar and euro denominated bonds issued by emerging markets. Compare the bid yield on these bonds (fourth from last column) to the US treasury rates of equivalent maturity and the Euro bond rates to the German Euro bond rate of the same maturity. For instance, the Brazil 1/20 bond is roughly a 5 year bond and the bid yield is 2.84%. The five-year US treasury bond rate is about 1.74%, giving you a default spread of 1.10% for Brazil.

3. Pages 4-5 are the sovereign ratings for countries on Moody's. You can get them yourself at http://www.moodys.com. Note that there is a foreign currency rating and a local currency rating for each country, and focus on the latter. Use that rating in conjunction with the ratings/default spread table on page 9 to estimate a default spread for the country of your choice. Thus, for Brazil, with its rating of Baa2, the default spread you would use is 1.90%.

4. Pages 6-8 are sovereign CDS spreads from September 9, 2014, for the countries which they are available. It is an alternate measure of the default spread. For Brazil, it was 1.99%. If you use a Bloomberg terminal, you can get these by typing in SOVR.

Here is how you would use it to get a risk free rate. Take Brazil. From (1), you would get a government bond rate in nominal reais of 11.43%. You have three measures of Brazil's default spread: 1.10% from (2), 1.90% from (3) and 1.99% from (4). Use one or an average of these numbers.
With the Government bond spread: Riskfree rate = 11.43% - 1.10% = 10.33%
With the sovereign rating based spread: Riskfree rate = 11.43% - 1.90% = 9.53%
With the CDS spread: Riskfree rate = 11.43% - 1.99% = 9.44%

Try this for Mexican pesos or Indian rupees and if you have questions, ask me or watch the webcast tomorrow! Until next time!

Attachment: Risk free rate data from September 2014

9/12/14 In yesterday's email, I went through the process of estimating a risk free rate in any currency. In today's webcast, I reproduce a link from a webcast I sent you during the corporate finance class on how best to estimate risk free rates. Start with the webcast:
Also, download the presentation that goes with the webcast
Finally, use the updated numbers I sent you in yesterday's email attachment to get a risk free rate in any currency.
Have a great weekend!

Hope you are having a great weekend! Just a reminder that your first weekly challenge is still open until tomorrow at 6 pm. I have reattached it to this email. Please give it a shot, then go into NYU classes and submit your answer. I will be putting the answer up online tomorrow. I am also attaching the newsletter for the week!

Attachments: Newsletter # 2 (September 13)


I hope your weekend was fun! If you did have a chance to try the weekly challenge, I have attached the solution. Even if you did not, you can still take a look at both the challenge and solution. On a different note, this week, we will complete our discussion of risk free rates and then move on to talk about equity risk premiums, betas and cost of equity. With equity risk premiums, we will first start with a contrast between historical and implied premiums and the implications of using each. We will also look at the question of country risk and whether you should have different equity risk premiums for different countries, and if so, how best to estimate these premiums. With betas, I will not stick to dogma and draw lines in the sand for the CAPM but focus instead on measuring the relative risk in an investment. See you in class tomorrow!

Attachments: Weekly Challenge #2 solution


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 using one of the three approaches that I described last week (in my session on risk free rates). 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. If you are interested, I have attached my January 2014 update:
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:

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 5.28%.

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.

The post class test and solution are attached.

Attachments: Post-class test and solution.


This week, rather than valuing an individual company, I will try to value an index (or equities collectively). I will focus on the most widely followed index in the world, the S&P 500, but the spreadsheet that I attach will travel to any other index, in any market. Let me start with the motive, which is the talk of a bubble that surrounds us. While I would am not ruling out the presence of a bubble (there is always that possibility, especially after the market has gone up strongly for many years), I find much of the talk to be sloppy, lazy and based either on false logic or incomplete facts. Here is a classic recent bubble story:
All the big names, including some with Nobel prizes are quoted here.

It is this bubble talk that I was responding to when I posted this on my blog:
I give you my logic (which you are welcome to disagree with) for why I think that even if you believe that there is a bubble, it may not make sense for you to get out of stocks. I also have a valuation of the S&P 500 index that I did at the time of this post (in June 2014), which I have updated to today (September 16, 2014). I have attached both valuations. Open the September 2014 spreadsheet and start working with the numbers. Once you have your assessment of value, go into the Google shared spreadsheet and enter your numbers.

Let's see if we collectively agree or disagreee with Robert Shiller. Until next time!

Attachments: My intrinsic valuation of the S&P 500 (June 14, 2014), My intrinsic valuation of the S&P 500 (September 16, 2014)


change over time. Other things remaining equal, lower stock prices, higher cash flows and higher expected growth all push up the ERP, whereas a higher riskfree rate pushes 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:
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)
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:
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:
Download the paper and browse through it. You will see much that is familiar.

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. The post class test and solution are attached.

Attachments: Post class test and solution


As promised in class, I am attaching the weekly challenge for the week. The first attachment contains the questions and the second has the data on equity risk premiums, interest rates and default spreads. Please post you answer on NYU classes and I will post mine on Sunday. Thank you giving it a shot!

On a different note, the TAs for this class, Siddharth Agarwal (sa3117@stern.nyu.edu) and Scott Farmer (scott.a.farmer@stern.nyu.edu), have generously agreed to run review sessions every week for the next 12 weeks of class. The sessions will be an hour, from 4.30-5.30 on Thursdays in room 3-80. They will focus on working through problems from past quizzes that relate to the topics covered until that week. They will be useful for you, if you feel comfortable with the big picture but want to get your hands dirty with the mechanics. Since 3-80 fits only 40 people, Siddharth and Scott have set up a Google shared spreadsheet for you to sign up for the sessions.

Spreadsheet Valuation review session sign-up sheet
Please sign up for the sessions that you are interested in, but please remove your name from the list, if you decide that you will not make it.

9/19/14 We spent much of the week talking about equity risk premiums and most of Wednesday's class on implied equity risk premiums. This week's webcast covers the logic and measurement questions in computing implied equity risk premiums. If you are interested in the webcast, go to the link below:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ImpliedERP.mp4
The supporting materials are below:
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/ImpliedERP.ppt
Implied ERP spreadsheet (from February 2013): http://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb13.xls
S&P on buybacks (from earlier this year): http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500buyback.pdf
S&P 500 Earnings: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500eps.xls
I hope you find this useful. The best way to make sure that you get it, is to try it out yourself on the September spreadsheet. Until next time!

The newsletter for the week is attached. Not much news, but hope you get a chance to glance at it. The weekly challenge is online. Please give it a shot.

Attachment: Newsletter # 3 (September 20)


I hope you had a chance to try the weekly challenge. If you did, you probably tried some statistics on the ERP/interest rate data. I don't our expect our answers to converge, but here is my solution:
Note that the regressions give you forecasts, but the forecasts have lots of noise in them.

On a different note, in the week to come, we will begin with an assessment of measuring relative risk (beta and its cousins) tomorrow and move on to estimating cost of equity and capital. If we move at a reasonable pace, we should be able to begin on cash flows on Wednesday. Needless to say, if you still have not picked a company to value, it is time to make a choice. See you in class tomorrow!

Attachment: Weekly Challenge #2a solution


Today's class represented the final pieces of the discount rate puzzle. We began with a discussion of bottom up betas, focusing on defining comparable firms and expanding the sample. Since you will often be the odd person out at your future job, pushing for this approach, I put together a list of questions that you may get asked about bottom up betas (why they are better, how to measure them etc.). You can find them by clicking below:
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. Next session, we will turn our attention to cash flows and earnings.

Attachment: Post class test and solution


I confess that I love Krispy Kreme's glazed raspberry filled donuts, but this post is about the valuation of the company. Krispy Kreme, which has made a partial comeback from disaster, just announced last week that they were increasing their authorized buyback from $80 million to $105 million, raising the question of what this means to you, if are a stockholder in Krispy Kreme. To set up the discussion, start with the backstory on Krispy Kreme:

To understand the contours of the discussion and how buybacks affect the value/price per share, try this very long post I had on the topic (from yesterday):
I think it lays out the big picture of buybacks.

Then, download the annual report, the quarterly report and my intrinsic valuation of KKD:
Annual Report: http://www.stern.nyu.edu/~adamodar/pc/blog/KKDAnnual.pdf
Quarterly Report: http://www.stern.nyu.edu/~adamodar/pc/blog/KKD10Q.pdf
Valuation of KKD: http://www.stern.nyu.edu/~adamodar/pc/blog/KKDvaluation2014.xls
Top off the process by downloading the buyback spreadsheet, where I work out the winners and losers on this deal. (Hint: If you are a KKD stockholder, tender your shares!!!!!!)
Buyback worksheet: Valuation of KKD: http://www.stern.nyu.edu/~adamodar/pc/blog/KKDbuybacks.xls

Finally, the Google shared spreadsheet for the week is attached for you to put in your thoughts about Krispy Kreme.


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.
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. Do try the weekly challenge for this week. It is a great exercise in tying up loose ends.

Here are my links for forensic accounting:
There are denser books on the topics but those are for forensic accountants. These books work for the rest of us.

Finally, I have created a Google spreadsheet for you to list your company choices and preconceptions. To preserve your anonymity partially, I have listed your Stern IDs (instead of names). Make your best judgment and please try to list your choice by this weekend.
Weekly challenge will follow later today.


Today's session may have been a little confusing with all the earnings adjustments and corrections. To get a sense of whether you get the process, try the weekly challenge for the week.

Attachment: Weekly challenge #3


My usual nagging email about the project. I am glad to see so many of you have filled out the names of the companies you will be following in the Google shared spreadsheet. If you have not yet, please do it soon. A good way to check your understanding of earnings and cash flows is with the company you have chosen. Try the following:
1. Check the lease commitments and see if you can convert them to debt:

2. If your company has R&D (or like expenses that you think should be capitalized), try capitalizing them with this spreadsheet:

I will be posting valuation tools webcasts on both issues tomorrow. So, if you are confused, please watch them. Until next time!

9/26/14 I know you are busy doing other stuff, but 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:
How to compute trailing 12 month earnings: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012)
How to convert leases to debt: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Leases.mp4 (Uses Disney in 2012)
How to capitalize R&D: http://www.stern.nyu.edu/~adamodar/ podcasts/Webcasts/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 supporting material by going to http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqfall14.htm
I hope you get a chance (at least after the quiz) to watch one or more of these webcasts

I hope that you are enjoying this absolutely amazing weekend. The newsletter for the week is attached. In case you were thrown off by the mention of a quiz next week in my last email, the first quiz is a week from Monday (on October 6). That is about it. Until next time!

Attachment: Newsletter #3


The weekly challenge solution is attached. It is not only a good exercise in understanding cash flows but also in preparing for the first quiz. What first quiz? This is as good a time, as any, to preview the quiz:
1. Quiz time/location: The quiz is in the first 30 minutes of class (not the middle, not the last) of class, a week from Monday (October 6). Please be there on time. It will be a little tight in the room, but since I don't have a TA, I cannot have two rooms (unless I can figure out a way to clone myself).
2. Missing the quiz? If you are going to be missing the quiz, first check out whether you have a good enough reason by going here:
You do have to let me know before 10.30 am on Monday (October 6) by email that you will not be taking the quiz.
3. Quiz coverage: The quiz will cover everything we will do through Wednesday's class. That will probably be the first 160 pages of the first lecture note packet and the Intro to Valuation packet. In terms of chapters in the investment valuation book, the quiz will focus primarily on chapters 7,8,9 and 10. If you can, do try the practice problems at the end of these chapters. The solutions are online here:
4. Past quizzes: All of the past quiz1s I have given are online. 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
Some of the earlier quizzes go further into the material and look at growth rates. You can ignore those problems.
I will be posting a webcast review session for the quiz later in the week and the TAs do have a session planned for Thursday. So, no need to panic.

Attachments: Weekly challenge 3 Solution & Synthetic rating


As we enter the fifth week of class (yes, it is progressing rather quickly) and the first quiz looms (a week from today), we stayed the course of inputs into discounted cash flow valuation by closing the loop on cash flows and opening the one on growth rates.
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 2014. I also have a link to a blog post that I did just a few weeks ago on the question of tax rates globally and why I think that the populist messages on taxes often drive out common sense:

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. I may even extend into advertising...
If you have negative earnings in your company, you have to make an assessment of why your earnings are negative before you can come up with a solution to the problem. Once you have that judgment, you can then go about fixing the problem
5. To get from FCFF to FCFE, you don't have to start from scratch. Instead, you can just focus on estimating cash flows to debt (interest expenses, principal payments) and from debt debt and net them out against FCFF
We ended the class with an entree into the different ways you can estimate growth: look at past growth (dicey and unsustainable though that might be) and analyst forecasts. We will follow up on Wednesday after the quiz.
The post class test and solution are attached.

Attachments: Post class test and solution


In this week's valuation, I take a look at Yahoo, a company that I first posted on in May 2014, where I labeled it a mystery, wrapped in a puzzle and an enigma, because so much of its value comes from its holding in two other companies - Yahoo Japan (35%) and Alibaba (22.1%). You can read the original post here (and my rationale for why I was buying Yahoo shares at $33.76/share)
Since then much has happened, as all three companies have updated their financials and Alibaba, in particular, has made the news with its IPO. Yahoo's stock price climbed to $42.50 on the day before the IPO but on the day of the IPO, when Alibaba climbed new heights, Yahoo's stock price dropped. This post gives you my feeble attempt at explaining why:

If you get a chance, try your hand on the master spreadsheet, where I bring together all of Yahoo's many pieces:
You can also download the intrinsic valuations of the three companies in the mix:
Yahoo US: http://www.stern.nyu.edu/~adamodar/pc/blog/YahooParentSept14.xls
Yahoo Japan: http://www.stern.nyu.edu/~adamodar/pc/blog/YahooJapanSept14.xls
Alibaba: http://www.stern.nyu.edu/~adamodar/pc/blog/AlibabaIPOSept14.xls
If you do try your hand and want to enter your numbers in the shared Google spreadsheet, here is the link:


We did complete our discussion of growth by first looking at analyst estimates of earnings growth, arguing that they contain far less information about long term future growth than you might think. We followed up 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.

Those of you who were in my corporate finance class may remember that I had reviews before each quiz. It has always been difficult to find the room and the time to do a review in this class. Last semester, I did put together an entirely webcast review for the quiz. I hope you find it useful. You can find it by going to:
The presentation for the review is attached. I hope the webcast helps.

Attachments: Review presentation, Post class test and solution


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 to give it a shot!

Attached: Weekly challenge


I know that you are busy preparing for the quiz. So, let me start with that first. I hope you have had a chance to watch the review session webcast and tried a few practice quizzes. The quiz will be in the first 30 minutes of class on Monday, from 10.30-11. I have two rooms and please try to stay in your assigned room:
If your name ends with Go to
A - L KMEC 2-60
M - Z KMEC 2-90

This week, we focused on estimating growth from fundamentals and built growth rates from accounting returns - return on equity and return on invested capital. Accounting returns can be messy and misleading. In this webcast (that some of you may remember from the corporate finance class), I look at the process of estimating accounting returns, using Walmart as my example:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ROIC.mp4
Walmart 10K (2013): http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pdf
Walmart 10K (2012): http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10Klastyear.pdf
Spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmartreturncalculator.xls
I hope you get a chance to take a look at it.


Last week, we completed our discussion of cash flows and growth rates. Next week brings the quiz (please check out the seating arrangement from yesterday's email) and the last pieces of the DCF input puzzle - the terminal value and the loose ends. The weekly newsletter is attached. Until next time!

Attachment: Newsletter # 4 (October 4)


I hope that your weekend was productive and fun (they are not mutually exclusive). Three quick notes:
1. Quiz 1 is tomorrow from 10.30-11. Just a reminder again that there are two rooms for the quiz and your seating is as follows:
If your name ends with Go to
A - L KMEC 2-60
M - Z KMEC 2-90
It is open book, open notes and you can use your iPad without connectivity but no computers.

2. The solution to the weekly challenge #4 is attached.

3. This week, we will complete the last two pieces of the DCF input section tomorrow and cover the loose ends in valuation (and you will see that there are quite a few) on Wednesday.

Attachment: Weekly Challenge $4 solution


We started the class with the quiz and I am truly sorry if I threw you off by not including the debt in the second problem. The quizzes are almost done and I will let you know when they are ready to be picked up (and send you the solutions, the grading template and the distribution). 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).
One final point. We are getting closer to the second lecture note packet. It is now available to download online on the webcast page for the class or at the link below. It will be in the bookstore about a week from now.
Back to grading and the post class tests are attached.

Attachments: Post class test and solution


The quizzes are ready and can be picked up in the finance department on the 9th floor of KMEC. When you come out of the elevator, walk towards the front door to the reception, but look to your right before you go through the door. You should see the quizzes in neat piles (neat when I left them) in alphabetical order. Please take just your quiz. I have attached the solution/grading template to this email and you can check against it. The median score on the quiz was 7 and the attached distribution reflects that.
While it is painful to go through a quiz just after you have got it back, it is also the best time unfortunately. So, here are a few key components to the quiz that I want to reinforce:
1. Problem 1 - Matching cash flows to discount rates: The key in this problem is matching up a rupee discount rate to rupee cash flows. You are given a cost of equity in Euros for a company with operations only in Germany (which effectively implies that the current cost of equity reflects only mature market risk). To convert into a rupee cost of equity, you have to first add the country risk premium (since the project is in India) and then scale up for inflation. I gave full credit to both the short cut and the full adjustment;
Short cut = 8% + 3% + 4% = 15%
Full adjustment = (1+.08+.03)(1.05/1.01) -1 = .154 or 15.4%
The net income = cash flow to equity, since cap ex = depreciation and there are no working capital needs.
2. Problem 2: Country Risk and Discount Rates
a. Levered beta: The first step is to compute the unlevered beta, as a value-weighted average of the unlevered betas of the businesses you are in. Then, get the debt to equity ratio. You are given the debt and the enterprise value (as the sum of the values of the businesses). Since the company has no cash and is correctly priced, the equity can be backed out:
Equity = EV - Debt
Since the debt is in the US, the tax benefit is at the US tax rate.
Some of you did try to estimate a levered beta for each country. This is tricky, since levered betas have to be weighted using equity values in each country (rather than the values of the businesses).
b. Cost of equity: Since the cost of equity is in US dollars, the risk free rate is the US T.Bond rate, not the Colombian dollar bond rate. The country default spread is actually embedded int the latter and needs to be backed out:
Country default spread = Colombian dollar bond rate - US T.bond rate = 4%-2.5% = 1.5%
Country risk premium = 1.5% *2 = 3%
Since only 60% of the operations are in Colombia, the net exposure is only 1.8%. Add that to your mature market premium to get your ERP for the company. There is insufficient information for a lambda estimation. So, kudos for trying but you cannot get there.
c. Cost of debt: This is a Colombia-based company and will bear some or a lot of the default risk for the country. Unfair, I know, but it is life. I added the entire country default spread but I accepted partial add ons as well. I even accepted one answer that made an elaborate argument for why it would not be exposed. I don't agree but I have to give full credit for trying.
3. Problem 3: Cash flows & Growth Rates
Not much to add to the solutions.

Attachments: Quiz 1 solution as well as the distribution of grades for the class.

10/7/14 I am sorry to get this to you so late, but I was watching a soccer game (with my son playing in it) and did not get a chance to do it until just now. The company for this week is Petrobras. (GoPro is for next week). Start off with this background story on why I think this is an interesting company:
Then, download the data for the company:
Finally, download the valuation. It is a very simple model that lets you play with the inputs:

Finally, if you get your own valuation (and try to do it before the final round for the elections on October 26), enter your numbers in Google shared spreadsheet:

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. In case you are interested in the Playboy mansion, click on the link below (you will not see any playmates, just the real estate...)

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. It is due two weeks from Friday (October 24) though not for grading, but for feedback. You just have to turn in the Excel spreadsheet containing your valuation and you are welcome to use of my mine (I would recommend one of the Ginzu ones) or build one of your own. I have also attached the weekly challenge for this week and it is a good one, if you are at all uncertain about terminal value.

Attachments: Post class test and solution


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 spreadsheets listed under (b) (even if you do not expect high growth). In particular, stick with the following choices:
a. http://www.stern.nyu.edu/~adamodar/pc/fcffginzu2014.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. http://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzu2014.xls or http://www.stern.nyu.edu/~adamodar/pc/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. http://www.stern.nyu.edu/~adamodar/pc/fcfeginzu2014.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. http://www.stern.nyu.edu/~adamodar/pc/divginzu2014.xls for financial service firms
You can find all 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 October 24, 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 DCF valuation (subtle nag here), you will undoubtedly encounter the big number, which is the terminal value. While we went through the four rules for keeping terminal value in check in class this week, and this week's challenge is all about it, I thought that webcast that went past abstractions would help. Consequently, I took a DCF valuation that was turned in a prior version of this class and put the terminal value under a microscope. I then set up a spreadsheet to check the terminal value for key assumptions and you can use this on your terminal value (or any others that you encounter in your life). The webcast itself is about 15 minutes long and not too painful. (Ignore the big DEMO right down the middle.)
The DCF valuation and the terminal value checking spreadsheet are attached.

Attachments: Sample DCF valuation, Terminal value analyzer


Last week, we completed the grunt work of valuation by looking at terminal value and choosing the right model. Next week, we finally turn to valuations of companies. The newsletter for the week is attached.

Attachment: Newsletter #5


The solution to the weekly challenge is attached. This week, we will first complete our discussion of loose ends tomorrow, by examining what to treat as debt to get from firm value to equity value and then looking at equity options/restricted stock granted to employees. On Wednesday, we finally start on full valuations. See you in class tomorrow!

Attachments: Weekly Challenge # 4a Solution


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.

In the final part of the class, we looked at the link between narrative and numbers. While this may seem like a tangent, I view it as central to doing good valuation. I have two blog posts that you may find useful. The first one is about how narratives and numbers are linked in good valuations.
The second one is about narrative shifts and uses Facebook, Twitter and Apple earnings reports to make the case:
I hope that you find them interesting.

One more quick note. Santiago Restrepo is organizing a session on taxes tomorrow that Professor Murphy and I will be speaking at in KMEC 2-60 from 12-1. Though you have probably heard everything I have to say about taxes, do come if you are free.

The post class test and solution are attached.


I am sorry to get to you so late, but I have a valuation of GoPro that you can take a look at. To get the back story, start here:

Then, download the company's prospectus and latest 10Q:
Prospectus: http://www.stern.nyu.edu/~adamodar/pc/blog/GoProProspectus.pdf
10K: http://www.stern.nyu.edu/~adamodar/pc/blog/GoPro10Q.pdf

Finally, take a look at my try at valuing the company:
I get a value of about $21, well below the $77 it was trading at earlier today.

If you do get the urge, try your hand at valuing the company and put your numbers into the shared Google spreadsheet:

I am planning to post on my blog on the company and would be grateful for any feedback that you can provide me on mistakes that I may have made or big markets that I may have missed.


I did get a chance to complete that GoPro valuation, updating the numbers and adding a pricing. You can find the post here:
Please give the GoPro valuation a shot when you get a chance.

I am also attaching the weekly challenge for this week. It is a good exercise to understand employee options.

Finally, just a reminder (to add to the dozen you already have) about your DCF valuation, which is due a week from tomorrow (October 24).


In class, yesterday, we 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 also 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.

Attachment: Attachments: Post class test and solution

10/17/14 In the assessments of young companies, in particular, we looked at the effect of having options outstanding on the value per share. The weekly challenge for this week zeros in on this particular aspect of valuation.. 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 (I sent it to you yesterday). 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://www.stern.nyu.edu/~adamodar/podcasts/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.

I hope that you get to enjoy this weekend more than the last one, now that you have the DCF valuation out of the way. I am in California, basking in 80 degree weather! I am attaching the newsletter for this week. Next week, we will be finishing off intrinsic valuation and starting on relative valuation, which is packet 2 of the lecture notes. Please download the packet online (either on the webcast page or on the lecture notes page) before next week. The direct link is below:
If you prefer a physical packet put together by the bookstore, the combined packets 2&3 should be available in the bookstore by now.

Attachments: Newsletter #6


So, we are getting through the last pieces of DCF valuation, though the principles will be reused in other parts of the class. We started today's session by looking at declining & distressed companies and how to deal with the problem of negative growth (more psychological than mathematical) and what to do when a company faces the possibility of default. We then moved on to emerging market companies and looking at the issues of country risk, corporate governance and cross holdings through those lens. We then moved on to 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. Attached is the post class test and solution for today.

Attachments: Post class test and solution


As I promised in class yesterday, I am attaching the valuation the week. Start with the back story, since it includes everything you need to know about the break up:
This provides a working description of the two companies that will be created from the break up of HP as a company. You can also get the financial information on HP by clicking on the links below:
Last 10K: http://www.stern.nyu.edu/~adamodar/pc/blog/HP10K.pdf
Last 10Q: http://www.stern.nyu.edu/~adamodar/pc/blog/HP10Q.pdf
Financial Summary: http://www.stern.nyu.edu/~adamodar/HPBloomberg.pdf

For background on why companies break up and how it might affect value, try my blog post from a couple of years ago on the topic:
It is not a tough read (at least I don’t think so).

Finally, try the spreadsheet I have on valuing the HP breakup. It is attached to this email.


In yesterday's class, we finally put to rest DCF by having a discussion of the difference between value and price, why they might be different and when the gap will close. Before entering into that discussion by talking about the values of intangible asset companies and commodity/cyclical companies. With the latter, we noted the importance of keeping separate our macro views (about the economy or commodity) from our micro views, and the use of Monte Carlo simulations to deal with uncertainty. If you are interested in simulations and how to come up with statistical distributions to use, I have paper on the topic and the link is below:

We ended the class by starting the discussion of multiples and comparable firms. We will continue with that discussion on Monday but this week’s weekly challenge is about consistency in multiples (the very last topic that we talked about yesterday). I will send it as a separate email.

The second quiz is approaching and is next Wednesday, October 29, from 10.30-11. It will cover the rest of packet 1 (from page 145-End) and hence will include terminal value, the loose ends in valuation and all of the mechanics of DCF. THERE WILL BE NOTHING FROM PACKET 2 (RELATIVE VALUATION) ON QUIZ 2. I have put the review session up online (on the webcast page for the class) with the presentation. The links are below:
Presentation: http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/valquiz2review.pdf
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz2review.mp4

You can also find all past quizzes with the solutions in the following links:
All past quiz 2s: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2.pdf
Quiz 2 solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2sol.xls
You will see relative valuation problems (multiples) popping up in the pre-2008 quizzes. You can ignore them!

Attachments: Post class test and solution

10/24/14 This is usually the day I send out my valuation tools webcast but I decided that since you have the quiz to prepare for, it is best to leave you alone. Thank you for all the DCF valuations that you have sent in already. I am back logged with about 80 DCFs that I have not looked at yet, but I will work through them as quickly as I can. If you have not sent in your DCF, there is still time.

A couple of quick notes. Today was a slow day for getting through valuations and I am sorry if I have not got back yours yet. And next week brings the second quiz on Wednesday. The review webcast is online, on the webcast page for the class. Finally, the newsletter for the week is attached.

Attachment: Newsletter #7


The solution to the weekly challenge is attached. This week, we will continue with the discussion of multiples, going through the four step process of defining, describing, analyzing and applying multiples. I know that this will not be on the quiz on Wednesday but I hope to see you in class tomorrow!

Attachment: Weekly Challenge #6 Solution


Today’s we continued with our discussion of multiples. Using a DCF model as the basis, we restated intrinsic value as intrinsic multiples. We stared with PE ratios today and determined that they are a function of expected growth, risk in equity (cost of equity) and payout ratio/ return on equity. Specifically, argued that higher growth, lower risk and higher quality growth translate into higher PE ratios. We extended the model to look at high growth firms and concluded that the determinants don't change. However, using a hypothetical company as the base, we concluded that PE ratios become sensitive to growth surprises as interest rates become lower. We then used the drivers of PE to explain differences in PE ratios across countries and time. We closed with an assessment of PEG ratios and why they are dangerous in practice. I have attached the post class test and solution for today's session.

Attachments: Post class test and solution

10/27/14 I managed to get 2-90 again for the second quiz and the seating arrangement is below:
If your last name ends with Go to
A - F 2-90
G- Z 2-60
The usual rules apply. Open book, open notes, open iPad (with no connectivity). No laptops. If you are going to miss the quiz, let me know before 10.30 on Wednesday. The quiz covers intrinsic valuation (or at least all the parts from terminal value to the end of packet 1).

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 2.2% 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 2.2%, 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 5-5.5% here... That is because the current implied premium in the US is about 5% (January 2014) or 5.4% (October 2014). 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.

Attachment: Valuation post mortem

10/28/14 In this week’s valuation, I take a look at Amazon, one of my favorite companies of all time, partly because it is so different from most other retailers and partly because of nostalgia (I learned everything I know about valuing young companies by struggling with Amazon in 1998). You can start with this background:
You can then follow up by downloading the 10K and 10Q for the company:
Amazon 10K: http://www.stern.nyu.edu/~adamodar/pc/blog/Amazon10K.pdf
Amazon 10Q: http://www.stern.nyu.edu/~adamodar/pc/blog/Amazon10Q.pdf
Finally, you can pull up my valuation of Amazon:
Amazon valuation: http://www.stern.nyu.edu/~adamodar/pc/blog/Amazon2014.xls
If you get a chance to value Amazon, visit the shared Google spreadsheet and enter your numbers:

The quizzes are done and can be picked up in the usual spot. The solution and grading distribution are attached. The usual rules apply: please don’t mess with the order, don’t browse and come and talk to me, if you think I have been unfair. (I promise that it is nothing personal. I just might have over looked something profound).

Attachments: Quiz 2 solution as well as the distribution of grades for the class.


I hope that you had a chance to pick up your quiz. If not, it should still be there tomorrow and the day after. So, take your time. There was class after the quiz today and for those of you who were there, thank you. We continued our discussion of the analytics of multiples, starting with price to book ratios, them moving on the EV/ Invested capital, EBITDA and revenue multiples. In the process, we did develop a short-cut for finding the companion variable for a multiple, dividing the net income by the denominator for equity multiples and after-tax operating income by the denominator for enterprise value multiple. We then moved on to the last phase of relative valuation, where we look for comparable firms and control for differences across companies. We will continue and complete our discussion of relative valuation next week. Have a great weekend (and you will hear from me, I am sure)!

Attachments: Post class test and solution

10/31/14 One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post:
Then watch the webcast:

You can download the presentation:
And the spreadsheet that goes through the calculations:
Hope you find it useful!

On this dark and wet weekend (which makes me yearn for Southern California), I hope that you have great and wondrous plans. In case you don’t, here is the newsletter for the week, with its usual gripping and exciting news about the class. Last week brought the second quiz and more discussion of pricing, starting with the descriptive and analytical tests of multiples, where we extracted the variables that determine and multiple, and ending with application. The essence of what we are trying to do is come up with the right questions to ask when confronted with a company that looks cheap on a multiple. Next week will bring us to completion on this process and begin with a look at asset-based valuation models and private company valuation.

Attachment: Newsletter #8


This week, we will continue and complete the discussion of relative valuation and start on asset-based and private company valuation. In the mean time, if you get a chance, please check out the solution to the last weekly challenge.

Attached: Weekly Challenge#7a solution


As promised (or threatened), the mystery project is ready for you. It is a group project, due on Friday, November 14, at 5 pm (I had originally scheduled it for November 7 but that does not give you much time). You can find the description at the link below and I am attaching the data to this email.
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).

Attached: The mystery project, Data for project


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. Here, for instance, is an article in the New York times that takes itself way too seriously:
Here is a fun article on how relative valuation is used in hotel valuation (As I mentioned today in class, It can be based on how much a can of soda at the hotel costs... I am not kidding)
On a final note, I was lax and forgot to send you the mystery project a week ago. I will be sending it out later today but the due date has been moved to a week from Friday (November 14 instead of November 7).

Attached: Post class test and solution

11/4/14 I just put up my valuation of the week, and as promised, it is the EBay valuation. Start with the back story:
Then, download the 10K and the 10Q for EBay
10K: http://www.stern.nyu.edu/~adamodar/pc/blog/ebay10K.pdf
10Q: http://www.stern.nyu.edu/~adamodar/pc/blog/ebay10Q.pdf
Finally, take a look at the spreadsheet that contains the valuation of the broken up units:
You can change the parameters that you think determine EBay’s break up value and look at the impact and examine the pricing effects. If you do get a chance, please put your numbers into the shared Google spreadsheet:

At the start of the class, we looked at the process of a sum of the parts valuation, taking United Technologies 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.

Attached: Post class test and solution


For the moment, I expect that you are working on the mystery project. I don't have much specific advice for you on the project, but remember that your mission is to do a relative valuation (not an intrinsic value). That gives you a lot more leeway in how you deal with items. For instance, if your were doing DCF valuations, you would have to value the employee options, using option pricing models, and subtract from the value of equity to get to value of common stock. With multiples, you may adjust for options much more casually (adjusting the number of shares for options outstanding, for instance). It will also mean that if you do not have the data to do something correctly, you may have to settle for an approximation. In case, the confusion about the due date is still persisting, the mystery project is due on November 14 at 5 pm.

I have also put up a webcast that is more statistics than finance about how to look at data and try to evaluate relationships between variables. I use the banking sector to illustrate my case but I hope that you find it useful for both your mystery project as well as for your overall project. If you are solid on your statistics, you can skip this webcast, since you already know everything that I am saying. If you need a quick review of the process, I think it will be useful.
Start with the webcast:
Download the slides:
Here is the raw data:
And the descriptive statistics:


I hope that your weekend is going well. Last week, we started on the challenges associated with valuing private companies and the newsletter reflects where we are in the class. Next week, we will get started on packet 3. Since I don’t find the bookstore to be timely in getting packets ready, I would be grateful if you can download the packet from the link below and print it off for yourself:
If you really are unable to do this, I will make a few copies of the packet for you to pick up in class next week!

Attached: Weekly Newsletter #9

11/9/14 Tomorrow, we will complete our discussion of private company valuation by looking at how to cost out illiquidity and value companies for IPOs. We will then start on real option valuation and while I am sure that you remember your option pricing models, I will assume nothing and do a quick review of option pricing before jumping into the fun stuff. I hate to be a nag but please print off the third lecture note packet soon. Here is the link:

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. Until next time!

Attachments: Post class test and solution


I know that you are busy with the Mystery project, but this week’s valuation of the week is a fun exercise, especially if you are a sports fan. It was a triggered by an annual event, Forbes publishing its list of most valuable NFL franchises, with the Dallas Cowboys at the top of the list at $3.2 billion, followed soon after by a speculative piece in Business Insider upping that value to $ 4.8 billion. You can get the full story by going to this link:

There is not a whole lot of information on these teams and doing a full intrinsic valuation may not be possible, but there is information that you can use to price sports franchises. If you want an extended discussion of this process, please read my blog post on valuing the Clippers at:

You can pick your sport of choice and download the raw data. Pick your favorite team and value it.
NFL raw data: http://www.stern.nyu.edu/~adamodar/pc/blog/NFLrawdataNov14.xls
NBA raw data: http://www.stern.nyu.edu/~adamodar/pc/blog/NBArawdata.xlsx
MLB raw data: http://www.stern.nyu.edu/~adamodar/pc/blog/MLBArawdata.xls
NHL raw data: http://www.stern.nyu.edu/~adamodar/pc/blog/NHLrawdata.xlsx
European Soccer raw data: http://www.stern.nyu.edu/~adamodar/pc/blog/eurosoccerrawdata.xlsx
IPL (Indian Cricket) raw data: http://www.stern.nyu.edu/~adamodar/pc/blog/IPLrawdata.xlsx
Once you have picked your franchise and valued it, go to this shared Google spreadsheet and put in your franchise and its assessed value in it.


In today's session, we tried applying (with mixed results) option pricing to value 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. In general, you are on pretty weak ground in using option pricing to value viable patents but it may be more useful in valuing non-viable patents in risky businesses.I have attached an option valuation spreadsheet that you can use to value patents as well as the post class test & solution. Until next time!

Attachments: Post class test and solution, Patent valuation spreadsheet

11/12/14 Sorry to hit you with a second email on the same day! I know that I have piled a lot on your plate this week, with the mystery project and the quiz. If you are interested, there is a review session up for the third and final quiz, which will cover lecture note packet 2:
Webcast for review session: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz3review.mp4
Presentation for the review session: http://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz3review.pptx
Past Quiz 3s: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
Past Quiz 3 solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xls
Please ignore any option problems that you may see on these quizzes. They are not covered on your quiz 3. And if you get a chance, try tthis week's challenge. It can help you at least on the private company valuation piece.
11/13/14 I hope that your mystery project is progressing. The deadline remains tomorrow at 5 pm. When you do submit your project, though, please follow these guidelines:
1. Electronic format: Please try to create a pdf file of your submission. It is easier for me to work with, comment on and grade.
2. Cover page: On the cover page, please include the names of everyone in your group (in alphabetical order) and the following information: the multiple or multiples you used, your five cheapest stocks, your five most expensive ones and your buyout target.
3. Format: Please keep your write up short and to the point. Explain why you picked the multiple that you used, how you used that multiple to find cheap and expensive stocks and what process you used to find your buyout target. Should not take more than 2-3 pages.
4. Excel spreadsheets: You don't have to add on all of your excel spreadsheets and worksheets.
5. Mail subject: In the subject, please enter "No mystery here", when you send your submission.
Thank you !

I know that you have absolutely no time for this, but just in case, I have a webcast on valuing patents as options:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/optiontodelay.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/optiontodelay.pdf
Spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/productoption.xls

For the quiz on Monday, we will again have two rooms, and here is my attempt to be even handed and spread the room burden. If your last name starts with Go to
G - L KMEC 2-90
A-F, M -Z KMEC 2-60
This way, everyone (I think) will have had a chance to take at least one quiz in KMEC 2-90 (though I don’t know whether that is a prize or punishment).


By now, you should have your mystery projects back. If you have not, please send it to me again. Looking over your analyses, here are some of the overall impressions I have:

1. Multiple used: The two most widely used multiple was EV/EBITDA, followed by PE. 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) and (c) EV/EBITDA neutralizes differences in capital structure. I think that these are all legitimate factors. A few groups mentioned that they were using equity multiples because you 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 two groups that used combinations of multiples and figured out creative ways to reconcile their choices. There were also a few groups that ran separate regressions within each sector and picked under and over valued companies on that basis. Two caveats, if you do this. The first is that some sectors have only 20-25 firms and you have to be careful about not having more than one or two variables in your regression. The second is that if you use equity multiples in some sectors and enterprise values in others, it can create a bit of a mess since you cannot percentage value differences directly, if some are equity value differences and some are enterprise value. The cleanest way to do this (and a pain to do) is to use the enterprise value multiples to get estimated enterprise values and then add cash and subtract debt to get to equity value.

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. Six 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.

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. However, there were some companies that showed up more frequently than others.
Company # Groups
Gazprom 18
SAIC Motors 14
Hyundai Motor 12
Lukoil 10
Delta Airlines 6
Tata Motors 5
McKesson 5
I am not going to be rushing out to buy Gazprom or Lukoil but they look incredibly cheap. The other companies on the list may need to be checked out.

For the overvalued companies, here were the most common choices:
Company # Groups
Qatar Industries 11
Naspers 10
Regeneron 9
Illumina 8
Yahoo! 8
Deere & Co 7
GE 7
Adobe 6
I am not selling short on Qatar Industries, since it is backed by the government. As a Yahoo! stockholder, it upsets me to see them on the list but the reason is simple: the enterprise value includes the values of their Alibaba and Yahoo! Japan Holdings. I wonder whether there is something similar happening at Deere & Co.

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. There was a scattering of companies that were choses. Only one company, Micron Technologies, was picked by more than two groups (three). 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. If you get a chance, please browse through it.

Thank you for the work you put into this project. I appreciate it.


I hope that you are having a good weekend (I know that I have ruined some of it, but at least its sunny). Last week, we completed private company valuation on Monday (by looking at IPO valuation) and then launched into our discussion of real options, first by setting the table on option pricing and then by looking at the option to delay. We used that option to value patents and natural resource reserves (undeveloped) on Wednesday. If you do get a chance, please watch the valuation tools webcast for this week. Next week, we have the quiz on Monday and will complete the discussion of real options.

Attachment: Newsletter #10


Your quizzes are done and can be picked up in the usual spot. I have also attached the solution and the distribution. If you have any questions, I will be in tomorrow. Drop by!

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


In case you are still interested in valuation, this week I venture into the darkest reaches of valuation where country, company, currency and commodity risk all co-exist as I value Vale (a Brazilian mining company) and Lukoil (the Russian oil company). You can start with this post:
You can then download the financial data for both companies (in US dollars)
Vale financial summary: http://www.stern.nyu.edu/~adamodar/pc/blog/ValeBloomberg.pdf
Lukoil financial summary: http://www.stern.nyu.edu/~adamodar/pc/blog/LukoilBloomberg.pdf
You can top it off with the valuations of both companies:
Valuation of Vale: http://www.stern.nyu.edu/~adamodar/pc/blog/ValeNov2014.xls
Valuation of Lukoil: http://www.stern.nyu.edu/~adamodar/pc/blog/LukoilNov2014.xls
I find them so grossly undervalued that I keep thinking that I might have missed something. So, please take a look at the spreadsheets and the valuations.

And if you are interested enough to give it a shot, enter your numbers in the Google shared spreadsheet:
Until next time!


In today's class, we looked at equity in a publicly traded company as an option, and argued that the optionality increases as the company's earnings health deteriorates and its debt increases and becomes more long term. In the process, we rethought what it means to go bankrupt, how to direct investments in distressed equities and how risk affects value. We then started the discussion of acquisitions, with the depressing evidence that most acquiring companies don’t gain from acquisition either at the time of the acquisitions and in the aftermath. If you are interested, I did a series of posts on acquisitions in December 2012 on my blog:
HP’s deal from hell: http://aswathdamodaran.blogspot.com/2012/11/hps-deal-from-hell-mark-it-up-and-write.html
Acquisition Archives: Winners and Losers: http://aswathdamodaran.blogspot.com/2012/12/acquisition-archives-winners-and-losers.html
Acquisition Hubris: Over confident CEOs and Compliant Boards: http://aswathdamodaran.blogspot.com/2012/12/acquisition-hubris-over-confident-ceos.html
Acquisition Advice: Big deal or good deal? http://aswathdamodaran.blogspot.com/2012/12/acquisition-advice-big-deal-or-good-deal.html
Acquisition Accounting I: Accretive (Dilutive) Deals can be bad (good) deals: http://aswathdamodaran.blogspot.com/2012/12/acquisition-accounting-i-accretive.html
Acquisition Accounting II: Goodwill, more plug than asset: http://aswathdamodaran.blogspot.com/2012/12/acquisition-accounting-ii-goodwill-more.html
Acquisition Alchemy: Creating value from deals: http://aswathdamodaran.blogspot.com/2012/12/acquisition-alchemy-creating-value-from.html
I have added the weekly challenge for the next week and a half on to this email, though I am a realist and expect little action on this front. Finally, I will be posting a to-do list for the project tomorrow, for those of you who want to use the next week to catch up. The post class test and solution are attached.

Attachments: Post class test and solution


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.

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 2014 or some earlier date)
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 December 5, 2014 (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 8, at 5 pm. A pdf 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 four days later (on December 12, 2014)


If your company is the one that meets the equity-as-option test (losing money, lots of debt), you are probably not happy. However, it is really not an involved exercise. To assist you, I did put up my latest valuation tools webcast, on valuing distressed equity as an option. I used Jet India, an Indian airline with a history of losses and a mega debt load to illustrate the process. You can start with the webcast below:
The financials for Jet India are contained in this sheet:

The DCF valuation that you need to get your option model started is here:
The value of Jet India's equity as an option is contained in this spreadsheet:
It is pretty straight forward and may be useful. Until next time!

Also,I know I have been harassing you with emails all semester. You will get no emails until next Saturday (I promise)!


Welcome back! I kept my side of the bargain. No emails for an entire week, but I will have to make up for it in the next few days. I am attaching the newsletter to remind you more of where we are in the class than to report news. We are into the home stretch of the last lecture note packet. On Monday, we will talk about acquisitions and the valuation or misvaluation of synergy and control. On Wednesday, we will take a different perspective and examine how we can change the value of a business. I hope that you will find that useful, especially if you are planning to run your own business or be in consulting. Finally, I don't meet to touch any sore spots, but if you have not been working on your project, it is time to turn your attention to the to-do list I sent before the break that I am reproducing below:

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. (Note: If you have a young or distressed company, the market regressions can yield strange values. Don’t freak out. You can use forward numbers (from your DCF) to get a forward multiple and value or you can estimate a market-based value and tell me that you don’t plan to use it in your recommendation).

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 on December 5 (not in January 2014 or some earlier date)
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 December 7, 2014 (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. (I had originally specified December 5, but that is probably too tight a deadline. Please get it to me as early as you can but the latest has to be around 8 pm on December 7).

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 8, at 5 pm. A pdf 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 four days later (on December 12, 2014).


I think that thanksgiving week is now officially over and I can go back to inundating you with emails. First, and on the very remote chance that you actually tried the weekly challenge, I have attached the solution (with the challenge, in case you have forgotten both). I am also sure that you are looking forward to being back in class (NOT!!! But let's make believe!)... In tomorrow's class, we will look at acquisition valuation. Rather than have a start of the class test, like we usually do, the test will run through the entire class. While the questions that will be posed are straight forward, it may be helpful to take a look at the questions before class. Should take only a few minutes of your time and will give you a head start on the class.

Attachment: Weekly Challenge #10 Solution


Just a reminder, in case you missed it yesterday. In today’s class, we will be looking at acquisition valuation. If you get a chance, please take a look at the attached set of questions. They should take only a few minutes to do and will help frame the class.

Attachment: Acquisition 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 session, 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. If you get a chance, take a look at a big deal and see if you can break it down into its components.

Attachments: Post class test and solution


I know that there is little chance that you will be able to look at this valuation, but if you still have questions connecting narrative to numbers, I hope it will help, The company is one that I have valued before, Uber, and it is fascinating simply because it so early in the process with so much possibility and potential that you can write almost any narrative you want. Start with this blog post that I had on Uber back in June, when a VC capital infusion valued it at $17 billion:
Then, follow up with this post that I wrote today (in response to another news story of a new VC infusion valuing the company at $40 billion).
You will notice that I am doing very unusual in this valuation and not giving you my estimate of value. Instead, I will set up the architecture to connect narrative to numbers and use your choices to estimate your value for Uber. This way, if you don’t like the value, you cannot blame me.

You can download the spreadsheet that contains the valuation by clicking below:
I am planning to post this on my blog and invite people to value Uber and put their values down into a Google shared spreadsheet. You can get the process started by going to:


In today's class, we completed our discussion of acquisitions by looking at the types of acquisitions most likely to create value. To start our discussion of value enhancement, 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. I have attached the post class test and solution.

Attachments: Post class test and solution


I know exactly what you are working on and will not waste too much of your time. As you get ready to pull your numbers together, here a few last notes:
1. Discounted cash flow valuations: You do not have to include the gory details of your DCF (like spreadsheet print outs). Just summarize the DCF, with the model you used, the inputs into the model and your value per share at the end.
2. Relative valuation: Again, I don’t need the raw data or the gory details but I do need to see the multiple you used, a description of the comps (though you don’t have to give me the entire list), the process by which you arrived at your relative value (sector average, sector median, a regression, something else). If it is a regression, please provide the key numbers on it (t statistics, r squared).
3. Market regression: If you have a money losing company and you plug in today’s numbers for that company into a market regression, you will get strange output. My suggestion is that you use your forecasted margin /ROIC/ROE in the regression to get a forward value and back into a relative value.
4. Don’t forget the recommendation. It is the icing on the top.

When your summary is ready, please send it in (I am attaching the spreadsheet again) to me with the subject “The end is near”. While I would like the summary for the entire group, I will take what I can get. So, if three of a group of five already have the numbers, send me the three as soon as you can and the two others can send their summaries later. When the final project is ready for submission, please send it in with the subject “The Grand Finale” on it.

12/5/14 The first few summaries are coming in and I thank you. Through the rest of the weekend, I will keep you updated on the progress, partly to keep you in the loop and partly to nag you to get your numbers in, if you have not already. As I mentioned in class on Wednesday, I need the numbers to pull together the last session, where you will see the results of your valuations, including the ten most under valued and over valued company. I hope to have the presentation ready by Sunday midnight and get it to you before class on Monday. Even if you have been taking the class virtually for the last few weeks, please do come to class on Monday.
Summaries received: 9
Number to come: 163
12/7/14 We are almost there, with 142 summaries in and 30 to go and I am sure that I will get most of them by tomorrow morning. I plan to wait until my commute tomorrow to pull the numbers together and prepare the final presentation. I will send the presentation to you by 9 am and try to make copies before class. Please, please come to class tomorrow, even if you have become used to the webcasts. I hope to make the class memorable and it will one part review of the material, one part assessment of what you found and one part philosophical closure.

Thank you very much for sending your summaries in. I have almost the entire class in the final spreadsheet, which I am attaching. I am also attaching the presentation for today. The good news is that I was able to make copies for everyone who will be in class (and I hope that you are going to be there).

Attachments: Closing presentation, Project summaries

12/8/14 Thank you for being at the closing class.The closing presentation and the summaries of your valuation findings (for the entire class) are available on the webcast page. If you are on the list of the ten most undervalued companies and are buying your recommended stock, please let me know. I may very well join in.
On a different note, the exam is scheduled for Friday from 1-3 in two rooms, with the following seating arrangements:
If your last name begins with Go to
J- P KMEC 2-90
A- I, Q-Z KMEC 2-60
I have a review session I put together focusing primarily on real options, acquisition valuation and value enhancement which will be 60% of the final exam. You can find it by going here:
Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valfinalreview.mp4
Presentation: http://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valfinalreview.pptx
All of the past finals and solutions are online. You can find them by going to:

Your projects are waiting in my inbox and you should be getting them sequentially as I finish grading them. In the meantime, two quick notes. The first is that Media had trouble with yesterday’s class and the webcast is still not up. They are working on it and the link will be up as soon as it is ready. The second is a reminder to get your CFE for the class done. You have a short window, from today through Thursday at midnight. Since it will take you only a few minutes to do, please do it now:
Student Instructions for Completing Online CFEs

Login to http://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password.
Select the CFE that you wish to complete.

12/9/14 The link to the closing session webcast is up but there is some bad news. Due to a recording snafu, the first 25 minutes did not get recorded. I am sorry but you can still pick up on the fourth layer of hell (if you have no idea what I am talking about, check the presentation for the class).
12/10/14 I think all the projects have been graded and returned by now. If you have not got yours back, check with your group (since some of you did not cc everyone in the group). If no one has got it back, just let me know and I will check through my emails. I know that you are busy and I hate to be a nag, but please do remember to do your CFEs. The instructions are below again:
Login to http://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password.
Select the CFE that you wish to complete.
Also, just in case you missed it, here are the seating arrangements for the final exam:
On a different note, the exam is scheduled for Friday from 1-3 in two rooms, with the following seating arrangements:
If your last name begins with Go to
J- P KMEC 2-90
A- I, Q-Z KMEC 2-60

The final exam is almost here and a few last notes.
1. CFE: Just in case you have not done your CFE yet, it is time to finish it. The window will close by later today. Here are the instructions:
Login to http://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password.
Select the CFE that you wish to complete.
2. Seating: The seating arrangements for the final exam are below:
If your last name begins with Go to
J- P KMEC 2-90
A- I, Q-Z KMEC 2-60

3. Calculators, iPads and Normal Distributions: It is open book, open notes and you can use your iPad for reviewing lecture notes but not for running Excel. I know that the option problems require you to use a cumulative normal distribution but a paper version of the distribution will be provided to you. In case you are wondering what I mean by a paper version, see the attached. You can use the nearest number on the table to get your N(d). Thus, if you get d1 = 0.18, you can use N(d1) = 0.5793, corresponding to N(.20). Your answers will be off by a little, but I am okay with that.


The final exams are graded and can be picked up in the usual spot. If you don’t know where that is, I don’t think you will be picking up your final anyway. The solution is attached, with the grading template. Just a couple of quick notes about the exam questions.
Timing: Unlike some earlier exams, I was pretty precise about the whether the earnings I was giving you were for this year or next year. The reason it matters is that if the numbers are this year’s numbers, you need a (1+g), as was the case in problem 4, but if they are next year’s, you don’t, and that was the case in problem 3. Problem 1 was ambiguous, since you had to normalize income, but since you cannot normalize last year’s income, it is probably better to think of it as next year’s income. Whatever you did, I cut you some slack on this one and gave full credit, but please keep that rule in mind for valuation in the future.
Cost of delay: This is a tricky and messy measure. In problem 5a, there is clearly a cost of delay since the clock on exclusivity is running down and every year you wait is one year less of exclusivity; you have the license for only twelve years. In problem 5c, it is debatable. On the one hand, the cash flows are perpetual and waiting a year does not have as large a cost attached to it. On the other, it is generating cash flows, and by waiting a year, you lose those cash flows, resulting in a cost of delay of 10%. I gave full credit to the zero cost of delay option valuation. On the cost of delay valuations, I gave full credit only if you carried your answer to its logical limit. The value that you get for the expansion option is $331 million, with the cost of delay, but the valeu of expanding immediately is $500 million. Logically, you then have to argue that there is no optionality and that the value of the acquisition is 1500 + 500 = 2000. I know it sounds like I am nitpicking, but this is the essence of an option, which gives you the right to exercise, if you so choose.
As always, if you have any questions about the final exam, I will be around for much of the rest of the week.

Attachment: Final exam solution


I hope you are done and are out celebrating. However, just in case you still care about grades, yours just went online. Since many of you are graduating, this will be my last email to many of you. I want to to wish you the very best with whatever you plan to do with your lives. I hope your "job" brings you as much joy as mine has to me. If you enjoy what you are doing, you will never have to work a day in your life. I mean it when I say that you have my email address for life and you can bounce off any questions, queries or issues that you have with corporate finance, valuation or the most valuable sports franchises in the world (the answer to the last is always the "Yankees"). It has been a pleasure having you in my class for the last semester or two.

And just in case, you need a valuation fix... here are some links:
Website: http://www.damodaran.com
Blog: http://aswathdamodaran.blogspot.com/
Twitter feed: @AswathDamodaran (Do your part to advance me to Lady Gaga status...

If you have any questions about your grade, use the attached spreadsheet to see where you ended up. Have a wonderful holiday season and a serene break!