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Corporate Finance and Valuation: In-Practice Webcasts

Corporate Finance

In this section, I post webcasts that track my semester long corporate finance class and parallel the live case study in my applied corporate finance book.

Topic Description Webcast Supporting material
Corporate Governance The first step in understanding a company is to recognize how corporate governance works in the company. Taking a look at who is on the board of directors and whether the rules of the game are skewed in favor on incumbent managers is a part of this process. In this webcast, I use HP to illustrate how you can use public data to make this assessment.

Webcast

  1. Presentation
  2. HP Annual Report
  3. HP DEF14A
Stockholder composition (for risk measurement) Knowing who owns stock in your company is useful on many levels. In particular, it can alert you to potential conflicts of interest that may arise down the road and how a company's policies may reflect those conflicts.

Webcast

Presentation
Estimating the risk free rate The risk free rate should be easy, right? In some cases, it may be, but it can be difficult to get risk free rates in some currencies, especially when there is default free entity. In this webcast, I look at the ways in which you can extract default spreads for governments to get to a risk free rate in a currency. Webcast Presentation
Moody's ratings
CDS spreads
Estimating implied equity risk premium I have been a strong proponent of implied equity risk premiums, forward looking estimates that are extracted by looking at stock prices today and expected cash flows in the future. While I have an implied equity risk premium spreadsheet on my website, I try to get some of the mystery out of both the process and the inputs in this webcast. Webcast
  1. Presentation
  2. Spreadsheet
  3. S&P 500 on buybacks
  4. S&P 500 earnings
Reading a regression beta page A regression of returns on your stock against returns on a market index is the standard approach to estimating betas. While I do not like these "single slice of history" estimates, the regression still provides useful information about the performance of a stock during the regression period and its riskiness. Webcast
  1. Bloomberg beta page
  2. Spreadsheet for analysis
  3. Disney Annual Report (2012)
  4. Excel regression beta page
  5. Disney (Raw Data)
  6. S&P (Raw Data)
Estimating a botttom up beta A single regression beta is a flawed measure of relative risk. A bottom up beta, which builds up to the beta of a company from its businesses, is not only more precise but also more flexible and forward looking. In this webcast, I describe the mechanics of estimating a bottom up beta. Webcast
  1. United Technologies 10K
  2. Spreadsheet for bottom up beta
Debt and the cost of debt You need the market value of debt and a pre-tax cost of debt to compute a cost of capital. To get the market value of debt, you first have to determine what items on the balance sheet qualify as debt and convert the book value of the debt into market value. You also have to bring lease and other contractual commitments into the equation. Finally, all of this will require that you estimate a current, long term cost of borrowing. Webcast Home Depot 10K
Home Depot 10Q
S&P rating for HD
Spreadsheet
Measuring accounting returns In assessing whether a company's existing investments are good or not, we draw on accounting return measures: return on invested capital and return on equity. However, navigating what should be in invested capital and what should not, and how to adjust for accounting inconsistencies is tricky. Webcast Walmart 10K (2013)
Walmart 10K (2012)
Spreadsheet
Identifying a "typical" project Knowing what a typical project for a firm looks like is useful not only to undertstand cash flow patterns & risks in investment analysis but also in structuring financing and dividend policy. Webcast Presentation
The trade off on debt The first step in assessing whether a firm can borrow, and if so, how much, is to look at the benefits of debt and weigh them against the costs, at least on qualitative terms. Webcast
  1. Presentation
  2. Spreadsheet
  3. Marginal tax rates by country
  4. Effective tax rates by sector (US)
The optimal debt ratio To assess the optimal debt ratio, you can use the cost of capital approach, where you minimize cost of capital (in the standard approach) or maximize firm value (when there are indirect bankruptcy costs) Webcast
  1. Dell 10K
  2. Dell optimal capital structure
Debt design The "right' debt for a firm reflects its assets and cash flows. To design this debt, you can either start with the typical project and work intuitively to the right debt or try a more quantiative approach. Webcast
  1. Presentation
  2. Spreadsheet
  3. WMT financial summary
Dividend policy assessment With every firm, there are three key questions that lie at the heart of dividend policy: (1) How much cash does this firm return to stockholders, (2) How much could it have returned and (3) Do you trust management? Webcast
  1. Spreadsheet
  2. Disney Annual Report (2012)
Valuation Valuation is the end game, where all of the aspects of corporate finance - investing, financing and dividend policies - come together in one number. Webcast
  1. Spreadsheet
  2. Apple 10K (Sept 2012)
  3. Apple 10Q (Mar 2013)

Valuation Tools

While it is nice to talk about the big picture of valuation , and I do, in my classes, it is the nuts and bolts issues that trip us up. In this section, I will be posting webcasts that can help you navigate some of these nuts and bolts questions.

Topic Description Webcast Supporting material
Getting data Before you can do valuations and process information, you have to first collect the information. In this webcast, I look at ways to get information on a company's filings, macro economic indicators and sector-wide data. Webcast
  1. SEC website
  2. SEC Live
  3. FRED (Federal Reserve)
From financial disclosures to value Much of the raw material (data) that we use for valuation comes from annual reports and financial filings. (10, 10Q). In this presentation, I lay out a template for extracting information from these filings, separating the stuff that matters from the stuff that does not, using P&G in September 2012 as an illustration.

Webcast

  1. Presentation
  2. P&G: 10K
  3. P&G: Valuation (Excel spreadsheet)
Creating a trailing 12-month financial statement When valuing a business, you want the most updated information you can find. But what if your most recent annual report or 10K is several months old? The solution is to create a trailing 12-month financial statement.

Webcast

  1. Apple: 10K
  2. Apple: 10Q
  3. Apple Trailing 12-month (spreadsheet)
Estimating an implied equity risk premium I have been a strong proponent of implied equity risk premiums, forward looking estimates that are extracted by looking at stock prices today and expected cash flows in the future. While I have an implied equity risk premium spreadsheet on my website, I try to get some of the mystery out of both the process and the inputs in this webcast. Webcast
  1. Presentation
  2. Spreadsheet
  3. S&P 500 on buybacks
  4. S&P 500 earnings
Leases and Debt Accounting standards allow companies to classify some leases as operating leases, primarily based upon the degree of ownership vested in the lessee. Operating lease expenses are treated as operating expenses, not financial expenses. The sensible thing to do is to convert lease commitments to debt. In the process, though, you have to redo your financial statements. Webcast
  1. Disney Annual Report
  2. Converting leases to debt (spreadsheet)
Capitalizing R&D R&D is the ultimate cap ex, if you define capital expenditures as investments designed to create benefits over many years. Accountants incorrectly treat R&D as operating expenses. The logical fix is to convert R&D from an operating to capital expenses, though this will also lead to a restatement of both the income statement and the balance sheet. Webcast
  1. Microsoft: 10K for 2012
  2. Microsoft: 10K for 2011
  3. Converting R&D to capital (spreadsheet)
ROIC and ROE: The "only" valuation numbers that matters The return on invested capital is more than an accounting number. If computed right, it measures what a firm is generating as a return on its existing projects and provides a key indicator (though not always a definitive one) of what it will generate on future investments. That, in turn, will determine how much value growth will add (or destroy) in the company. If you don't know this number for a company, your valuation has no moorings. Webcast Walmart 10K (2013)
Walmart 10K (2012)
Spreadsheet
Terminal Value Check The terminal value is a "big" number in DCF valuation, but it is subject to misuse and manipuluation. In this session, I take a look at how you can detect problems with a terminal value computation (in both your own DCFs and in other people's DCFs) Webcast Sample DCF valuation
Terminal value analyzer
Employee Options When a company uses options to compensate employees or to pay suppliers, it saves itself cash that it would have used otherwise but it does "dilute" the value of the equity held by common stockholders. When valuing a company with a significant option overhang, the right thing to do is to value the options as options and subtract that value from the estimated value of equity, before dividing by the number of shares outstanding. Webcast Cisco 10K
Option spreadsheet

EV, Firm Value and Equity Value

The "value" embedded in a multiple can be the value of the entire firm, the value of its operating assets (enterprise value) or the value of the equity. In this webcast, we look at the differences between the three and why you may use one over the other. Webcast Blog post on topic
Presentation
Excel spreadsheet

Multiples and Fundamentals - Analyzing relationships

When asked the value a company, relative to other companies, one of the biggest challenges you face is in assessing and analyzing the data. In this presentation, I looks at steps in analysis. Webcast
  1. Presentation
  2. Bank raw data
  3. Descriptive Statistics
Valuing Patents as Options
The exclusive rights to produce a product or provide a service can provide the owner with "optionality", allowing for a premium on top of a discounted cash flow value. In this webcast, I look at a simplified example. Webcast
  1. Presentation
  2. Spreadsheet
Valuing Distressed Equity as an Option
With money-losing companies, with a lot of debt, equity takes on the characteristics of a call option (to liquidate the business). In this webcast, I look at the mechanics of applying this approach to a troubled company. Webcast
  1. Jet India Financials
  2. Jet DCF valuation
  3. Jet Option valuation

Valuations (Examples)