The emails for this class will be collected on this page, arranged chronologically. Have fun with them!
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 $51 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? Is the unraveling of the Chinese market complete and why should we care, if we don’t invest in Chinese stocks? If you have not visited my blog, I have or will be putting my thoughts down on these and other questions:
1. What is this class about? If you are new to valuation and did not take corporate finance with me, you are probably wondering (and perhaps having nightmares about what this class is about). To put your fears at rest, I have put together a very short YouTube video on the class to come. If you have a few minutes, please take a look at it since it may clear up some misconceptions about valuation and give you a sense at least of what this class is about:
2. 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
3. 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
4. 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
5. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store. As an alternative, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. 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". Of course, if you have money to throw around, you can buy all four and do a compare and contrast. If you don’t have any money, you can get by without any of them.
6. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) in developing a valuation app for the iPad or iPhone that you can download on the iTunes store:
7. 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 another email about other online resources 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.
One of the themes of this class will be that while your valuation looks like a collection of numbers, the story that holds these numbers together is the glue. Consequently, to get a handle on valuation, you have to learn to navigate that space between stories and numbers and your skills have to be broad. I know that you are still on break and that the last thing you want to do is reading, but if you do get a chance, please read this post that I have on my blog:
Another theme is that you should not be shy about challenging conventional wisdom, even when it comes with impeccable logic and backing. In this post, I take on the notion that CAPE, a market metric that was developed by Robert Shiller (Nobel Prize winner and bubble forecaster extraordinaire), is an indicator of market pricing.
Just a few quick notes leading into class two weeks from now
The clock ticks on and summer is drawing to a close. Hey, hey… I am just the messenger, not Father Time. Anyway, a few last notes before class starts next week.
I look forward to seeing you in class a week from today in Paulson at 10.30 am. Have a great Labor Day weekend and enjoy your last few days of summer!
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 lemmingitis) 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:
It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
On a different note, I violated one of my writing rules, which is to never blog when you are outraged, after I read the Tesla prospected for Solar City. The post is below:
Finally, this is one of the few forums where you get much of the second year MBA class in one room. If you have announcements to make, there is a sign-up page on Google:
|9/9/16||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. If you are an exchange student, please find out your Stern email address, since you will need it to tap into Capital IQ.
I did not mention this in the opening session but at the start of every class for most of the semester (other than the three quiz days), there will be a start of the class test, where we will look at questions that preview the material that is coming in the rest of the class. (I know… I know.. This sounds backward, but trust me on this one).We will start class tomorrow with a series of scenarios, where you have to decide whether you will be biased to push your values up or push them down. To give you chance to look at the scenarios before you get hit with them, I am attaching the start of the class test for tomorrow. With each one, think of the direction of the bias and also think about the mechanism that you will use to bring that bias into your numbers. (As an owner, you may inflate the market potential for your product..)
Attachment: Valuation bias: A test
Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. Since I mentioned Carl Icahn and Bill Ackman as hostile acquirers (catalysts), you may want to look at Herbalife, the company that Ackman has targeted as being over valued and Icahn did for being under valued. See if you can get a list going of how each is trying to be the catalyst for the correction... and think about the dark side of this process.
We then started our discussion of intrinsic valuation, with a simple experiment on valuation, which led to three propositions about valuation. In the course of that discussion, I mentioned the weapons of mass distraction that people throw at us, as work through the numbers. If you get a chance, take a look at this post I have on the topic:
|9/13/16||It is time for the first valuation of the week. Before you freak out and have conniptions, let me remind you of what I said in the first session. Valuation is learned by doing. So, give this valuation is your best shot and work with what you feel comfortable doing right now (which may be very small and incremental). To make this process a little more fun, I picked a company that you have all (I am sure) read about and have some prior views on, Tesla. My suggestion is that you start with this blog post from a couple of months ago:
Then, follow up by downloading the excel spreadsheet with my valuation of Tesla, (where I estimated its value to be $151.85, which would have made it about 44% over priced on July 14, when Tesla was trading at $221).
The stock is now down to about $195 and there have been no new financial statements since this valuation. If you do want an updated set of accounting numbers for Tesla, here is my Capital IQ download for Tesla.
Give the valuation your best shot, even if all you do is open my spreadsheet and change only one number. Once you have a value for your company, go into this Google shared spreadsheet and enter your value and the current price.
Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate.
I 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:
In class today, we started with the claimholder consistency principle, arguing that there are two ways to value equity: discount cash flows to equity at the cost of equity or discount cash flows to the firm at the cost of capital and then subtracting out debt. Done right, I argued that you should get the same answer. I hope that you had a chance to try the first weekly challenge. It starts simple but it will test you on your implicit assumptions about valuation. Until next time!
Attachment: Weekly challenge #1
I know that it is early in the semester but this once-a-week sessions for the first four weeks can lull us into a false sense of complacency. So, please find a group and company to value. If you have already, here is the first order of business:
On a different note, you should have got the weekly challenge in your email yesterday. If you have no idea what to do next, here is what I would suggest. Give it your best shot but don’t send your answers to me. On Sunday, at about 6 pm, I will post my solution to the weekly challenge. You can check your answer against it. There is no grade attached to this process and I will not force you to do it, but it will help understand valuation better and perhaps get a start on getting prepared for the first quiz. Until next time!
|9/17/16||Just two quick notes. The first is that I did put up an in-practice webcast yesterday (but did not get a chance to let you know). It is a very basic webcast on how to read a 10K, using P&G as my example. The links are below:
Downloadable video: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Reading10Knew.mp4
YouTube Video: https://youtu.be/UzUJzdn7c2w?list=PLUkh9m2BorqmRAGzJb5OIvTAKZZu9HWF-
P&G 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/Reading10KPG.pdf
P&G Valuation (excel spreadsheet): http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls
Second, I have attached the first newsletter for this class. Not much to report but think of it as a roadmap of where we are and where we plan to go.
First things first. This week, we will be delving into the mechanics of discount rates, starting with the risk free rate and then moving on to the equity risk premium. They are both central to valuation and we live in unusual times, where the former, in particular, is doing strange things. Additionally. I hope that you had a chance to try the first weekly challenge. If you did, you can check your solution against mine. Even if you did not, you can try the challenge now (or in the near future) and check out the solution.
Attachment: Solution to weekly challenge #1
We started the class by completing the discussion of risk free rates, exploring why risk free rates vary across currencies and what to do about really low or negative risk free rates. The blog post below captures my thoughts on negative risk free rates:
|9/20/16||This week’s valuation of the week is of a company that is a familiar one, for most of you. It is Netflix. The valuation itself is a bit dated, from February of this year, right after they filed their 10K for last year. The blog post that I posted at the time is at the link below, and I take a look at what I called the disruptive duo, Amazon and Netflix:
I will give away the ending. I valued Netflix at $61.44, about 30% below the stock price then of $87.40. You can find the valuation at this link:
Since then, Netflix has had two quarterly earnings reports and I have attached both the last 10K and the most recent 10Q below:
Last 10K: http://www.stern.nyu.edu/~adamodar/pc/blog/Netflix10K.pdf
Most recent 10Q: http://www.stern.nyu.edu/~adamodar/pc/blog/Netflix10Q.pdf
The stock is currently trading at $98. You can easily update my valuation to reflect the updated data and perhaps update the risk free rate as well and get your own value. If you do, the Google shared spreadsheet awaits you:
Give it a shot and see you in class tomorrow!
In the session today, we started by looking at the implied equity risk premium as of September 21 and I am attaching the implied premium spreadsheet for you to experiment with. After a brief foray into lambda, a more composite way of measuring country risk, we spent the rest of the session talking about the dynamics of implied equity risk premiums and what makes them go up, down or stay unchanged. We then moved to cross market comparisons, first by comparing the ERP to bond default spreads, then bringing in real estate risk premiums and then extending the concept to comparing ERPs across countries. Finally, I made the argument that you should not stray too far from the current implied premium, when valuing individual companies, because doing so will make your end valuation a function of what you think about the market and the company. If you have strong views on the market being over valued or under valued, it is best to separate it from your company valuation. Post class test and solution attached.
There is a lot of mythology about equity risk premiums and the best way to separate the truth from fiction is to look at the data. That is what we do in this week’s challenge. The attached dataset contains my estimates of implied ERP each year, with the T.Bond rate, the T.Bill and the Baa bond default spread each year. Your mission, if you accept it, is to play Moneyball with the data and to try and answer a few questions:
I had emailed you yesterday with the news that the audio for the last 20 minutes of class were not on the webcast. Since those 20 minutes are irretrievably lost to history, I decided that my best ploy was to actually recreate them in my office. So, I did a recording of the missing minutes in my office, with slides 72-78 (the no-audio slides). I then attached this video to the webcast from yesterday’s class (after chopping off the last 20 minutes) and reposted it to YouTube and to iTunes U. If you missed class yesterday or just want to review a portion of it, the “fixed” video can be found here:
On a different note, I want to check on where you are on the project. Assuming that you have picked a company, joined a group and downloaded the financials, I hope that you have estimated a risk free rat in the currency of your choice. Once you have that, please try the following:
|9/23/16||Two tools webcasts are up this week. The first one is on risk free rates and the second on implied equity risk premiums.
Risk free Rates
Moody’s ratings (3/13): http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/Moodys.pdf
Sovereign CDS spreads (3/13): http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/CDSfeb13.pdf
Implied Equity Risk Premiums
The supporting materials are below:
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 that you get a chance to watch one or both!
I hope that you are enjoying the weekend, with hints of Fall in the air (with the depressing reality that winter follows). This is perhaps your last weekend of relatively little to do before the &$%% hits the fan. So, if you have not found a group and picked a company yet, this is a good time to do that. Even better if you can pull up the financials and think about risk free rates and equity risk premiums. I have attached the newsletter for the week.
Attachment: Weekly Newsletter #2
First things first. The solution to this week’s challenge is attached. I hope that you got a chance to do it. If not, I hope that you get a chance to look at it. Looking forward to this week, we will start tomorrow’s class with the last piece of the cost of equity puzzle by looking at how best to measure the relative risk of an investment. We will look at the conventional measure, a regression beta, and why so many people find it problematic and solutions to those problems. We will them move on to cost of debt, which should take us a lot less time, and finally to cost of capital. On Wednesday, we will start on the key first step in cash flows, accounting earnings and the many fixes and updates that we have to make to the numbers we see in financial statements.
Attachments: Weekly Challenge #2a solution
Today's class represented a continuation of the discount rate discount rate. We started by reviewing the pitfalls of regression betas and went on to talk about bottom up betas, focusing on defining comparable firms and expanding the sample. I did make a big deal about bottom up betas, but may have still not convinced you or left you hazy about some of the details. If so, I thought it might be simpler to just send you a document that I put together on the top ten questions that you may have or get asked about bottom up betas. I think it covers pretty much all of the mechanics of the estimation process, but I am sure that I have missed a few things.
|9/27/16||In this week’s valuation, I revisit a company that I am biased towards and have valued multiple times in the last few years, Apple. The valuation that I have for Apple in May 2016 is at the link below:
The valuation reflects my assumptions about revenue growth, margins and cost of capital, all of which are estimates and subject to error. Rather than wave my hands or give you useless ranges (useless because they are so wide), I am going to draw on a statistical tool, Monte Carlo simulations, and add it to the valuation. I describe the process by which I did the simulation in this blog post:
To do this on your own, you will need to download the spreadsheet on a PC version of Excel (either on a PC or a Mac, running a PC front end) and then download Crystal Ball (you can download a trial version from Oracle). As you use Crystal Ball, you will probably find, like me, that most of the distribution choices look foreign to you (Quick quiz: What does the Bernoulli distribution look like?) and I have created a primer on distributions that I hope that you find useful:
If you do get a chance to try the simulation out, with your own assumptions, please go into the Google shared spreadsheet and enter your final numbers:
In today’s class, we started with computing costs of debt for companies without the usual crutches (traded bonds and ratings) and talked about synthetic ratings and default spreads. If you are interested in getting updated default spreads (on the cheap or free), try the Federal Reserve site in St. Louis:
We then moved on to getting the base year's earnings right and explored several issues:
I know that today’s discussion on leases and R&D, while intuitively simple, can be technically complicated. The best way to understand them is by doing them. So, with no further ado, here is this week’s challenge, entirely built around these adjustments. Hope that you get a chance to try it, since it may be good practice for the first quiz on October 10.
Attachment: Weekly challenge #3
We are done with the cost of capital portion of the class and while I know that this is probably unrealistic, it is a good time for you to compute the cost of capital for your firm. If you have not started and are intimidated, try this paper that I have on estimating and using cost of capital
Two more quick notes. First, there is no class on Monday (10/3). So, have a long weekend, enjoy yourself and start on your work for the first quiz, which will be a week from Monday (10/10). The past quizzes for this class are at the link below. Stick with quiz 1 and use the most recent quizzes (perhaps the last 5-6 years) as indicators, since some of the earlier quiz 1s covered more material. The quiz will cover what we do through next Wednesday but it will cover everything through cash flows and perhaps the rudiments of historical and analyst estimates of growth (but no terminal value and fundamental growth questions). Second, I am not sure whether there was a snafu on the review session. I know that the class got moved to 2-65, but it looks like might have been other logistical issues. Let me know if there is an issue and I will try to resolve it.
On this weekend, when it looks like Fall has arrived, a couple of quick notes.
2. Newsletter for the week: This week, we finished our discussion of cost of capital and moved on to earnings and cash flows. The newsletter lays out that path and looks at the (shortened) week to come.
Attachments: Newsletter # 3 (October 1)
I hope that you are enjoying the long weekend, gray and cold thought it is. We have no class tomorrow and I have attached the weekly challenge solution. Give it a shot when you get a chance. It is good preparation for the first quiz, which is a week from tomorrow (October 10). For those who might have missed this, there are no make up quizzes. If you have to miss the first quiz for good reason (and I will cut a wide swath for good reasons), the 10% on the quiz will be moved to the remaining two quizzes and the final exam. So, it is not the end of the world!
Today's class covered a lot of topics, some related to cash flows and some related to growth. Let's start with the cash flow part first. I argued that capital expenditures should be defined broadly to include R&D and acquisitions, for consistency reasons. If you want to count the good stuff (growth) that comes from these investments, you have to also count the cost. To get from cash flow to the firm to cash flow to equity requires us to bring in cash flows to and from debt. While borrowing more can make your cash flows to equity higher, they also make your equity riskier, raising the cost of equity. The net effect of leverage on the value of equity can be positive, negative or neutral, depending on the firm and where it is in its borrowing cycle. On growth, we started with historic growth and quickly dispensed with the notion that it is a fact. Depending on how it is estimated (arithmetic vs geometric) and over what period, you can get different numbers. It is also thrown off when a company's earnings go from negative to positive and generally becomes lower as companies get larger.
I also mentioned forensic accounting in the context of accounting game playing. While truly extraordinary items are easy to deal with, accounting ploys to move expenses into the extraordinary column may require some detective work. For those interested in forensic accounting, here are a couple of references:
Finally, my long delayed valuation of Deutsche Bank is online. I know that this is a busy week and you probably won’t get time to get to it, but if you do, it is a fun valuation. Start with my story about Deutsche Bank and then review my valuation. I am planning to make a blog post tomorrow on the company. So, I would be much obliged if you can let me know anything that I could be doing differently:
|10/7/16||Just a quick note, since I know that you are busy preparing for the quiz. I just put up a valuation tools webcast on how to convert R&D expenses to capital expenses. The links are below:
How to capitalize R&D: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/R&D.mp4
Microsoft 10K 2011: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/R&D/Microsoftlastyear10K.docx
Microsoft 10K 2012: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/R&D/Microsoft10K.docx
Hope you get a chance to try it out.
Very quick note. The newsletter for the week is attached. Hope you get a chance to browse it, in the midst of preparing for the quiz.
Attachment: Issue 4 (October 8)
The good news is that the first quiz is over and I will let you know as soon as it is ready to be picked up. If you were able to hang in there mentally and physically, we continued our discussion of growth by first looking at the limitations of analyst estimates of growth and then examining 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 two 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? In the next session, we will continue this discussion. Incidentally, there is no class on Wednesday. The post class test and solution today is a little ahead of the notes, but I think you can handle it. See you next Monday!
The quizzes are done and can be picked up on the ninth floor of KMEC. As you come off the elevator, head towards the door to the reception but look to your right before you get to the door. The quizzes should be in two alphabetical piles. Please don’t mess them up or browse. I have attached the solutions to the quizzes with the distribution.
|10/11/16||This week, I decided to revisit one of my favorite haunts, Twitter, since it seems to be in the news yet again. Like everything else that this company tries, they seem to have mangled even being the target of an acquisition. You can start with this post that I had on Twitter at the start of the year:
That post contains my valuation from February 2016, when I estimated a value of $17.58 and the stock was at $14.31.
The stock price since has gone up, as high as $25 a week ago, but it is now back to $17.56 (No victory dances for me.. Pure coincidence). I revalued Twitter based upon trailing 12 month data and updated risk free rates at $19.77:
If you want to get the updated 10K and 10Q, you can get it at this link:
If you try your hand at the valuation and want to change my inputs, feel free and then enter your values in the shared Google spreadsheet:
As I mentioned in email yesterday, there is no class tomorrow. So have fun the rest of the week and don’t forget to pick up your quizzes.
|10/13/16||I know that the project is not even on your mind this week, as you get ready for the first quiz. However, they are not mutually exclusive. To the extent that your firm has operating leases or R&D, you should try capitalizing them and view it as prep for the final. If you can estimate the free cash flow to the firm and free cash flow to equity last year, you are well on your way.
Now that we are on to growth, you can try a couple of exercises with your company:
1. Compute historical growth, across different time periods, in different measures, and using arithmetic and geometric averages.
2. See if you can find analyst estimates of growth for your company and whether you can decipher what measure (revenues, operating income, net income or earning per share) the estimate is for.
Next week, we turn to the fundamentals that drive growth.
|10/14/16||Accounting returns can be messy and misleading but they are a key input into estimating growth and the value of growth. 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:
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
Its a beautiful weekend out there and I hope that you are not checking emails or reading newsletters. But if that is what rings your bell, the newsletter for this week is attached.
Attachment: Issue 5 (October 15)
|10/16/16||I am sorry that the last two weeks were so disjointed with one session a week and a quiz in the second session. We are now back on a twice a week schedule for the rest of the semester and I am glad since there is much to be done. This week, we will spend tomorrow’s session completing the discussion of growth rates and get into the discussion of the elephant in the DCF room, terminal value. In Wednesday’s session, we will finish the terminal value discussion, talk about how to pick the right model to use in valuation and then start on the loose ends in valuation. I hate to be a nag but if you have put your DCF valuation for the project on the back burner, please move it up your priority list. I know that it is daunting if you have never valued a company, but my suggestion is that you getting started on a base case valuation is the best way to conquer your fears.|
We started today’s class by talking about estimating sustainable growth in all its forms, from per share equity to operating income and closed the growth section by looking at the most general way of estimating cash flows, starting with revenue growth, moving to operating margins and ending with reinvestment. The heart of today's class, though, 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:
|10/18/16||As some of you might have read in the financial news overnight, Netflix had a monster quarter in terms of adding subscribers and the stock is up almost 20% today. It is a good time for me to revisit my valuation of the company that I laid forth in a blog post earlier this year:
In that blog post, I had valued the company at about $61 but the updated valuation reflects not only the new numbers since but a signal that my story for the company may not capture its growth potential. You can get my valuation of Netflix as of today:
If you want to check out the latest 10K, you can get it here:
The most recent earnings report (which came out yesterday, October 17) is at the link below:
Finally, if you want to change the numbers in my spreadsheet and make it yours, go ahead and then go to the Google shared spreadsheet:
In today’s class we started with a discussion of which model to use in valuing a company and then moved on to 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. I have attached the post class test and solution. On a different note, please do get a jump on the DCF valuation of your firm. The valuation is due on November 4 but only for feedback, not grading. So, don't feel the pressure to get it right. Just get it done. I have also attached two weekly challenge for this week, if you feel the urge to try them. If not...
|10/20/16||Please do get a jump on the DCF valuation of your firm. The valuation is due on November 4 but only for feedback, not grading. We have covered everything you need to do this in class from estimating the inputs to picking the right model. So, no reason to put it off any more.|
|10/21/16||In this week’s webcast, I look at the terminal value and how to run diagnostic checks on it to make sure that you have been internally consistent and grounded while estimating this number.
Sample DCF: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvalueDCF.xls
Diagnostic Spreadsheet: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/TermValueCheck/termvaluecheck.xls
I have attached the solutions to this week’s challenges and the newsletter for this week. I meant to send it out yesterday but was traveling back from Asia much of the day. This week, we will actually value companies (since we have not valued a single one this semester all the way through) but tomorrow will be for tying up loose ends and actually setting up the story telling process. On Wednesday, we will start with easy valuations and pick up steam with more difficult companies. Should be fun!
Today, we put the last three loose ends to rest. First, well looked at complex businesses and how to incorporate our concerns into value. The, we went back and looked at defining debt. While we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Next, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. If you are still a little shaky on why stock-based compensation should not be added back as a non-cash expense, please read this post:
We then started on the discussion of numbers and narratives, i.e., the process of connecting stories to valuations and used Uber as an example. If you are interested in reading more about this process, try this blog post:
|10/25/16||I decided to value a stolid (another name for boring) company this week, a German company called Henkel. You can find out more about them here at this Wikipedia page:
You can also get their financial statements for an extended period by clicking on the link below:
The reason that I picked Henkel was because I wanted to do a valuation in Euros, with the German Euro bond rate at 0.03%. There is a lot of mythology about how DCFs become impossible to do or impractical, when the risk free rate is zero or negative. So, here is my valuation of Henkel:
To see the effect of changing the risk free rate, please read this piece I put together on Henkel:
Finally, if you do feel the urge to play with the numbers and do your own valuation (perhaps at a negative risk free rate), enter your numbers into the Google shared spreadsheet:
In today's class, we started with a quick review of narrative changes, shifts and breaks and how earnings reports, in particular, can alter your narrative for a company. Since many of you will be dealing with earnings reports in the next couple of weeks, I thought you may find these two posts of interest in how narratives shift, and with them, values:
|10/27/16||So, where are you in the DCF process? I hope that you have picked a company, collected the financials and actually tried to do a base case. A piece of advice. Get a base case valuation going with just minimal information (last annual report or 10K) and come back to it with more details. I have reattached the valuation checklist I sent you a couple of weeks ago, since you may find it more useful now. In case, you have forgotten which spreadsheets work best if you want to start with one of mine, you should stick with the ginzu versions:
a. fcffginzu.xls: For a firm with stable operating income and return on capital: http://www.stern.nyu.edu/~adamodar/pc/fcffginzu2016.xls
b. fcffsimpleginzu.xls: For a money losing firm or a high growth firm or want to allow your margins to change over time (This is the most general model and you can use it for almost any non-financial service firm): http://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzu2016.xls
c. fcfeginzu.xls: For valuing a firm using the FCFE approach: http://www.stern.nyu.edu/~adamodar/pc/fcfeginzu2016.xls
d. divginzu.xls: for financial service firms and perhaps REITs/MLPs: http://www.stern.nyu.edu/~adamodar/pc/divginzu2016.xls
The valuations are due for feedback by November 4 (and I apologize for the mixed messages on the date of submission) and I want to reemphasize it is not for a grade. You are not obligated to make changes based on my feedback and view them just as suggestions. When you do turn in your DCF for feedback, please use “My Perfect DCF” in the subject so that I can put it into the right mailbox.
|10/28/16||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 last week's weekly challenge was built around options. After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below:
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 know that you are busy preparing for quizzes and perhaps even working on your valuation. If you do get a chance, check out the latest newsletter.
Attachment: Issue 7 (October 29)
In today’s class, we started on the dark side of valuation, where we value difficult-to-value companies. We started the valuaton of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. I argued that to to value a young company, you have to visualize what you see as success for it and work backwards to get the numbers by year, and adjust this valuation for the likelihood that the company will not make it. We then moved on to companies in transition and how you can arrive at two values for these companies: a status quo value and a changed-management value and how you have to take an expected value. We will continue on the dark side on Wednesday, starting with declining companies and moving through companies in different sectors.
|11/1/16||No valuation of the week this week, since you have one you should be working on right now. The DCF is due by late Friday (try to get it in by 5 pm, but if not, 6 pm or 7pm..). A few notes on the submission:
1. Individual, not group: This portion of the submission can be done individually and should be done individually rather than as a group, The feedback is specifically for you.
2. Submission content: An Excel spreadsheet will do, with notes embedded on your story and any specific assumptions
3. Submission subject: Use “My Perfect DCF” in your subject
Remember that this DCF is for feedback, not a grade, but work on it as if were your final valuation. That way, the feedback will be more focused and perhaps more useful.
In today’s session, we continued our travels on the dark side, starting by valuing financial service companies (where loss of trust has driven us from dividend discount models), moving on to emerging market companies (with corporate governance, cross holdings and country risk all playing starring roles) and then looking at companies with intangible assets (where capitalizing R&D-like expenses can increase or decrease value) and to commodity and cyclical companies. I suggested that you use Monte Carlo simulations to bring in uncertainty into your valuations. I hope that something that we did today helps you on your DCF valuations, which are still due on Friday.
About a fifth of the class has sent their DCFs to me and I will try to get those back by the end of today. If you are still working on your DCF, the window remains open and you can submit them through tomorrow. To put a bow on this part of the class, I have a blog post that you may find enjoyable about dysfunctional DCFs.
On a different note, I have put the review session for quiz 2 (scheduled for November 9) up online (on the webcast page for the class) with the presentation. The links are below:
I am piling on now, and I am sorry. However, the clock is running and we do have stuff to get done. Two quick notes. First, next week, we will be starting on pricing and using multiples. One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post:
Now, on to the other important note. As promised (or threatened), I will be getting your mystery project to you on Monday. It is a group project, due on November 21, just before you take off for Thanksgiving break. I know that I am asking a great deal of you, with the DCF due today (I see about 200 waiting for me, in my inbox), the quiz week and the mystery project a week and half after that. I thank you, in advance, for the work that you will be putting into it.
am about two-thirds of the way through the DCFs for feedback and you should get yours back sometime today or tomorrow, if you sent it. The latest newsletter is attached, if you are sick and tired of election news.
Attachment: Issue 8 (November 5)
By now, many of you (about 220, by my count) should have received back your DCF valuation back. If you have not received yours back, resend it since you may have just mangled the subject (My Perfect DCF). 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
Output page checks:
- If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital:
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.
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.
In today’s class, we started by looking at why the value and pricing processes can diverge and the difference between investing and trading. Value is driven by cash flows, growth and risk and price is driven by momentum, liquidity and herd behavior. A trader makes money playing the pricing game (buy low and sell high) and an investor from playing the value game (buy something when its price is less than your assessed value and then wait for the gap to close). Each side has its own weaknesses, but it is important that you decide which game you are playing and choose the right tools for that game. We then looked at the process of relative valuation (pricing) by examining what goes into a multiple. Starting on the process of deconstructing the multiple, starting by defining the multiple and checking to see if it is consistently defined and uniformly estimated. We closed the class by looking at the distributions of multiples (left peak, right tail and skewed) and how these distributions show up in the numbers.
I am piling on but I cannot help myself. I know that you are busy studying for tomorrow’s quiz but I had promised you a mystery project and I am delivering. The mystery project is a pricing project, not a valuation one. If you don’t get the distinction, rewatch yesterday’s lecture. The description of the project and the dataset that you will need to do it are both attached. This is a group project and the project report is due on November 21, 2016 by 5 pm. Until next time!
|11/9/16||I am sorry for the room confusion this morning. I would love to blame someone else but this one was entirely on me. After the quiz, we continued with our discussion of multiples by looking at an analytical device that can be used to find the drivers of multiples. With equity multiples, you go back to a simple equity DCF model (a DDM or FCFE stable growth model) and with some algebra make the equation an intrinsic one for a multiple. With enterprise value multiples, you go back to a firm valuation models and do the algebra. We even expanded the model to consider high growth companies and saw how changing the growth rate and risk can affect PE. We closed by looking at the perfectly mismatched stock, one with a low PE, high growth, low risk and high ROE. No post-class test or solution for this week!|
The quizzes are done and can be picked up at the usual spot (ninth floor of KMEC. look to your right as you come off the elevator). The solutions are attached and the grade distribution is also attached.
I just wanted to draw your attention to the mystery project which is now posted on the webcast page on the class and that I emailed to you day before yesterday.
Dear mr Damodaram, (One of hundreds of possible misspellings of my name.. Does not bother me in the least..)
|11/11/16||If you have opened up the mystery project, you probably also are recognizing that this is an exercise in working with data sets. I have 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:
Until next time!
The weeks are ticking by and I am reminded of this as I see that this is the ninth newsletter (and there are only twelve all together). I hope that you have had a chance to take a look at the mystery project and at the data that goes with it. Since it is due a week from Monday, I think it would be a good idea. Just in case your response is “what mystery project?”, I have attached both the project the data again to this email.Attachments: Mystery Project Description, Mystery Project Data
I was so fixated on sending you the mystery project attachments that I forgot to attach the newsletter which is attached now. On a different note, my blog post on the investing, pricing and value effects of the election are now up on my blog:
Attachments: Issue 9 (November 12)
In this session, we extended the discussion of the analysis of multiples by looking at PEG ratios, EV multiples and book value multiples. Each multiple, we argued, has a driver and companion variable.We then moved on to application and how best to find comparable firms and control for differences. At this point, you have the tools you need to price just about any stock (or asset). Remember that you are paying to heed to the market, controlling for differences as much as you can and hoping that pricing divergences disappear over time.
|11/15/16||I first valued Valeant on my blog in November 2015, when they were in the throes of a meltdown. My blog post is here:
Things went from bad to worse and the stock dropped to $27 in May 2016, when I revalued them again in this post:
I then bought the stock at $27 and needless to say, it is not one of my winners yet, dropping as low as $14 after its most recent earnings report. I did a valuation with the updated numbes from that report:
I decided to top the process off by doing a pricing of the company, relative to its peer group. You can read about what I did here:
If you want to play with the pharmaceutical company raw data, the spreadsheet that has the data is here:
Finally, if you want to go into the Google shared spreadsheet and enter your pricing judgment, go here:
In today's class, we closed the book on relative valuation by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. I found this link recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
We then moved on to asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation, and we will continue with this discussion on Monday. Just a head’s up that we will be starting on packet 3 in the next week. Post class test and solution is attached, as are the two weekly challenges for this week.
|11/17/16||I know that you just got your quiz back and have a mystery project to work on and Thanksgiving coming up and Christmas shopping to do. So, I would not blame you for putting the big project on the back burner. Assuming that you have done your DCF, and perhaps even sent it to me and received feedback, you can, if you have time, complete the pricing section of the project. This will require you to get on S&P Capital IQ and downloading raw data on your company and the peer group (and you will have to make judgments on what to include in this peer group). You can then go through the pricing exercise, standardizing prices (with multiples), controlling for differences in risk, growth or whatever else the market seems to be pricing in and makinga pricing judgment on your company. Don’t be surprised if you get a pricing judgment (that your company is cheap or expensive) that contradicts your DCF conclusion. You will have to pick but there is no better illustration of the difference between value and price than doing both a DCF and relative valuation.|
I have attached the newsletter though I seriously doubt that any of you will have the time to read it, given that the mystery project is due on Monday. I won’t butt in with great insights but I will make a few suggestions that may (or may not) help you on the project.
Attachment: Newsletter# 10 (November 19)
I hope that you are done or almost done with your mystery project. When you are ready to send it it, please put “No mystery here” and cc everyone in your group. It will help me keep things in order and send back my graded version to all of you at the same time. I have also, on the very, very tiny chance that you have tried the weekly challenges for this week, attached the solutions to the two challenges. Finally, this week is a short week. We have class tomorrow before Thanksgiving week kicks in. We will cover the rest of asset based valuation and a significant part of private business valuation.
In today’s class, we completed the last few strands of sum of the parts valuation (not pricing) and then started on the discussion of private companies. After laying down the base principle, which is that the fundamentals that drive private company value are the same that drive public companies, we began looking at why motive matters with private company valuation, since the same business can be worth different amounts to different buyers. In terms of specifics, we looked at the challenges of undiversified buyers, illiquidity and key person effects in private-to-private transactions and how they all go away when the buyer is a public company. Next session, we will start on valuing/pricing IPOs and then move on to real options (packet 3, if you have not printed it off yet). We have no class on Wednesday! Have a happy and safe thanksgiving!
|11/22/16||I hope that you are headed off to be with family and/or friends. I will leave you alone for the rest of the week, but just in case you decided to get some studying done for the third quiz which is a week from tomorrow, I decided to put the review session online. As you work through the past quizzes, remember that it will cover three topics, multiples (pricing), asset based valuation and private company valuation. Thus, it will cover all of packet 2. While that seems like a lot, a great deal of it is old wine in new bottles. The review session for the quiz and the presentation are available below:
Here are the links to past quiz 3s and solutions. As you work through, please remember to ignore the option-based problems that you may find on the earlier quizzes:
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
|11/23/16||By now, you should have your mystery projects back. If you have not, please send it to me again. It may be because you got the subject wrong on your email. Looking over your analyses, here are some of the overall impressions I have:
Multiple used: The two most widely used multiples were PE and EV/EBITDA, with a smattering of other choices thrown in. There were two sets of rationale used for the choice of multiple. The first were intuitive, with the primary argument for EV/EBITDA being that it was unaffected (or less affected) by leverage. The second were statistical, with high R-squared dominating the statistics. A few groups mentioned that they were using equity multiples because they were equity investors. I don't think that is necessarily the case. Equity investors can use EV multiples and back into a value for equity... There were a few groups that used combinations of multiples and figured out creative ways to reconcile their choices. There were also a few groups that ran the regression within each sector and picked under and over valued companies on that basis. If you followed this path, though, remember that your sample sizes drop off and you are perhaps altering you mission of finding the five cheapest and most expensive stocks.
Regressions: Almost everyone followed the script and ran the regressions, though the project did not actually require it. 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 (when the t statistics suggest low or no significance) rather than leave it in is the better choice. A few groups ran the regressions by sector or used sector dummies. While this makes sense, you have to be careful to make sure that you have enough data within each sector to sustain the regression. (The simple rule of thumb is that you can have one independent variable for every 15 observations. Thus, if your sample size is 35, you can have at the most 2 independent variables.)
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. Also, if you mixed EV multiples and PE in making your choices, the two are not directly comparable; a company that trades at an EV ratio 20% below its predicted value is more under valued than one that trades at a PE ratio 20% below its predicted (and I will et you figure out why). 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. There were a few companies that showed up on many lists, with auto companies showing up most frequently on the under valued list and Amazon and Netflix on the over valued list.
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 chosen. The two most widely targeted were Kroger and Allergan. 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.
I hope that you were able to get something of value out of the project. Screening is the name of the game in portfolio management and this project is just a small step towards how big data and big analytics are coming together (with mixed payoff
|11/27/16||I hope that you had a wonderful thanksgiving break and that you are back, rested and ready. Tomorrow, we will finish our private company valuation section, by looking at IPOs and VC valuations. We will start on the real options discussion. On Wednesday, we will have the third quiz from 10.30-11 and it will cover all of packet 2: multiples (pricing), sum of the parts valuation and private company valuation. After the quiz, we will take up the option to delay and use it as a vehicle to examine how best to value patents and exclusive licenses.|
In today's class, we put the finishing touches on private company valuation by looking at key questions that arise in private company valuation (illiquidity, key person etc.) and then looked 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. The third quiz will cover all of packet 2 and the seating arrangement is as follows:
|11/29/16||I know that you have a great deal on your plate both from this class and others and have neither the time nor the inclination to do other valuations on the side. So, to ease things, I decided to do a fun pricing this week, drawing on a post that I did two years ago when Steve Ballmer bought the Los Angeles Clippers for $2 billion.
Start with the post, since it not only has the valuation of the Clippers but my pricing, as well as data on NFL, MLB, NHL, Euro Soccer and Indian Cricket league teams, which should cover almost every sports fan in the class. Have fun with the data, but also recognize the possibilities. The sports business is now big-money entertainment and it is run badly and priced/valued abysmally. There is opportunity here, if you choose to take it.
It was touch and go, but I touched and went. I was able to finish all of the quizzes and they are ready to be picked up. I will be in Vienna for the next three days. So, if you have issues with the grading, you can either wait until Monday or send me a picture of your contested page and what you think I might have missed.
I know that your project has been on the backburner for a while, but please take a look at what is left. Broadly speaking, you have four more tasks to complete.
Attachment: Weekly Challenge #9
|12/2/16||I have a valuation tools webcast on using option pricing models to value patents and here are the links:
I hope that you find one or both useful.
The newsletter for the week is attached. Needless the say, the end is near and if you have been putting off finishing your project, this is a good week to get caught up.
Attachment: Newsletter #11 (December 3)
It is the second to last full week of the semester and I would like to tie up a few loose ends. First, I have attached the solution to this week’s weekly challenge. Second, this week, we will complete the discussion of real options by examining the options to expand and abandon tomorrow, as well as looking at financial flexibility and distressed equity as options. On Wednesday, we will look at acquisition valuation, with the intent of seeing why so many acquisitions go bad. Third, the project moves inexorably towards its end game and I thought you might like a list of to dos which you can either check off, if you are already done, or start checking off as you do them.
1. DCF Valuation
2. Relative valuation
3. Option valuation (tomorrow’s class)
5. Numbers to me!!!!
6. Final Project write up
7. Celebrate, but remember that your final exam is two days later.
We started today's class by looking at the option to expand, where your capacity to enter or expand into new (big) markets can justify up-front bad investments and then at the option to abandon poorly performing investments. We then valued financial flexibility as an option, and argued that it was worth more to capital-constrained companies with unpredictable and high-value-added investments. We continued with our examination of equity in trouble, debt-laden companies. Given that the equity in these companies takes on the characteristics of an option, we teased out three implications:
|12/6/16||For much of this class, we have talked about pricing as an alternative to valuation and how the two can yield different numbers. Thus, you can value a stock based on its expected cash flows or price it and get different numbers. There are some assets, though, where the only thing that you can do is price an asset. Here are some examples:
1. Gold: Gold is an asset that has been held by investors in their portfolios for millennia but do you value gold? The answer is that you cannot but you can price it, usually relative to paper currencies, with gold’s value increasing as your trust in paper currencies decreases. A few years ago, I wrote a post trying to price gold and you can read it here:
You can download the dataset that I used for my pricing, visit the Fed’s data site in St. Louis (FRED) and update the information through today; you can make your best pricing of gold.
2. Bitcoin: Much talked about, but how do you value Bitcoin? The answer again is that you do not. It is a digital currency and it can be priced against other currencies. Again, I try my best in this post:
Again, give it your best shot.
In fact, you can extend this discussion to include collectibles (baseball cards etc.), art and wine.
I am sorry if you found today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's sessions, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. There are ways to succeed, though, and that is to go where the odds are best: small targets, preferably privately held or subsidiaries of public companies, with cost cutting as your primary synergy benefit. If you get a chance, take a look at a big M&A deal and see if you can break it down into its components. I did not get to look at the Inbev/SABMiller in class but rather than do it in class, I am going to offer you the blog post that I did on it when it happened:
If you have not started the project yet, please do. If you have already completed, kudos. If you are in the middle, here is the to-do list that I sent out on Sunday, just to keep you motivated.
2. Relative valuation
3. Option valuation (tomorrow’s class)
5. Numbers to me!!!!
6. Final Project write up
7. Celebrate, but remember that your final exam is two days later.
|12/9/16||This is the last of the valuation tools webcasts. 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.
|12/10/16||I hope that your weekend is going well, though I have probably ruined much of it. As you work through the relative valuation section, a few questions that seem to be recurring:
1. Sample size: There is a trade off between sample size and finding companies that look more like yours. If you are doing a subjective comparison - comparing your company's PE with the PE ratio of comparables, controlling for differences with a story, you want a small sample of companies that look like yours. If you are doing a regression, you should try to get a larger sample, even if it means bringing in firms that may not look like yours. You can control for differences in the regression. If you can get your sample size up to 20-25, you should be okay. And one more thing. Don't fight the data. If a regression does not work, it does not. Remember that you get to make the ultimate judgment and you can decide that given your company and its peers, the best estimate of relative value is just the average PE for the sector.
2. Market regressions: The updated market regressions from the start of 2016 are on my website under updated data. Look to the bottom of the page (and at the first link in the first column, not the archives). Here is the direct link
3. Young or money losing companies: Running these regressions with young companies is always tricky. The first is that if you use current data, the only multiple that you have any shot at using is a revenue multiple. Nothing that you can do about that. You can try to use forward numbers to do relative valuation. What does that mean? You can go into your DCF, find your revenues or earnings in year 10, and use the fundamentals at that point to get a multiple for your company. Remember, though, that this a value in the future and you still have to discount it back and deal with survival risk.
In today's class, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don't) and why there is a minority discount in private company transactions. We closed the class by taking a very brief look at CFROI and EVA to illustrate that much of what passes for new and innovative in value enhancement is just old wine in new bottles. I have attached the post class test and solution.
I don’t mean to rush you but as you get the numbers together for your project, please put them into the attached spreadsheet and send them to me as soon as you can and at the latest, by tomorrow night. If you can turn in the numbers as a group, great, but even if you don’t have all of the members, I will take the numbers that you have. Thank you again!
Attachments: Project Summary
|12/13/16||The summaries are coming in much faster. Thank you. We are up to 150 and I am waiting on the last 100. The window will stay open for much of the rest of the night. So, get it in whenever you feel up to doing it. I know that you are probably busy on your final projects, but just in case you are ready to turn your attention to the final exam, the webcast review for the final exam is now accessible:
Past finals: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.pdf
Past final solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.xls
1. Closing Class: Thank you for being at the closing class. I have attached links to both the closing presentation and the summaries of your valuation findings (for the entire class).
2. Final Exam: The final exam is scheduled for Friday from 1-3 and will be in two rooms, KMEC 1-70 and Paulson. The seating arrangement is below:
3. CFEs: Finally, please remember to do your CFEs. If you don't get them done, you will not be able to check your grades. I have been told that they will be accessible after midnight tonight but the window is open only for a day (tomorrow all day). So, please do it tomorrow.
|12/15/16||As you prepare for the final exam, you are probably discovering that there is way too much material to prepare for it all. I understand (really). Here is my advice (and feel free to ignore it). The final exam has 5 questions all worth 20% of the score. The last three questions are on value enhancement, acquisition valuation and real options, the three topics that we covered after the third quiz. Start with that material first. The first question is a DCF question (covering the first two quizzes) and the second question is a pricing question (from the third quiz material). The review sessions are up and running on the website page for the class. One more reminder to do your CFEs as soon as you can. The window is now open and will close at midnight. So, take a break and spend the five minutes completing the CFE. As I mentioned, my motive is selfish, since if you don’t, you will not be able to see your grade, and we know what follows.|
There are three questions seems to be coming up on the real options problems and m afraid I have contributed to the confusion. So, here is some clarification:
1. What is the probability that S>K?
2, What is the cost of delay?
3. How am I going to estimate N(d1) and N(d2)?
I know that the final exam was challenging both in terms of concepts and time. They are now graded and ready to pick up int he usual place. Please, please don’t get them out of alphabetical order. I have attached the solution to the final exam (there was only one) with explanation of the grading. Please read the computational explanations that I have put for the answers. I have not added a grade distribution since your final grades will be up shortly.
Attachments: Final exam solution
|12/19/16||I hope you are done and are out celebrating. However, just in case you still care about grades, yours just went online. 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. Well, at least, I have not. 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"). And just in case, you need a valuation fix... here are some links:
Twitter feed: @AswathDamodaran (Do your part to advance me to Lady Gaga or at least Kanye West status…)
If you have any questions about your grade, use the attached spreadsheet to see where you ended up. You do need to know your final exam grade to be able to use it. If you cannot pick up your exam tomorrow, I will figure out a way for you to check your final exam score. Also, I know that some of you were unable to finish your CFEs, since the Stern server went down on Thursday night. Using my immense negotiating skills, I have been able to ensure that all of you will be able to check your grades. For the last time (in this class, at least)!