The emails for this class will be collected on this page, arranged chronologically. Since I send quite a few, you can target it on a specific month by going here:
Have fun with them!
I am sure that you are finding that break is passing by way too fast, but the semester will soon be upon us and I want to welcome you to the Valuation class. As I looked at the class list, I see lots of familiar names from corporate finance. So, you do know what’s coming. I will bury you with emails, and here is the first one. One of the best things about teaching this class is that valuation is always timely (and always fun...) Just as examples: Is it time to sell Tesla? Is Aramco really the most valuable company in the world? Was WeWork worth any money ever or was Softbank delusional, and if the latter, what does that make Oyo? How much does a Super Bowl add to an NFL team’s value? You will find the answers to these and other questions on my blog:
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 page:
2. Syllabus & Calendar: The syllabus for the class is available on the website for the class and there is a google calendar for the class that you can get to by clicking on
For those of you already setting up your calendars, it lists when the quizzes will be held and when projects come due.
3. Lecture notes: The first set of lecture notes for the class should be available in the bookstore by the start of next week. If you want to save some money, they can also be printed off online (if you want to save some paper, you can print two slides per page and double sided). To get to the lecture notes, you can try
Please download and print only the first packet on discounted cashflow valuation. If you want to save paper, you can download the pdf file on you iPad, Android or Kindle and follow along...
4. Delivery choices: I hope to see you all in class for every session, but there are two supporting delivery mechanisms that I would like you to take advantage of:
5. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store... If you are the law-abiding type, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. If you can get the Asian edition, even better. It is exactly the same book and costs about a third. 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". Finally, if you really want to take a leap, try my newest book, Narrative and Numbers at
You will find the webpages for all of the books at http://www.stern.nyu.edu/~adamodar/New_Home_Page/public.htm. If you want a comparison of the books, try this link: http://people.stern.nyu.edu/adamodar/New_Home_Page/valbookcomp.html
6. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad or iPhone that you can download on the iTunes store: http://itunes.apple.com/us/app/uvalue/id440046276?mt=8
It comes with a money back guarantee... Sorry, no Android version yet…
I am looking forward to seeing you in a couple of weeks in Paulson.
I know that week one is approaching and 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:
The post was triggered by the awe I felt, looking up at Brunelleschi’s Duomo in Firenze this summer, but the thoughts are all investing/valuation thoughts. In fact, I wrote a book on connecting stories to numbers and here is the post introducing the book (which became available about two years ago).
If you did get a chance to read my long email last week (and I would not blame you if you skipped it), you probably missed the link to the lecture note packet that I said was available at this page:
Also, if you missed the first email, the email chronicles will record them for posterity and you can find them by going to this link:
That is about it for the moment. If you want to get ready for the class, start by keeping up with the business news for the next week. See you next week in class. Until next time!
This is it! Super Bowl Sunday is here and I hope that you are at a party, but after the party is done, your winter break is officially over and I have the unpleasant task of reminding you that your first class is tomorrow.
Have fun and see you tomorrow! Until next time!
We are officially rolling. If you enrolled in the class in the last couple of days, you did miss the first two emails but they are already in the email chronicle, in case you are interested:
Email chronicles: http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqemail.html
This chronicle will be updated at the end of each week to include all emails sent up until then. There were three handouts in class today. If you were unable to get one or more, here are the links:
Introduction to Valuation (Slides for Wednesday’s class): http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/Valintrospr20.pdf
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 suggested that you start thinking about forming a group and picking companies. To get the process rolling, here is what I have done
1. Group: Please do find a group to nurture your valuation creativity, and a company to value soon. If you are ostracized, or feel alone, I have created a Google shared spreadsheet (an Orphan list, so to speak) that you use to find others like you in the class:
2. Company Choice: 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 2017) 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.)
3. Webcast of today’s class: The web cast for the first class are up and running (or at least the streaming version). You can access it by going to:
The links to iTunes U and YouTube will also be up shortly.
4. Lecture Note Packets: You can wait for the bookstore to get its act together and get the packets ready or you can get a jump by downloading the lecture note packet online. It is available at the top of the webcast page (see link above) in either pdf or ppt format.
5. 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. I will also be sending out a post class test and solution after each session that should take you no more than 5-10 minutes to do. It is a good way to review the class and I hope that you find it useful. Sorry about the length of this email, but there will be more to come (I promise!).
n this valuation of the week, I am revisiting a company that I have visited many times before. It is Tesla, In June 2019, I valued Tesla at about $190 and since the stock was trading at $180, I bought it for the first time. You can find the valuation and the post at this link:
On Thursday (January 30), I revalued Tesla again, and came up with a value of $427. If your question is whether value can change that much in a short period, with a stock like Tesla, my answer is yes. Since the stock was selling for $640, I sold the stock and I did so reluctantly, partly because those profits will now be treated as ordinary income (not capital gains).
In the post, I explained that I was selling even though the mood was euphoric, and the momentum entirely on the upside, and the market confirmed that by pushing the stock up to $780 today. Needless to say, I’ve heard from quite a few people (mostly Tesla fans) asking me whether I regretted selling too early. You may not not believe me, but I don’t. I have to play the game I came to play and that game is a value game, and if try to play a game that I am not very good at, I risk going down a slippery slope. As the old Wall Street adage goes, you can be a bull or a bear, but never a pig, and I am thankful that I had a good ride on Tesla and it is time for me to move on.
If you get a chance, open the spreadsheet that I have my valuation of Tesla from last week:
Feel free to change what you think needs to be changed. The key levers are revenue growth, the target margin and the sales to invested capital. If you have been following Tesla (and have a point of view on the company), change the valuation to reflect your story. I know that some of you feel not quite ready to make big changes. So, make small ones. When you are done, go to this Google shared spreadsheet and enter what you found.(My numbers are already in there),
Have fun with this!
As I mentioned in the first session, we will have 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 today 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 today. 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. See you in class!
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 on the webcast page for the class. 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 will be starting on the first lecture note packet on Monday. So, please print off the packet or buy it at the bookstore (if it is available) and bring it to class.
Each week, I will use the Thursday email to prod, nag and bug you about the project. So, without further ado, here is where you should be this first week:
In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable data resource with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. As MBAs, you should have access to Capital IQ on the Stern Dashboard, but you need to ask for access, I have attached a pdf file that shows you how.
Attachment: Capital IQ Access
A few quick notes. The first is that I did put up an in-practice webcast today. 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
P&G Valuation (excel spreadsheet): http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls
Second, for those of you who were trying this week’s valuation of the week (of Tesla) and feeling a little lost about what growth rate or margins to use, I wrote a post yesterday containing not only a DIY valuation of Tesla but perspective on how to decide whether to use a 25% growth rate or a 35% growth rate.
Have fun with it!
Finally, for those of you who are late to this party, we have run out of beer and chips, but you can read all of the emails that I have sent so far in the class:
If you read them all, it is the equivalent of drinking a six-pack. So, please don’t drive or operate heavy machinery! Until next time!
I hope that you are enjoying your first weekend back at school. I will intrude with a couple of notes.
1. Teaching Fellows/Review sessions: Just a reminder about the TFs for this class. There are two:
I trust them to give you good advice and help, and they will have review sessions every Wednesday, starting February 12, from 4.30-5.30. The room is KMEC 2-65 and you can sign up in this Google shared spreadsheet:
2. Newsletter: The first newsletter for the class is attached. As I said, there is usually not much news in these newsletters. Think of it more as a timeline for the class, telling you where we went last week and laying out our plans for the week ahead. If you get a chance, take a look at it.
Finally, we will be starting with the first lecture note packet in class on Monday. Please have it with you for class. The bookstore has it now or you can download it online, by going to the webcast page for the class:
Have a great weekend! Until next time!
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.
Second, we will be starting off tomorrow's class with the question of firm versus equity valuation. I am attaching the cash flow table that we will be using for the start-of-the-class test as well. If you get a chance, please take a look at it before you come into class. The question is at the bottom of the page.
Third, I was checking out the Google shared spreadsheet on my first valuation of the week.
I see that only 25 of you have tried to value the company. You can still do it, if you have not done it already and you can use the Tesla DIY valuation that I linked to on Friday.
Until next time!
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 began our intrinsic value discussion by talking about the weapons of mass distraction. If you want to read the blog post I have on the topic, try this link:
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. In particular, we broke down risks into different types and argued that only some of these risks belong in discount rates, if investors are diversified. Next session, we will start with a discussion of risk free rate, a foundational number that will drive the rest of our calculations. I have attached a post class test for today, with the solution, but I think that four of the questions relate to risk free rates, which we have not covered yet. So, if you want to wait until Wednesday’s class, you might have an easier time. Until next time!
For this week, I thought I would switch gears and value a very different company from last week’s hot mess which was Tesla. This week, I look at Aramco, a company that became the most valuable public company (in terms of market cap) over night, when it had its IPO last year. The place to start this valuation is with the Aramco IPO, a document written by bankers for bankers, and hence thoroughly boring:
You can follow up with two posts that I wrote at the time of the IPO:
The excel spreadsheets containing my valuation of Aramco is here:
Take a shot at valuing Aramco and when you are done, here is the Google shared spreadsheet:
Until next time!
We started the class with a 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:
If you want to see my updated perspective on risk free rates, try my data post on the issue from earlier this year:
We just started on the discussion of equity risk premiums but the contours of the discussion should be clear.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
Click on current data, and look to the top of the table of downloadable data items. Finally, The post class test and solution are attached. We also embarked on assessing country risk. I won’t drown you in the details, but you should also be able to look up equity risk premiums by country at the data link.
One lastnote. It is Wednesday and time for the first weekly challenge, and it relates to the consistency of equity versus firm valuation. I have attached it and will post my solution by Sunday night. Until next time (which won’t be until a week from today. Monday is a university holiday!)
By now, you should have a company picked, and if so, you can start thinking about at least the first two pieces of your discount rate calculation, a risk free rate and an equity risk premium.
That’s about it for the moment. Enjoy the long weekend, and until next time!
|2/14/20||Since this is a long weekend and you have nothing to do (just kidding), I have put up two valuation webcasts. The first one is on risk free rates and the second on implied equity risk premiums.
Risk free Rates
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
The webcast uses the February 2013 spreadsheet, but I have tweaked the spreadsheet a little bit and the cell numbers have changed in the updated version, but the process remain the same. I hope that you get a chance to watch one or both! Until next time!
Hope that you have only fun stuff planned for this weekend, other than all the things that you have to do for valuation. I have the newsletter attached. Also, there were a few typos in the lecture note packet, mostly related to dates that never got updated (2019 should have been changed to 2020). The version online now is the correct version, but you don’t have to print the whole packet. The only page that needs a serious fix is page 64 and I have attached the corrected page.
Attachment: Issue 2 (February 15)
I hope that you had a good weekend. Two quick loose ends to tie up. First, I hope that you had a chance to watch the in-practice webcasts on the risk free rate and implied equity risk premium (I know you probably were busy doing more fun stuff, but no harm asking). Second, I sent you a weekly challenge last Wednesday. I don’t know whether you had a chance to try, but it is still not too late. I have attached the solution to that weekly challenge (and the weekly challenge, in case you have no idea what I am talking about). This week, we will turn our attention to equity risk premiums, talking about forward-looking estimates and we will then move on to the cost of debt and capital. So, if you are shaky about any of those concepts, I hope that you are rock solid, by the end of the week.
Attachment: Weekly Challenge #1 Solution
week’s company bears no resemblance to your first two. It is Heineken, the Dutch brewer, with a worldwide brand name. The reason that I am focusing on the company is not because I like its product, but because this is a valuation that I did in September 2019, in Euros, when the risk free rate was negative in that currency. Begin by reading this post on negative interest rates from 2016:
You can continue by reading this piece that provides the background for the company and my valuation:
You can download the historical data on the company here:
You can download my valuation here;
You are welcome to update the valuation to include the additional quarter of information that has come out, but not much has changed. Try playing with the risk free rate/stable growth rate combination, and I use the word “play” deliberately, since you are messing with first principles when you do so. When you are done, you can enter your number and an updated price into this Google shared spreadsheet:
If nothing else, this will give you bragging rights, since 99% of people who do valuation for a living have not only never valued a company with negative risk free rates, but many in this group will claim it cannot be done. You can say it can and will be done.
'In the session today, we started by doing a brief test on country risk premiums. 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. I am attaching the excel spreadsheet that I used to compute the implied ERP at the start of February 2020. Play with it when you get a chance. Post class test and solution attached.
First things first. By now, I hope that you are in a group and have picked a company. If you have, you should be able to complete two basic tasks related to discount rates, estimating risk free rates and equity risk premiums. Along the way, you have to get comfortable with how to estimate implied equity risk premiums, and to further you on that path, I posted a webcast on equity risk premiums last week. Take a look at it, when you get a chance. Finally, I posted my fourth data update for this year, and since it is about topics that we have been talking about in class, I thought it may help. You can find it here:
Finally, the second and third packets for the class (yes, there are three) are available to download on the webcast page for the class:
If you remember, we started this discussion in class by looking at how to measure company risk exposure to country risk, using Embraer, Ambev and Coca Cola, using revenue weights, and then looking at Royal Dutch, where we used oil production weights. In this week’s valuation tool’s webcast, I look at estimating a company’s risk exposure to country risk.
Supporting data: http://www.stern.nyu.edu/~adamodar/pc/datasets/ERP&GDP.xls
Of course, the table you see in this webcast with GDP and ERP is an old one, and you can get the updated version here:
Give it a look, when you get a chance.
Last week, we continued on our discussion of discount rates by looking at how best to estimate the equity risk premium. This coming week, we will complete that discussion and start on the meat and potatoes part of valuation, which is cash flows. In the meantime, attached is the newsletter for the week.
Attachment: Issue 3 (February 22)
This week, we will complete our discussion of hurdle rates and move on to murkier territory, where we estimate earnings and cash flows. I hope you had a chance to try the weekly challenge. If you did, the solution is at the link below.
Give it a glance, if you have the time!
|2/24/20||In today’s class, we started by reviewing the pitfalls of regression betas. They are backward-looking, noisy and subject to game playing. We 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.
We then started on the cost of debt, starting with a definition of the cost of debt as a long term, current cost of borrowing and laid out out a procedure for estimating this cost. Specifically, I talked about estimating a synthetic rating for your company with a look up table, which is in this spreadsheet:
You can get updated default spreads for ratings classes on a Bloomberg terminal (FIW is the function) or on FRED, the Federal Reserve of St. Louis datasets.
I know that I have used up my quota of emails for today, but this has nothing to do with this week’s class, but has to do with the final. As you well know, your final exam is scheduled for May 18, and I know that some of you have other commitments to family and friends and would like to take the exam early. I will be offering an early exam on May 13, TBA, for you, if you are interested. I have started a Google sheet for you to sign up, if you want to take the early exam. Don’t worry! If you sign up and change your mind, I am okay with that too.
I am sorry to get this to you so late on a Tuesday, but I shelved my original plan of valuing Kroger (Berkshire Hathaway’s latest investment addition) in favor of the news of the moment. Without doubt, that is the market collapse that we have seen in the last few days, in response to news about the Corona Virus. I had talked about this a little bit during class yesterday, but it was only partly formed then, and I spent a portion of today to pull together a more complete assessment of how the virus is affecting S&P 500 value. Start with this reading:
Follow up by downloading the spreadsheet I created to assess the impact on value drivers and value.
Change the numbers to reflect what you think about the virus and revalue the index. Once you are done, go to the Google shared spreadsheet and enter your numbers.
I would really like everyone to give this a shot. Honestly, it should not take more than 5 minutes, and if nothing else, you will get bragging rights that you have valued the Corona Virus. Just don’t catch it!
In today’s class, we started with the cost of debt and computing debt ratios for companies and how to deal with hybrid securities.. If you are interested in getting updated default spreads (on the cheap or free), try the Federal Reserve site in St. Louis:
These are spreads on indices created by rating, updated daily. Neat, right? We then moved on to 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. . Post class test and solution attached as is the weekly challenge. You will get another email later tonight about the first quiz. So, stay tuned.
|2/26/20||The first quiz is coming up and I wanted to cover some logistical details.
1. Quiz location and timing: The quiz will be from 1.30-2 on Wednesday, March 5. There will be an extra room to take the quiz. Please see below for where you should go for the quiz:
If your last name begins with Go to
A -H KMEC 2-60
I - Z Paulson
There will be class after the quiz. So, please come to Paulson, when you are done with your quiz.
2. Quiz coverage: The quiz will cover everything through the end of cash flows (about slide 154); growth is not on this quiz. It will therefore include the big picture sessions on valuation, discount rates and cash flows.
3. Past quizzes: I am posting the links to the quizzes from just the past few years. While there are older quizzes you can cover, these are much more relevant for the quiz at hand.. If you do run into a growth question, skip it.
Practice quizzes: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/shortquiz1.pdf
Practice quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/shortquiz1sol.xls
As you work through these quizzes, please do remember that I will be grading the quizzes, not a computer or a TA. I grade on process. Please show your work, with your solution and I am perfectly open to alternate solutions to problems, if I feel that you have been logical and consistent and used all of the information in the problem.
4. Quiz review webcast: I have a webcast that I have put together where I take you through the material that will be covered on the quiz. It is about 35 minutes long and it may help you get ready for the quiz (or not)…
I was going to remind you of the project and working on it, but if you are turning your attention to the quiz, you may be checking out the links I sent yesterday for the past quizzes and solutions. Since the link I sent yesterday included only a subset of the quizzes and stopped in 2016, I decided to update the files and create new links. Try these for all the quizzes through 2019, and remember to work backwards, since the earlier quizzes may have slightly different coverage:
Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xlsx
I hope that you find some time to not just review the lecture notes, but work through the practice problems. In fact, it is the working through problems, using the lecture notes as a guide, that will provide the deepest learning.
know that you have big and fun plans for the weekend and it is my job to ruin them. If you feel the urge to catch up on your project, I am going to give you the capacity to do so by posting not one, not two, but three in-practice webcasts:
1. Trailing 12-month numbers: In the webcast for this week, I look at how to compute trailing 12 month earnings from a 10K and a 10Q:
http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012)
The most productive use of the webcast is to print off the most recent annual and quarterly report for your company and work with your company’s numbers.
2. Converting leases to debt: I have also posted a second webcast on converting leases to debt which takes you through the process of which numbers to use in this conversion and how to deal with loose ends (like the lump sum that is often given for past 5 years).
3. Converting R&D to capital expenditures: We also talked about converting R&D from operating to capital expenses. I use Microsoft from a year gone by to illustrate this concept:
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
Incidentally, to add to your stress, I just want to remind you that the first quiz will on Wednesday (March 4).
I know that you are busy and I have a guess about what you are working on. I have attached the newsletter, on the odd chance that you may want to take a look at it. Incidentally, the version of the quiz and solutions that you should see online right now should include the 2019 exam and quiz. If you don’t see it, try refreshing the browser. Google Chrome specifically saves an old copy of the downloaded file and will show it instead.
As you prepare for the quiz, try not to drive yourself into a frenzy. It is just a quiz, just 10% and if you do badly, you can make it go away. That said, it is better to do well than badly. So, good luck and see you in class on Monday.
Attachment: Issue 4 (February 29)
In tomorrow’s session, we will continue on the path of estimating earnings and getting to cash flows. Along the way, we will have to deal with tax rates, capital expenditures, working capital and other potential pitfalls. On Wednesday, you will take the quiz in the first 30 minutes of class, from 1.30-2, and please go to the room you have been assigned. The quiz is open book, open notes, calculators and iPads allowed, but no laptops or Excel on your tablets. There will be class after the quiz. I had sent you some prior year quizzes (2009-2015) with solutions, but a few of you seem to think that it is not enough and would like more. Who am I to argue? If you want all quizzes that I have given (1997-2019), you can get them at the links below:
I think it is over kill, but whatever makes you happy. Finally, remember to let me know if you are not taking the quiz, before the quiz (by 1.30 pm on Wednesday).
We continued our discussion of cash flows, by first putting to rest some final issues on earnings, including the tax rate to use in computing after-tax cash flows and dealing with money losing companies. We then moved on to examine broad questions about what to include in capital expenditures and working capital, before putting the cash flow topic to rest by working out debt cash flows and cash flows to equity. We then started our discussion of growth rates, first by looking at historical growth (and the choices that you make that can alter that number) and then looked at analyst growth (and its use or misuse). Next session, we will start with the quiz, but then continue our discussion of growth rates
This week, I turn to one of my favorite companies to value, Uber. I first valued Uber in June 2014, got the story horribly wrong, but still learned from it. I have returned to Uber multiple times since, and did a series in 2015 on both the challenges for Uber specifically and the ride sharing business, in general.
When Uber filed its prospectus in 2019 for its IPO, I jumped on the chance to read the prospectus and value it at the time:
Uber IPO post (with value link): http://aswathdamodaran.blogspot.com/2019/04/ubers-coming-out-party-personal.html
I valued the company at between $27-28 at the time, and the stock was initially offered at $45 before imploding in the weeks following. In October 2019, the stock was trending down and I revisited it in a more general post on 2019 IPOs lessons for public market investors:
My October 2019 valuation of Uber is available here:
In fact, I bought Uber at between $28 and $29, doubled my holding when the stock unlocked and dropped to $27 and have had a good run since. If you get a chance, download the Uber 2019 valuation, update the numbers and come up with your current value for Uber and then enter the numbers in Google shared spreadsheet:
I hope that you have recovered from the quiz. In this session, which occurred after the quiz in the first 30 minutes of class, we looked at analysts estimates of growth and why they do not carry more predictive power (given that analysts often are immersed in company-specific knowledge and have access to management). We then looked at tying growth to two fundamental questions: (1) how much companies reinvest and (2) how well. The way we measure these can vary depending on whether you look at earnings per share, net income or operating income. The weekly challenge for this week, if you feel up for it, centers on fundamental growth. Try it, if you get a chance.
The quizzes are done and you can pick them up on the ninth floor of KMEC. As you get off the elevator, look to your right, just before you get to the front door and they should be on the top shelf of the cart. To preserve order and prevent free for alls, a few rules for the pick up:
I know that you just finished (and hopefully picked up) your first quiz and that you are probably in no mood for valuation. If you are, though, this would be a good week to take your company’s annual report apart and estimate the free cash flow to the firm and equity last year as well as accounting returns. If you have the historical data for your company, you can not only estimate historical growth in earnings per share but in other metrics as well (net income, operating income, revenues). While I almost never do a valuation based upon historical numbers, I find it useful as a platform for understanding the company and devising my story and forecasts for the future. If you want to see historical growth rates of all companies, broken down by sector, please visit this link:
Scroll down to historical growth, and you should see the data not just for US companies, but broken down globally and regionally. All these growth rates are in US dollars.
|3/6/20||I am testing your patience at this point, but I am going to go on anyway. In the session after the quiz (yes, there was class after the quiz), we looked at the link between fundamentals and growth, and in particular, at how much of a role ROE and ROIC have on assessing both growth rates and the value of growth. The scariest aspect of these numbers is that they are entirely driven by accounting choices, which can create biases. In this webcast, 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
An updated version of the return calculator is attached. In case, you are interested in learning more about returns on capital, you should first seek out a psychiatric evaluation, and if you pass, try reading this awesomely boring paper of mine on the topic:
If nothing else, I can guarantee you that if you have sleep problems, this paper will get rid of them.
This may be your weekend to forget valuation, but I am afraid that I have to intrude. The most recent newsletter is attached. Also, if you have not picked up your quiz, and you are in school this weekend, please pick it up on the ninth floor of KMEC.
Attachment: Issue 5 (March 7)
This coming week will be our last week of classes before the break. That is both good news and bad news. The good news is that you will be blessedly free of my harassment for a week or so. The bad news is that we are now half way through the semester. So, if you have not picked a company, you should. If you have, you should have the financials. If you have the financials, you should be working on the valuation. I think you get the picture. I have also attached the solution to the weekly challenge. If your reaction is what weekly challenge, I don’t blame you!
Attachment: Weekly Challenge #4 Solution
In today’s session, we started by looking at fundamental growth in all its variants. With EPS, net income and operating income, we argued that the long term or sustainable growth rate for a firm is a function of how much it reinvests and how well it reinvests, with the measurement of each varying depending upon the earnings metric. We then looked at the possibility of efficiency growth in the short term, as ROE or ROIC change, and finally at the most general way of estimating cash flows, where we start with revenues, then forecast margins and tie up loose ends with reinvestment, tied to sales. In the final part of the session, we looked ways to keep the terminal value from running away with your valuation by capping growth, limiting the growth period and reinvesting enough to sustain growth. We also looked at the choices in building a DCF model. I have two reading suggestions if you are interested. First, I mentioned my incredibly boring paper on accounting returns. You can find it here:
Consider yourself forewarned. The blog posts that I have on terminal value may be more up your alley:
They capture everything we talked about in class today
By now, you have probably heard that NYU has decided to move classes online starting with Wednesday’s class and going through at least the first week after the break (March 11, March 23 and March 25). I am still wrestling with the most effective way to do this. I could use Zoom and teach the classes live, but I have to check to see whether it can accommodate 250 people. One way or the other, we will get the classes in, do valuations of the week, talk about the events of the day and keep working on your valuation projects. Since next week was scheduled to be spring break, I was planning to give you a week off emails, and I will stick with that plan. More on this later today!
Finally, I know that today is usually the day I post a valuation of the week. Given the turmoil in the market, it is unlikely that any of you can get your heads wrapped around individual companies, but I decided to give a shot at valuing Zoom. You can find the financials and my valuation at the links below:
Online meeting market information: https://financesonline.com/video-web-conferencing-statistics/ (Note that this came out before the Corona Virus and reflects the expectations then)
Zoom’s prospectus: http://www.stern.nyu.edu/~adamodar/pc/blog/ZoomProspectus.pdf
Zoom’s updated financials: http://www.stern.nyu.edu/~adamodar/pc/blog/ZoomFinancialsMarch2020
I tried to value Zoom this morning ant it is very much of on the fly valuation.
My valuation of Zoom: http://www.stern.nyu.edu/~adamodar/pc/blog/ZoomMarch2020.xlsx
If you have no time to check a spreadsheet out, try this picture that summarizes my Zoom valuation:
I think I have told a pretty optimistic story, especially on the revenue front. The entire online meeting market is only $6 billion this year, but was expected to grow to $20 billion by 2025 and I am assuming that the Corona virus scare will accelerate this shift. An investment in Zoom is as much a bet on how much of a shift there will be, as it is on Zoom dominating that market.
Once you have tried your hand at valuing Zoom, please input what you find in the shared Google spreadsheet:
I know that many of you are either on your break already or mentally there, and I had promised no nagging, but one last email before you go about sundry items. In today’s class, which was the first online class, we covered the loose ends in valuation, from valuing cash and cross holdings, to how to define debt and deal with employee options. The session was recorded and you can find it on NYU classes under Zoom (look for recordings). I am also working on putting up a YouTube recording of the class online in the next couple of hours.
I know that I have been nagging you about getting the intrinsic value portion of your project done soon, to allow for the feedback on March 29. You are welcome to use my data, spreadsheets and valuation tools webcasts along the way. If you are planning to get caught up during the break, I have added not one, not two but thee tools webcasts to help you on your way.
Incidentally, if you find yourself lost among the host of spreadsheets on my site, go with the ones that have a ginzu in the name. They are the most comprehensive, and in an Orwellian this, the simple version of each of the spreadsheets usually is the one that works across most companies.
For non-financial service companies: http://www.stern.nyu.edu/~adamodar/pc/fcffsimpleginzu2020.xlsx
For financial service companies; http://www.stern.nyu.edu/~adamodar/divginzu2020.xlsx
Most of all, just remember to stay safe and have fun, and you will not hear from me until a week from Saturday.
|3/11- 3/18||Spring Break. No emails from me.|
Its only been a week, but it does seem a lifetime ago, since I talked to you last, and I hope that you and your loved ones are safe and in good health. Now that the class has been moved entirely online, I decided that it would be good to make sure that we had the logistics lined up, given that my end game is that you receive the same experience (or as close to it) as we can get, as you would have at Stern. Here is what I thought made the most sense, and I am willing to listen to suggestions:
I know that these are unsettling, scary times, but we will get through them, and perhaps even come out stronger, smarter and kinder on the other side. I have been posting weekly about how this is playing out in markets, and you can all find the first three below:
There will another one coming on 3/20.
biblical expression. This too shall pass! That said, I am going to return to the same routine we would have had in a regular year. So, with no further ado, here we go.
1. Class: If you have completely lost track of where we are in the class, I would start with the newsletter, where I mention where we are on the class and where we are going.
There will be class on Monday at 1.30 pm, NY time, online. The zoom links are available under NYU classes, but just in case, you need a quick link, here it is: https://nyu.zoom.us/j/361781652.
2. The Project: As you know (or should know), your DCF is due on April 3 (roughly two weeks from now) for review. It is true that there is no grade attached to it but it you chance to get some feedback on the session. To advance you on the valuation, I have a tools webcast on dealing with equity options in a company,. Let’s face it. 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:
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.
3. Lecture Note packet 2: Finally, we will be approaching the end of the first lecture note packet for the class in about 3-4 sessions. When you get a chance, please print off or download or buy the second packet:
If you have trouble with this file (It is immense and you may have trouble converting it to readable format on your computer), try the pdf version. It is more foolproof.
4. Google shared spreadsheet: I sent you a link to a Google shared spreadsheet, asking for location, time difference and the company that you are valuing. If you have entered that information already, thank you! If not, please try to do it soon (like today).
I hope that you are safe and doing well. As we return from the spring break, we will be returning online and tomorrow’s class will be on Zoom from 1.30-2.50 pm, New York time.
I know that this may be tough for some of you, given the time difference, but please attend if you can.If you cannot the recordings will be on Zoom and I will also make a YouTube video for low bandwidth devices and settings.Those recordings and additional material will be on the webcast page for the class:
In tomorrow’s class, we will start on valuing companies, starting with a valuation of the index as of January 1, 2020, and a discussion of what’s changed since, and then moving on to more difficult and messy cases. In the meantime, I am working on updating my equity risk premiums, since the last few weeks have upended them. More details to come soon!
I am sorry about the tech problems on the Zoom session. Between the landscapers next door, the Zoom miscues and the head not in the frame problems, it was quite an excursion. And I had trouble getting Zoom to record. All in all, my apologies, but I did record the session on my computer and am converting into a YouTube video. It should be accessible later tonight. During the session we finished the last loose ends in valuation and started on connecting stories to numbers. If you find the Zoom session tiresome to watch, you may prefer this Google talk version that I did a few years ago on the same topic:
It is a little easier to get through and covers the topic.
The DCF is due by late Friday (April 3) (try to get it in by 5 pm, but if not, 6 pm or 7pm..). If you can get it in earlier, all the better. 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. To put a bow on this part of the class, I have a blog post that you may find enjoyable about dysfunctional DCFs.
I hope that none of your DCFs fall on this list.
Attachments: Post class test and solution
|3/24/20||In this week’s valuation of the week, I look back at a valuation I did last year, when Brexit was still up in the air in the UK and people were unsure about how it would play our, with as many as seven different options on Brexit, ranging from a No-deal Brexit to no Brexit at all. I tookeasyJet, a UK company that is particularly exposed to Brexit, because it gets so much of its revenues from the EU, which has stringent rules on who can or cannot fly between EU countries, and tried to value it under different scenarios. You can read my valuation thesis here:
If nothing else, you will see how scenarios can be used to deal with uncertainty. The valuations themselves are at the links below:
Brexit may now be settled, and you may not care about easyJet, but review the write up and valuation anyway, since this approach may help you in valuing your company, especially if you feel that the Corona crisis may have the same type of discrete consequences for your firm.
If you were at the Zoom session today, thank you for joining. If you were unable to join, the good news is that I remembered to hit the record button on Zoom. So, the session should be available in all of its glory by later today. The links can be found either on NYU classes or on the webcast page for the class as well, where I will also include the YouTube and audio versions. They will all be accessible by later today.
In today’s class, we talked about how story breaks, shifts and changes. Since I talked about dealing with new earnings reports, I thought you may find these two posts of interest in how narratives shift, and with them, values:
Reacting to Earnings Reports: http://aswathdamodaran.blogspot.com/2014/08/reacting-to-earnings-reports-lets-get.html
Narrative Resets: http://aswathdamodaran.blogspot.com/2015/08/narrative-resets-revisiting-tech-trio.html
We started with two conventional valuations, one of Con Ed, another of 3M. If you are still wrestling with the question of management options, I have a weekly challenge that may help you work through your doubts:
Of course, the stories on these companies has evolved since, but it should give you a taste of how narratives change.
I hate to be a nag but your DCF is due for feedback on April 3. Again, I will emphasize that I will not be grading your DCF. Here are some more details about this submission:
First, a reminder that my first Zoom office hours will be at 1 pm, NY time (in about 15 minutes) and I will stay on for an hour, if you have any questions. I will have to check out at about 1.58 pm, NY time, since I have office hours for another class at 2 pm. I know that your project DCFs are not due until a week from tomorrow, but if you have checked the calendar, the second quiz is on April 6 and you may want to reserve the next weekend for that. If you decide to work on your DCF and even turn it in early, here is some general guidance.
Don’t put too much pressure on yourself. This is only for feedback
I hope that you are well. I hope that you are in the process of valuing your companies, but I wanted to clarify a couple of points on which there seems to be confusion. There are three choices that you can use in doing your valuation.
1. You do not have to use the spreadsheet that I sent you. You can build your own, but if you do, don’t make it so complicated that it is impossible to tell where numbers from. And no, you cannot use or adapt for use the investment banking spreadsheet from your last summer or job. I can almost guarantee you that it will violate at least three and probably more simple consistency rules, and it will trigger me. If you do build a spreadsheet.
2. You can use the spreadsheet that I sent you yesterday, with added features to capture the effect of the virus on risk premiums and earnings/revenues this year. In fact, this week’s valuation of the week takes you on a tour of that spreadsheet, using Boeing’s numbers to illustrate. You can find the YouTube link and the spreadsheet link below:
3. You can take my spreadsheet and adapt it, but if you do, please do not hard code numbers directly into the valuation. That will make it more difficult for me to decipher what is going on, and for you to change your mind, as you will later this semester. Instead, create extra rows or cells in the input sheet, and add your changes in there. (I give you an example during the video guide)
Finally, looking at week after next, you have a quiz on Monday, April 6. It will be online and while the quiz will be accessible for 9 hours on that day (more details to follow), once you open the quiz online, you will have an hour. It is open book, open notes and you can use your laptops. The one concession that I have had to make is that the quiz, while it will resemble past quizzes, will be multiple choice (I am sorry but open ended online quizzes for a class this big are not viable). It is a little early to be doing much about it, but if you are raring to go, the past quiz 2s are already online at the link below:
If you want to wait, I will send you more detailed instructions next week,
I hope you are safe and healthy this weekend, as as your loved ones. I am attaching the newsletter for this week. If you get a chance, take a quick look. It does not contain earth shattering news or purple prose, but…. Two different notes:
1. I know that you are working on your DCFs, as evidenced by the emails that I have been receiving, and I am grateful. A few of you have already turned in your DCFs and I think I have returned those already. If you have not got it back, you may have missed putting “My Perfect DCF” in the subject. Try again.
2. We will be done with packet 1 soon. Please download the second and third packets of the notes when you get a chance. They are available at the top of the webcast page:
Attachments: Issue 7 (March 28)
I hope that you have had a chance to watch my Friday valuation tools webcast, especially if you are working on your DCF and struggling with what to do about the viral effects on the economy and your company. A few of the DCFs have been rolling in, and I have sent those back. I also know that some of you are struggling with personal and logistical challenges. So, please view the April 3 deadline for the DCF feedback as just a loose one, and if you feel you need more time, take the time and send me the DCF whenever you are done. I am not planning on gong anywhere.
This week, we will continue to roll through valuations, mostly on the dark side, starting with valuing companies across the life cycle (from young to mature to declining) tomorrow and across different sectors (financial, commodity etc.). I hope you get a chance to join in the Zoom live sessions, but if you do not or cannot, the recordings should still be accessible. Let me know if there is anything I can do to make your online lives easier and more productive!
It is still early, but your next quiz in valuation is a week from Monday (on April 6) and if you want to get a head start, you can check out the quiz review session, as well as the past quizzes with solutions on the webcast page for the class. If you prefer to wait, I will send you more detailed instructions during the coming week.
|3/30/20||As always, thank you for joining me in today’s Zoom session, if you were able to. If you were not able to join in, the session was recorded and you should be able to find the recording online and the YouTube and audio versions should be available shortly. In today’s class, we looked at how best to adapt valuation models to value companies on the dark side. Specifically, we examined how best to value young companies with limited information. If you are interested, try this paper on valuing young companies:
I also mentioned a blog post that you may find relevant for today’s discussion on how dilution in future years is already incorporated into value:
Your second quiz is on Monday, April 6, and it will be online, and multiple choice. You will be able to find the quiz by going to NYU classes and once you have found this class, by checking the menu items on the left. You should see tests and quizzes and if you click on that, you should see quiz 2 but only on Monday. My suggestion is that you check it out sometime in the next few days, so that you are not desperately looking on Monday. The quiz can be taken any time from 5 am, NY time, to 1 pm, NY time, to allow for time zone differences. Once you open the quiz, you have an hour to complete the five multiple choice questions. So, please don’t open the quiz until you are ready to take it. And you have to complete the quiz by 3 pm. So, start by or before 2 pm. The quiz is open book, open notes, open iPads and open computers. I have put the review session for quiz 2 up online (on the webcast page for the class) with the presentation. The links are below:
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.xlsx
I was supposed to go to Tampa during spring break, with my sons (all three) and grandson (only one) for Yankee spring training, and those plans came to naught. I know that this is a time of fear and worry, and I wanted to ease up this week, with a valuation that may fill a void for sports fans, who have been watching reruns of great games from the past these last few weeks, instead of the NCAA tournament or spring training baseball. This is a throwback in time, but it is a valuation and pricing that I did of the Los Angeles Clippers, when Steve Ballmer paid $2 billion for the team. I explain how I value the Clippers and how I would value any sports franchise in this post:
You can find my valuation of the Clippers in this link:
You can do one of the two things in this week’s valuation challenge.
1. You can take my Clipper valuation and make your own assumptions (there are relatively few) and value the Clippers as of June 2014.
2. You can then follow up by trying to price the Clippers, a preview of the pivot that we will be making away from valuation in the weeks to come. To help, I have raw data on sports franchises below:
For MLB, NFL, NBA and NHL: http://www.stern.nyu.edu/~adamodar/pc/blog/SportsTeamData.xlsx
For European soccer teams: http://www.stern.nyu.edu/~adamodar/pc/blog/eurosoccerrawdata.xls
For IPL (Indian cricket) teams: http://www.stern.nyu.edu/~adamodar/pc/blog/IPLrawdata.xls
The data is a little outdated and you are welcome to update them, if you want. If you are a fan, you can pick your favorite team and using the raw data in these spreadsheets, try to value and price your franchise.
In today’s session, we continued on the dark side of valuation with a valuation of Amazon in 2018, where I told a very different story for the company (a disruption machine), allowing for a much greater level of revenues, but still found it overvalued. I used a Monte Carlo simulation to illustrate how it can enrich your investment decision process. We then looked at mature companies on the verge of transitions, and how you have to value the status quo company and the restructured one to make a judgment on investing in it. Finally, we looked at declining companies, where your forecasts may have to show declining revenues and margins, and added a twist with distressed companies, where you have to follow up your DCF. In the last part of the class, we looked at the challenges in valuing young companies, from country risk to currency choices to corporate governance and cross holdings. None of these are unique to emerging market companies and learning how to deal with them becomes central to valuing any company.
On Monday, we will move on to the second quiz for the class. In case you are nervous about it, here are some specifics:
1. Quiz time and logistics: The quiz will be accessible from 5 am to 2 pm, NY time, on Monday, April 6. Since it is a one hour quiz, you will need to start by 1 pm to get done. We will have class from 2 pm - 2.50 pm, NY time, on April 6. To get to the quiz, you need be on NYU Classes and to get you comfortable, I have created a demo 5-minute quiz that will be accessible from 1 pm, NY time to 5 pm, NY time today. The quiz is just a freebie and has nothing to do with the class material, but it will give you a sense of how the logistics work. I have a couple of people who are entitled to extra time, and if you are one of the, you should see 8 minutes for your quiz. Let me know if you have issues.
2. Content: It will cover the mechanics of DCF, starting with growth rates and terminal value and extended into the loose ends of valuation and the versions of the DCF we have used on the dark side.
3. Review for the quiz: The links to the review for the quiz and the past quizzes are below:
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.xlsx
4. Office hours: I have Zoom office hours today from 1 pm - 2 pm, NY time, and will add an office hour on Sunday for last minute questions.
I am sorry for not getting your perfect DCFs back to you earlier, but I was grading corporate finance quizzes yesterday. I will turn my attention to your DCFs, but I do have some family commitments this weekend, which may get in the way. I will get them back by mid week next week.
I know that you are in no mood for this, but I do have a valuation tools webcast for this week about enterprise value, firm value and equity value that is a good precursor to next week’s sessions on pricing. By the way, please download the second packet for next week. Start with this blog post:
Then watch the webcast:
You can download the presentation:
And the spreadsheet that goes through the calculations:
Second, as you get back to preparing for the quiz, you are probably struggling most with the section on cross holdings and equity options. I don’t know whether this will help but I have a short write up on cross holdings that you are welcome to use as as a guide.
I am being kept quite busy by my grandson and keeping a two-year old occupied, when attention spans are measured in minutes, is exhausting. I did update the newsletter for the week, and I will have an hour of office hours today (5 pm - 6 pm, NY time on April 4) on Zoom, while Noah is napping. If you have any questions about the quiz, you can call in:
I tried to create it as a joint Zoom session with corporate finance and if you have trouble logging in, please email me.
Attachments: Issue 8 (April 4)
I won’t even bring up what the rest of the week holds, since I am sure that you are focused on quiz stuff for now. To take the quiz, you should get on NYU classes starting 5 am, NY time, on March 6, or later. The quiz will remain open until 2 pm, and since it is one hour long, you should start by 1 pm, NY time, at the latest. It is open book, open notes, open laptops. So, you are completely in control of your destiny (or most of it)!
There are two topics on the quiz which have historically given people trouble and I made a couple of webcasts to cover them. The first is cross holdings, always a mess, since we seem to add some things, subtract others and ignore still others. Try this 10 minute webcast that looks at four past quiz problems built around cross holdings:
The other is management options, much simpler, but still confusion. Try this even short review that is built around a couple of past quiz problems.
We do have class from 2 pm - 2.50 pm, NY time. I would like you to see you there. Zoom sessions without participants are barren affairs.
In today’s quiz-shortened session, I looked at valuing companies facing truncation risk ranging from Acts of God to terrorism to nationalization. I argued that discount rates were never designed to carry the burden on nationalization risk, and that decision trees work better, using Aramco and the possibility of regime change to illustrate. I followed up then looking at banks. For decades, we have valued banks using the dividend discount model, simply because getting cash flows is so difficult, but that approach is built on trusting management at banks to behave sensibly (paying out what they can afford to in dividends) and regulators to do the same. For me, that trust was breached in 2008, and I present a way of estimating FCFE for a bank, using investment in regulatory capital as my stand in for reinvestment. Next session, we will wrap up the valuation section and start on pricing. Please have packet 2 ready for Wednesday’s class. If you are interested in reading more about valuing financial service companies, try this link:
The Deutsche Bank post is here:
I know that you are done with valuation for the moment, but the beat goes on. In this week’s valuation of the week, I turn to Levi Strauss, which went public at about a year ago. You can start with the prospectus:
You can read my thoughts about the Levi Strauss IPO here:
And download the valuation of Levi Strauss IPO here:
Its been an eventful year, and Levi Strauss now trades at about $11-$12/share. If you are up for it, download the most recent annual report here:
And update the valuation. As someone who wears Levis 501s half the days of the year, I wear my biases openly.
In today’s session, we started by completing our discussion of intrinsic value by looking at how capitalizing R&D affects the value of companies and then how to be macro neutral when valuing commodity or cyclical companies. We continued by drawing a contrast between price and value and how to view the gap between the two, before looking at the mechanics of pricing and its allure to investors. We viewed multiples as standardized prices and set up a four step process to assess pricing. In the first step, we asked definitional questions about whether a multiple is consistently defined and uniformly estimated. We will continue with this discussion in the next session. I have attached the post class test and solution, as well as the weekly challenge for this week.
If you get a chance, please read my latest viral update post:
In addition to breaking down the market action by market, and within equity, by region, sector and other classifications, I updated the price of risk. Put simply, I computed the equity risk premium every day from February 14, 2020 to April 3, 2020. On April 1, 2020, the ERP for the S&P 500 stood at 6.01% (adjusted for lower earnings/cash flows). I used this update to also revisit my equity risk premiums by country and the updated ERPs by country are at the link below:
I know that many of you are still waiting for your DCFs and I am truly sorry for not returning them. I do have a really good reason. My son and daughter-in-law were expecting a baby on May 4, but Lily Marie Damodaran decided to come four weeks early (she is only just arrived in this picture). She is doing well, as is her mom, but my wife and I are looking after our two-year old grandson (Noah) and he is hell on wheels. I just put him to bed and I am far more exhausted than after teaching ten hours. We have him for the next four days, as my wife and granddaughter are in the hospital (a little scary in the midst of a pandemic). I will keep you posted.
Next week, we will be on our way on pricing an asset or company. As you will notice in the discussion, you will find that pricing is more about data and statistics, though a front loading of finance gives you perspective. One of the tools that we will draw on is regressions. This week’s valuation tools webcast takes you through the process. I know that we have not gone into pricing yet, but if your statistics are a little shaky, please go through the webcast. I use the banking sector to illustrate my case but I hope that you find it useful for both your 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 am also pondering how best to do the Zoom sessions for the coming week. Noah (my grandson) is a delight but he is also two years old, and will not sit quietly for an 80-minute session. I may have to record the sessions after he falls asleep, but I will have extra office hours in case you have questions. I am sorry for the last minute perturbation in the schedule, and I will make it up to you in the following weeks.
I hope that your weekend is a little less frenetic than mine, but I am definitely not bored. That said, I wanted to slip in the newsletter to you while Noah was napping. And nag you about getting started on the pricing portion of your project.
Attachments: Issue 9 (April 11)
As I mentioned on Friday, I am sorry, but I will have a tough time doing live classes this week, but I recorded a class yesterday that is already available online on the webcast page for the class for tomorrow:
The session covers the fundamentals of pricing, and I don’t think it is too painful too watch. Since there will be no live Zoom session tomorrow from 1.30 pm - 2.50 pm, NY time, please watch the recorded session in whatever format you want (YouTube, Zoom recording or audio). I will follow up on the session tomorrow.
I apologize for not doing a live session today, but I hope that you have had a chance to watch the recorded session. If you have not, it is available at the links below:
During the session, we completed our discussion of the definitional tests of multiples, played Moneyball with the data and then extracted the variables that determine each multiple. If you are disciplined about following this process, you will find multiples much more useful and have an easier time controlling for differences.
I am sorry again for teaching in absentia this week, but I will be back next week, live and eager to go. I hope you had a chance to watch yesterday’s recorded session, and tomorrow’s session will also be a recorded session that you can watch online at the regular class time (1.30 pm - 2.50 pm, NY time). I will have an added office hour from 5 pm - 6 pm, NY time, tomorrow, if you have any questions, since I will be occupied during the regularly scheduled office hour. The meeting link for tomorrow’s office hour is:
I know that most of you have given up on the valuations of the week, but about a year ago, Kraft Heinz reported earnings with a trifecta of bad news, languishing operating numbers (flat revenues & declining margins), an accounting irregularity (with an SEC subpoena) and a massive impairment of goodwill, sending the stock price down by more than 25%.
While companies reporting bad numbers is not uncommon, what makde Kraft Heinz special is the pedigree of its lead investors, with Berkshire Hathaway owning 26% and 3G Capital (a Brazilian private equity group with an unmatched reputation for financial acumen and ruthless cost cutting. Investors who followed Buffett into the stock were not only shocked but claimed to be betrayed, that the oracle would mislead them. I wrote a post on why this unquestioning faith in Investment Gods is dangerous and delusional, and posted my valuation of Kraft Heinz.
The financial information, including the most updated earnings report at the time of the post, can be found at this link:
I found the company close to correctly valued, with a value of $34.88, almost equal to the stock price of $34.23. The stock is currently trading at $28.45 and you can update the valuation, if you are so inclined.
I hope that you had a chance to watch the recorded session for today. If you have not, here are the links:
During the session, I continued the discussion of pricing, playing the role of a naive equity research analyst, using sloppy pricing to push buy recommendations on stocks in a number of sectors, based purely on the level of multiples (low PE, low PBV etc.) and asking for pushback. In some cases, we just noted qualitatively the forces that may explain the stock’s cheapness (the beverage sector, for example) and in others, we used regressions. The bottom line, though, is that most companies that look cheap deserve to be cheap. The key to pricing is finding a mismatch between the pricing and the fundamentals (low PE & high growth, low PBB and high ROE, low EV to Sales and high margins). It is basis for much of equity research, and takes the form of screens. If you are interested, I have a post that expands on the notion of screening.
Since you have access to Cap IQ, you can try this out in any sector.
|4/16/20||I know that you have other things on your plate, but I will nag you about your final project nevertheless. If you have your DCF done, and most of you hopefully have (and I will get them back to you, if you have sent them to me for feedback soon), it is time to price your company. Go through the process that we went through in class of choosing comparable firms, finding a multiple that works and then controlling for differences (statistically or otherwise). Along the way, don’t forget that pricing is a pragmatic game. If it works, use it. To give you a sense of pricing, I I suggest that you read this excerpt that I found in a guide for appraisers trying to value a hotel on how to do it.
Another valuation rule-of-thumb used in the lodging industry is that each room of a hotel is worth 100,000 times the price of a Coke™ in the on-floor vending machine or in-room mini-bar. More formally:
Value = Coke™ price x Number of Rooms x 100,000
The Edgemore Hotel sells cans of soda for $1.50 in the room mini-bars. Thus, the value of the Edgemore by this “precise" valuation method is:
$1.50 x 300 x 100,000 = $37,500,000
We urge market participants to use this technique judiciously, as some properties seriously "misprice" soda in relation to property. (Really?)
No. This is not a parody but a real technique. If you don’t believe me, read the whole thing:
You may find it laughably simplistic, but in pricing, if it works, don’t fight it.
Rather than hit you with another valuation tools webcast, I would like to direct you back to the webcast from last week on pricing. As you watch the webcast, you will notice that I draw on statistical tools, and while you can use Excel, it is far easier to use a statistical package. I know that Stern has Minitab. I use SPSS but there is a great add on pack for Excel called StatPlus. I think that it is well worth investing in a good statistics package not just for this class but for your professional life (whether it is in finance, marketing or even strategy). We live in a world of big data and statistics is designed to make sense of large and contradictory data.
I have also attached the links to review for the third quiz, even though it is not until April 27. To review for the quiz, you can use the following resources:
I have attached the latest newsletter to this email. Just a reminder that next week, we will be completing packet 2 and moving on to packet 3. If you get a chance, please download the packet on the webcast page for the class:
I hope that you are also getting a chance at pricing your stock. I know that I have been tardy about returning your DCFs and I am sorry. But you don’t need the DCF to start on pricing. I am looking forward to seeing you live next week
Attachment: Issue 10 (April 18)
|4/19/20||I cannot wait to get back to being live this week, and we will continue and finish our discussion of pricing tomorrow and follow it up by talking about how to value a company as the sum of its parts. In Wednesday’s session, we will value private companies, noting both what they share in common with public companies and what sets them apart. Please do remember to download packet 3, when you get a chance.|
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. Specifically, we focused on when it makes sense to value a company by valuing its assets and what pitfalls to avoid. If you are interested in a more extensive assessment of companies like United Technologies, you may find this reading useful:
We ended the class by listing out the unique challenges in valuing privately owned businesses, from the lack of market prices to accounting differences. We will continue that discussion in the next class.
I decided to go back in time to 2017 for this week’s pricing is of a Russian steel company, Severstal, because it helps illustrate the process of pricing and contrasts it with the intrinsic valuation, and may be helpful as you price your companies. You can get the story of the pricing at this link:
You can see the raw data for steel companies in this link, with an added worksheet for just the top 25 steel companies in market cap terms:
I used this raw data to estimate median values and compared Severstal to those values in this link:
Finally, I looked at the 25 largest steel companies and ran scatter plots and a regression. Even though you may not have the time to do this now, come back and take a look at it when you are working on your final project, if you get stuck on the pricing section.
In today’s session, we talked about the challenges of valuing private company, especially when the buyer is undiversified and cares about liquidity. We argued that you need to adjust for the lack of diversification in your discount rate (using a total beta) and for the lack of liquidity with an illiquidity discount, which should vary across companies, buyers and time. We also showed why the value to a private buyer will be lower than to a public buyer, and that this can lead to shifts in ownership of assets over time. We closed by looking at IPOs, and how to incorporate both the proceeds and the pricing considerations of bankers (who guarantee an offering price) as well as how VCs and PEs may look at firms during their transitions. Along the way, we had a discussion of direct listings as a challenge to the IPO process and
Finally, some of you wanted a distribution of grades on the second quiz. It is attached. The post class test and solution are also attached.
I won’t nag you about the project, though I will double up after the quiz. As you prepare for quiz 3, please keep your focus on packet 2, though remembering your intrinsic value basics can only help.
Just a reminder that the third quiz is on Monday. The quiz will be available from 4 am, NY time to 2 pm, NY time, and it will take an hour. So, please start by 1 pm. We also have a live class on Monday from 2 pm - 2.50 pm and it will start on option pricing applications in valuation. That’s it for today.
The newsletter for the week is attached. As the clock winds down, deadlines are approaching. The third quiz will be on Monday (April 27). It will cover packet 2 (pricing, private company valuation and asset based valuation). So, keep that in mind as you review past quizzes. You can find them here:
Past quiz solutions: http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xlsx
My suggestion, if you have limited time, is that you start with the most recent quizzes and work back since they will be more closely tied to the material for this quiz. The review session for the quiz is at the links below:
The quiz will be accessible from 4 am to 2 pm, NY time, and will take an hour. So, please get started by at least 1 pm.
Attachment: Issue 11 (April 25)
I will keep this short. I hope that your preparation for the quiz is going well. In case, you have last minute questions or just clarifications, I will have be around later today on Zoom. (Where else? It’s become my alternate universe…) The details are below:
Aswath Damodaran is inviting you to a scheduled Zoom meeting.
Topic: Office hours for valuation and corporate finance
Time: Apr 26, 2020 05:00 PM Eastern Time (US and Canada)
If you were able to join me on the Zoom session today, after the quiz, thank you. Today we started on our discussion of real options by doing the grunt work of first describing the basis for real options (learning and adaptive behavior) and understanding the basics of what makes options different from other assets and the fundamentals of option pricing. Though it is a bit off a grind, it is worth understanding the replicating portfolios and arbitrage that lie at the heart of option pricing models. We will use this knowledge in Wednesday’s class and beyond when we talk about real options and how best to incorporate them into valuation. By now, many of you (about 180, by my count, out of a class close to 230) should have received back your DCF valuation back. If you have not received yours back, please send it to me again. 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.
In class, I have made a fetish about connecting stories to numbers and I am going to stick with that fetish. As I looked at your valuations, I always stopped and asked what the underlying story you were telling about your company. You did a really good job, collectively, and I would classify the submissions into three groups:
One thing that I would recommend that you do, especially if you are using my spreadsheet, is to use the story worksheet that is built into the spreadsheet and enter the story for your company. (Many of you did, but some of you have left my Boeing or Zoom story in there…)
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 0.75 or 0.8% 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 the Euro riskfree rate, 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 5-6% here... That is because the current implied premium in the US is about 6.01% (April 2020). If you are using a premium of 4%, 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: Operating lease inputs
If you capitalize operating leases, make sure that you get the current year’s lease or rental expense in addition to the lease commitments. If you cannot find the former, enter a number equal to your first year’s lease commitment.
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.
I know that you have lots to do and I am adding one more item to your to-do-list, but I have taken the Google shared spreadsheet that I created when we moved to the online format, and added five extra columns to it (DCF value, Multiple used, Your pricing per share,Current Market Price/share and recommendation). If you are valuing a private company, enter a price equal to your estimated value. Please, please enter the numbers for your company in these columns, when you get a chance.
|4/28/20||There is no valuation or pricing for this week. I think that you have had enough of me. Before I continue nagging you about the project and getting done, I want to deliver on something I promised yesterday. You did your quiz 3 yesterday and you should be able to check the solutions on NYU classes, as well as your grade. Since some of you are concerned about the distribution, I have put up the distribution of both quiz 2 and quiz 3 grades below. Don’t read too much into your standing at the moment, whether it is really good or bad, since 70% of the grade lies on the final and the project.|
In today’s class, we used real options to examine why the rights to non-viable technology can be valuable and why the values of natural resource companies are affected by both the level and variability of commodity prices . As a cautionary note, you are pushing option pricing models to breaking point when using them to value these options, but the key takeaway is that even if you do not value the options explicitly, understanding that they exist can alter how you behave as a business. It is also true that the information that you will need to value many real options will be accessible only if you work at the pharmaceutical or natural resource company, and consequently, you cannot apply it to your company (project), since you will not have that access.
During the course of the class, there were a couple of places where I was guilty of not being as clear as I should have been. One was when we discussed why I used Merck’s pre-tax cost of debt in my present value calculation for Biogen’s license fee. Let me break down my rationale into multiple parts:
The other issue is the cost of delay, where I use different approaches for different options (1/n for the patent, the CF as a percent of value for the undeveloped reserves). That reflects judgment choices, but ultimately, the question you are trying to answer is what you, as a company, will lose by not exercising an option (patent or undeveloped reserve) once it becomes viable. There is one potential application of options in valuation and that is valuing equity in troubled companies with lots of debt as options that you can try on your company, and it will be relevant if you are valuing a money losing company with a lot of debt.
you have already completed, kudos. If you are in the middle, here is the to-do list , just to keep you organized.
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, at least for revenues and operating income.
1.4. Review your final valuation for consistency
What you should include in your final report: A picture that shows your valuation (with the story embedded). If I were turning in a valuation of Boeing, for instance, here is what it would look like (If you are using my spreadsheet, this is already a worksheet in the spreadsheet that you can use to fill in your story.
2. Relative valuation/ Pricing
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. You can find the regressions here:
What you should include in your final report: Tell me what multiple you used in pricing (and why), the comparable firms you used (with sample size), how you controlled for differences (if you used a regression, give me a summary of what you found with statistical significance - t stats and R squared) and your pricing judgment. For example, if I were presenting a pricing for Boeing, this is what it may look like:
Multiple used: EV to Sales, because earnings are negative and EV to Sales has the highest R squared among the different EV multiples
Comparable firms: Global aerospace and defense firms (Sample size = 28 firms)
Control tool: I ran a regression of EV to Sales against operating margins across the 28 firms
EV/ Sales = 0.83 + 6.51 (Pre-tax Operating Margin) R squared = 38.33%
(Numbers in brackets are t statistics with the two stars indicating significance at the 99% confidence interval)
Boeing’s pricing = 0.83 + 6.51 (.096) = 1.46 (I used expected future margins, since 2020 margins will be negative)
Boeing EV = 1.46 * $76,559 = $111,390
Boeing Pricing per share = $164.11 (I added cash and subtract out debt to get to equity value, before dividing by number of shares)
3. Option valuation (Monday’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: Estimate the variance in firm value, using your own estimates or the industry averages that I have estimated and are built into the linked spreadsheet.
3.2.5: The value of equity that you get from this model is your option pricing estimate of value for equity.
What you should include in your final report: Boeing is losing money, but its debt is only $28.5 billion (about 25% of its value). So, the option to liquidate is not worth computing.
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 in May 2019 (the date will depend on when you get done)
4.3: Make your recommendation (buy, sell or hold)
What you should include in your final report: My DCF value ($161/share) and pricing ($164/share) are both higher than the current price. I am buying Boeing.
5. Numbers to me!!!!
Fill in the Google shared spreadsheet when you have the numbers for your company.
To provide some motivation beyond my pathetic begging, I will assign 5 points out of the 40 points on the project to just getting the numbers into the spreadsheet. (Please don’t enter random numbers)
6. Final Project write up
Write up your findings in a group report and submit as a pdf file. 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, May 11, 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.
Just to keep the over zealous from going over board, I am going to put a page limit of 15 pages for each report (for up to five companies). You can add two extra pages for each additional company to the limit; with 7 companies, the page limit is 19 pages. If you are doing your valuation individually, a page limit of 4 pages applies. Please do not attach excel spreadsheet. And no.. you don't have to do everything that these groups did. 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.
I know that this has been an unsettling semester for many of you, both in terms of classes and life, and the last thing I want to do is to make your life more difficult. I know that I have been demanding of your time and that I nag you without stop, but I really, really want to make sure that you are able to get as much out of this class online, as you would have in person. That may not be doable, but I will be damned if I stop trying. That said, we are on the cusp of the last part of the class and I decided that it is time to talk about that which will not be mentioned, which is grades. With no further ado, here we go.
If you feel like exploring valuing a patent as an option, I have a webcast on how to do it and here are the links:
I have also added a weekly challenge related to options that you can try out. It is attached and the solution is also attached.
Attachment: Weekly Challenge
The countdown has begun. We have three sessions left in the class, nine days until the project is due and sixteen days until the final exam (but who’s keeping count, right?) The last newsletter is attached and while it contains no real news, it is a ritual that I go through each week. As you work on your project, please do enter your final numbers in the Google shared spreadsheet:
In my Thursday email, I also mentioned using my market regressions, but I just realized that I sent you the link to the January 2019 regressions, not the January 2020. I am sorry, and here is the right link:
As you look to the final, note that it will be accessible for 12 hours on May 18 and that it is a 2-hour final. More details on reviews, office hours and other specifics will come some time this week.
Attachments: Issue 12 (May 2)
|5/3/20||It is the last full week of class ( with the last session a week from tomorrow) and I am sure your plate is full. We will complete our discussion of real options tomorrow, first talking about the value of flexibility (to be able to walk away from mistakes and to borrow money) and then valuing distressed equity as an option. On Wednesday, we will talk about acquisition valuation, focusing on the values of control and synergy. Since you will be wrapping up your project, I will have office hours on Tuesday, Thursday and Friday. I will send you the links tomorrow.|
In today’s class (I am sorry but you will notice that the Zoom recording starts about 8 minutes into the class, but the YouTube has the full class), we completed our discussion of real options, starting with an analysis of why the option to abandon and financial flexibility can be viewed as options, and how to value them. We then turned our attention to distressed equity, and why stock in a highly levered, money losing firm can become an option, and why it matters for investors. Since the value of distressed equity as an option rests on having a lot of debt, you will not find much use for it on your project, unless you happening to be valuing a company where there is negative earnings or the threat of negative earnings and a lot of debt. If you do, you may find this spreadsheet useful in getting that option value:
If you are have trouble with figuring out where to get the inputs, I am sending you a preview of the very last valuation tools webcast, where I use Jet India (a company that I think has been put out of its misery) a few years ago, with the model:
Jet DCF: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/DistressedEquity/jetindiaDCF.xls
Jet Equity as option: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/DistressedEquity/jetindiaoption.xls
As I said, don’t force your company through this, if it does not fit.
Tomorrow, we will turn our attention to the many sins in acquisition valuation and as a precursor, I have attached a series of questions that cut to the heart of acquisition valuation and will form the backbone for tomorrow’s class. It is a great way to review the entire class while also getting ready for tomorrow’s class. So, please give it your best shot. Next Monday, in the last session, we will turn our attention to the last part of this class, where we will go inside companies and look at the levers to increase value. For those of you who will be in consulting, strategy or running your own businesses, you will get to see what drives value up (or down).
As you embark on the closing touches of the project, here are a few things to keep in mind:
1. Tweak your DCF, if you need to, estimate a value and let it go. This is an ongoing story and this your take, as of right now.
2. Do the pricing of your company, recognizing that your final pricing conclusions are going to be a function of the multiple you use, the companies you use as comparable firms and how you control for differences. If your R-squared is low, try alternatives, but at some point, adopt the karmic pose. It is what it is.
3. If the option pricing applies to your company, try it.
3. Make your recommendation and I will accept your judgment.
I know that this is shaping up as the week from hell for some of you and I share some (or all) of the blame. Anyway, it is too late for me to be offering you "substantive" help on the project, at least on a collective basis, but here is a list of "to dos" for you and me over the weekend:
1. Finish the number crunching for the project.
2. Enter your numbers into the Google shared spreadsheet:
3. Work on writing up the project report. Don't get fixated on format or on small details.
4. Next Monday morning, check your email. You should find a presentation for the class attached to the email.
5. Tune in live to the Zoom class on Monday. I know that some of you are in different time zones and have been watching the recordings, and that is perfectly understandable. However, Monday's class is special. If this were a play, it would be when the fat lady sings. While I may not be fat, a lady or hold a tune, I will do my best impersonation.
6. Turn in your project report by email by 5 pm, as an attachment. Make sure that you cc everyone in your group and In the subject, please list "The Grand Finale”.
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 briefly mentioned the InBev/SABMiller merger in class but if you want something more extensive, I am going to offer you the blog post that I did on it when it happened:
If you look towards the bottom on the post, you will see a YouTube video on the merger.
I go through the process of valuing control and synergy in a merger, and even if you don’t agree with my assumptions, the framework can still be useful.
I hope that you are moving towards completion on your project. I am tracking your numbers on the Google shared spreadsheet, and if you have not entered them in already, please try to get your numbers in by Sunday (the earlier in the day, the better). If you already have your numbers in there, and want to change them, you have until Sunday to do it, before I download to prepare for the last class:
I also sent out links to the final exam review and past finals in yesterday’s emails. If you are getting on a jump on preparing, here are a few suggestions:
1. In reviewing the material, start at the end and work backwards, with packet 3 getting your attention first. While it is a cumulative exam, these are the materials you have not already studied for a quiz.
2. In working through past exams, start with the most recent ones and work backwards, since I have changed the format a little.
3. I sent the wrong link for the slides for the review in yesterday’s email. Here is the right link:
Slides for final exam review: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valfinalreview.pdf
I have office hours tomorrow (Friday from 1 pm - 2 pm), in case you have questions.
I know that you are busy and I will keep this brief.
1. Please wrap up your pricing. As you work on the pricing, recognize that you cannot fight the data. Put simply, if no matter what you try, you cannot get any of the regressions to work, the message is that the pricing in the sector cannot be explained by the fundamentals on the ground today. That does not make pricing pointless but it can give you a pricing for your stock that is very different from your intrinsic value.
2. If your pricing and intrinsic value are very different, you have to choose which one you want to use for your final recommendation. DO NOT average the two. Bankers may do it, but it is very bad practice. When choosing, recognize that there is no right choice. It depends on faith (do you have faith in your DCF) and philosophy (are you a trader or an investor?). I will not second guess your recommendation.
3. I will be having office hours today at 1 pm, NY time. I know that office hours are getting crowded, but I have about 800 people in the three classes put together. I know office hours are scheduled to be until 2 pm, but I will stay on today as long as there are people waiting.
It is the final weekend of the class, and I wanted to remind you again to enter the numbers for your company, when you have them, into the Google shared spreadsheet:
(Just a request. When entering numbers for the stock price, value and pricing for your stock, please use the currency tool in Google, but if you cannot find it, just enter the number. Please don’t enter EUR 39.33. Just enter 39.33. It makes it impossible for me to work with your inputs, without fixing them)
In addition, please remember to fill out the course evaluations. The instructions are below. To be honest, I don’t know what the consequences are for forgetting, but why risk it? Just get it done!
Student Instructions for Completing Online Course Evaluations
The project is approaching its end and here are a few final reminders.
Thank you for entering your numbers into the Google shared spreadsheet. It was the raw material that I needed for tomorrow’s class and the presentation is at the link below:
I would love to see you live in class for the grand finale.
|5/12/20||I hope that finishing the project took a big item off your to-do list. But there is no rest for the wicked, since the final exam is next Monday (May 18). Here are some links:
You can also find past final exams and solutions at this link:
Past solutions; http://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.xlsx
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?
As stated in class, it is N(d2) which is the risk neutral probability that S>K. In some of the problems, though, I have used a range from N(d1) and N(d2) as the range of probabilities. Let me explain why. N(d1), in addition to being an option delta, is also a probability that the option will be in the money. In fact, the only reason d1 is different from d2 is because you are uncertain about S
d2 = d1 - square root of the standard deviation
If you had a standard deviation of zero, N(d1) = N(d2). As the uncertainty increases, the gap between these two numbers will widen. Thus, you go from being certain about the probability to having a range. Having said all of this, N(d2) should be the point estimate on the probability that S>K. You can use the range to indicate that there is uncertainty about this probability.
2, What is the cost of delay?
This is a tough one. Sometimes, I use 1/n and sometimes I use the cashflow next year/ S and sometimes I use no cost of delay at all. Lets look at the conceptual basis. The cost of delay is a measure of how much you will lose in the next period if you don't exercise the option now as a fraction of the current value of the underlyign asset (It parallels the dividend yield. On a listed option on a stock, if you exercise, you will have the stock and get the dividends in the next period) . Thus, if you have a viable oil reserve, the cost of delay is the cashflow you would have made on the developed reserve next period divided by the value of the reserve today.
Here is the overall rule you should adopt. If you have a decent estimate of the cashflows you will receive each period from exercising the option, it is better to use that cashflow/ PV of the asset as the dividend yield. If your cashflows are uneven or if you do not know what the cashflow will be each period, you should use 1/n as your cost of delay. If you will lose nothing in terms of cashflows by waiting, you should have no cost of delay.
Let me take three examples. The first is the bidding for rights to televise the Olympics in an earlier quiz. There were two years left to the Olympics and you were trying to price the option. In this case, there is no cost of delay since you really cannot exercise the option early even if it is deep in the money. (You cannot televise the Olympics a year before they happen...) The second is the oil reserve option. Since the cashflows from the reserve tend to be fairly uniform over time (based upon the barrels of oil you would produce and the current price per barrel, it is easy to estimate the cashflows you would generate each year on the reserve. In most of the oil reserve problems, therefore, you would go with the cashflow/ PV of oil in the reserve as your cost of delay. The third is the patent examples. While you may be able to estimate the expected cashflow each year from commercialising the patent, these cashflows are more difficult to obtain and are less likely to be uniform over time. That is why many of the patent problems use the less preferred option of 1/n as the cost of delay, where n is the number of years left in the patent.
3. How am I going to estimate N(d1) and N(d2)?
I will give you the cumulative normal distribution. You still should be able to estimate d1 and d2 on your calculator. While the distribution may not give you a precise N(d), I will accept the nearest number. Thus, if d =0.48, I will take N(.50) as your estimate.
I have been asked many times what the final exam will look like, and about the logistical details. Since I have confused many of you with my office hour times, I thought I should clarify matters better. So, here you go:
I have also been asking about grading, since you have the option to switch to a pass/fail until the last moment. I will relax the standard grading curve (35% A/A-) to have a more liberal policy (my guesstimate is closer to 45% A/A-) to reflect the difficult circumstances of this class. Unfortunately, there is no way that I can guarantee you an A right now, based upon what you have done so far in the class, since the final is 30% and the project is 40%. On the project, I would not expect much dispersion, at least based upon my grading of the first few projects. The bottom line is that your final grade will ride on how well or badly you do on your final exam. That would have been true, with or without COVID. I am sorry that I cannot resolve more of your uncertainty, but I don’t see how I would do that.
Finally, please remember to do the course evaluations, when you get a chance. The last day that you can do them is Friday and that can creep up on you. Here are the instructions:
Student Instructions for Completing Online Course Evaluations
I hope you are done, and are celebrating, social distancing as you do it. However, just in case you still care about grades, yours just went online. I know that this semester was a challenge. None of us signed up for an online class, and I am sure that you are all Zoomed out. And valuing a company in the midst of a full-blown market crisis is never easy. The good news is that if you can value a company in this environment, you can value it any setting. I appreciate your showing up for the online class and the work you put into the class, and the patience you showed as I drowned you in emails, valuations of the week, weekly challenges and other torture devices.
I know that many of you are graduating and I that 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. 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"). If you are not graduating, I will see you around school. While I will not be teaching in the fall, I will be back teaching both corporate finance and valuation in the spring, and you can watch another entering MBA class endures the duress of unending emails, non-stop nagging and everything else that goes with this class. I could tell you that I hated doing it, but I would be lying. 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 Kanye West status…)
My son and daughter tell me that TikTok is the social media platform of the day. Perhaps, I should be Tiktoking soon…. So, have a great summer and an even better rest of whatever life has in store for you!