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The emails for this class will be collected in this file. Have fun with them!
Date |
Email content |
| 8/19/14 | Hi! 1. Preclass work: I know that some of you are worried about the class but relax! If you can add, subtract, divide and multiply, you are pretty much home free... If you want to get a jump on the class, you can go to the class web site 2. Syllabus & Calendar: The syllabus for the class is available and there is a google calendar for the class that you can get to by clicking on 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 4. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store... If you are the law-abiding type, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. Or, as a third choice, you can try The Dark Side of Valuation, again the second edition, if you are interested in hard to value companies.. Or if you are budget and time constrained, try "The Little Book of Valuation". 5. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad or iPhone that you can download on the iTunes store: 6. Online reach: As you probably know (if you were in my corporate finance class), I have tried over the last few years to provide multiple ways to access the class. So, you will shortly be getting a second email from me (if this one gets through) inviting you to to join the Lore grouping for this class and offering you a way to also add this class on to your Apple devices on iTunes U. I know that this may be over kill, since you will be physically in the class, but I think you will find it useful. I am looking forward to seeing you on Sept 3 - Wednesday at 10.30 at KMEC 2-60 to be precise.. I think we are going to have a lot of fun (or at least I am). Until next time! Aswath Damodaran |
| 8/24/14 | Hi, 1. iTunes U course: I will be putting the class on iTunes U. Not only will all the webcasts be accessible from the site, but I will post all of the material for the class on there as well. If you have an Apple device (iPhone, iPad), joining the class is easy. You should first go the App store and download iTunes U for the iPad/iPhone. It is free. After you have downloaded the app, you can do it in one of two ways. 2. Lore class: I will also be putting the class online through a service called Lore (that some of you might remember from the corporate finance class). 3. NYU Classes: I am not particularly fond of closed systems (Blackboard, NYU classes) but you should be able to find the valuation class on NYU classes. Not only will the webcasts and material be on this site, but this is the place where you should be able to see your quiz grades and to submit weekly challenges (more on that later). 4. Google Drive: I will be using Google drive every week to put up a shared spreadsheet, where you can put up your valuations of the company that I will use as my valuation of the week (Again, more on that latter). Could you take the class without any of these add ons? Absolutely, but try them, if you can. They are fun to work with! Until next time! |
| 9/1/14 | Hi, 1. Previous emails: This is the third email for the class (and class has not even started). If you have no idea what the first two emails were about, you can find out by clicking below: 2. Lecture notes: As I noted in my prior emails, the lecture notes for the class are available. You can get the first packet by clicking on the link below: 3. Capital IQ access: As a Stern student, one of the few privileges you get is access to Capital IQ, an incredibly comprehensive dataset that includes rich information on market, accounting and corporate governance data on about 41,000+ publicly traded companies. At some point in the class, you will need access to Capital IQ. So, at the risk of jumping the gun, please do this as soon as you can (how about right now?). 4. Corporate Finance class: As I scan the class list, I notice many familiar names from the corporate finance class and I look forward to seeing you again. I also noticed a few new names and I look forward to seeing you for the first time. I don't require that you remember your corporate finance in every detail, but it does give you a leg up in valuation, if you start with a good corporate finance base. Just in case you feel that your corporate finance basics are shaky, I have just put online a compressed corporate finance class that you may (or may not) find useful to review the material: 4. Class on Wednesday: I will see you in the revamped KMEC 2-60. While I think that the school spent way too much money (they always do), they did a pretty good job with this room. I think we will have fun with the room. In fact, after Paulson, it will feel cozy. I will also bring physical copies of the syllabus, project description and the lecture notes for the first two sessions. I know that some of you will be missing the class, and if you are, you can download the pdf versions of these three documents by going to: |
| 9/3/14 | First, a quick note about today's class. During the session, I told you that that this was a class about valuation in all of its many forms – different approaches (intrinsic, relative & contingent claim), different forums (for acquisitions, value enhancement, investing) and across different types of businesses (private & public, small and large, developed & emerging market). After spending some time laying out the script for the class (quizzes, exams, weekly tortures), I started on the intro to valuation by giving you my reasons for doing valuation (to fight looming lemingitis) and starting on the discussion of widely held misconceptions about valuations. With that out of the way, have you classified yourself yet? Are you a proud lemming, a "Yogi bear" lemming or a lemming with a life-vest? While you are pondering that life-changing question, I do have some points to make: As I emphasized in class this morning, you learn valuation by doing and the first valuation of the week is up and running. It is my valuation of Alibaba and I would encourage you to make it yours. If you don't know much about Alibaba, start with this article from the Economist (which while dated captures the spirit of Alibaba): Sorry about the length of this email, but there will be more to come (I promise!). Until next time! |
| 9/4/14 | A few quick notes: 1. I hope that you have found a group and if not, that you are working on finding one. I do have two orphans on the list and if any of you need or would like one or two additions to your group, please let me know. Please do pick a company soon. Rather than torture yourself with making the "right'' choice, recognize that you can always switch companies later (it really is no big deal) and that it is better to choose quickly and start working on a company than it is to no pick a company at all. Just to clarify, there does not have to be an overriding theme for your group and you can work with private businesses (if you can get the information on these businesses). 2. If you are interested in Alibaba, please do take a look at my blog post and valuation and then try to do your own version. It does not have to be submitted to me, but when you are done with your valuation, go to the Google shared spreadsheet and enter your numbers into that spreadsheet. I will not grade you or hold it against you, if you choose not to do the valuation. I understand that you have other things on your plate right now. 3. If you were not at the first class, or were just trying to take a look at the webcast, you have probably noticed that only the streaming link is available. Stern switched to a new technology provider for webcasts this semester and some of the wrinkles are still being ironed out. I should have the podcast available soon and will keep you posted. That is about all for the moment. Until next time! |
| 9/5/14 | I hope that the first week of classes went well. I am back to bug you on three counts: 2. Valuation Tools Webcast: I know that many of you still pondering your company choices and group dynamics, but if and when you pick a company, the first step is to get the raw material you need for your valuation. These include data on the company (annual reports, regulatory filings like the 10K/10Q), sector wide data (numbers for other companies in your sector) and macro economic data. I know that many of you already know exactly how to do this. However, if you feel uncertain, you can try this webcast out. 3. YellowDig: This semester, I plan to try out new educational technologies each week. I know that I have already drowned you with a lot of choices when it comes to technology, but you are welcome to try some of the technologies with me. This week, I am trying out YellowDig.com. This is a start-up that tries to bring social media in a sophisticated way to the classroom. The company has been able to sign up students across about fifty universities (including Wharton and other business schools) and I plan to put the class sessions up on the site, as we go through the class. You can post interesting links, comment on the sessions or on other posts and carry on conversations about the class with other students in the fifty universities. So, go on to the website (Yellowdig.com) and register and you should be off to the races. 4. Alibaba: Alibaba just valued itself at around $162.7 billion. One more reason for you to try to value Alibaba on your own. My value (which was $157.7 billion) has been up online since Tuesday. What's your estimate? Have a great weekend! Until next time! |
| 9/6/14 | It is tough to write a newsletter when there is no news to write about, but that did not stop me. Give the newsletter a quick look (it won't take more than a few minutes). In the meantime, I think I have found matches for all the orphans who have contacted me so far. So, if you are still up for adoption and would like to me play match maker, please let me know. Have a great weekend and you will hear from me again tomorrow! Attachment: Newsletter # 1 (September 6) |
| 9/7/14 | I hope you had a great weekend. In the coming week, we will be spending time on what I call the philosophical foundations of valuation. For those of you who were expecting numbers and models, this may come as a surprise, but that's my job, right? To keep you off balance. In fact, in preparation for the class tomorrow, I would like you to do two things (it will take you about 15 minutes overall and I would really appreciate you spending the time before the class): 2. Bias, Uncertainty and Complexity: In tomorrow's class, we will also consider what I call the Bermuda Triangle of valuation, with bias, uncertainty and complexity being the three sides. Just as planes and ships were rumored to have disappeared into the actual Bermuda triangle, good sense disappears in the valuation Bermuda triangle. In preparation for the class tomorrow (we will start class with this pre-class test), please take the attached test. Again, don't worry about your experience or lack thereof in valuation. This is common sense. Attachment: Valuation bias: A test |
| 9/8/14 | Today's class started with an examination of left and right brains and how a good valuation requires them to work together. While you may be a little mystified about how exactly you will be connecting stories to numbers, it will come and you find this blog post on the topic useful: We also started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. We also spent some time on the Bermuda triangle of valuation, where bias, uncertainty and complexity make valuations go off the tracks. We then moved on to talk about two of the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, and relative valuation, where you value an asset based on the pricing of similar assets . With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. Since I mentioned Carl Icahn and Bill Ackman as hostile acquirers (catalysts), you may want to look at Herbalife, the company that Ackman has targeted as being over valued. See if you can get a list going of how he is trying to be the catalyst for the correction... and think about the dark side of this process. One final note before I leave you to your own devices. I just posted my updated Alibaba valuation online, with my read on how the bankers arrived at their estimated price: Finally, as will be the case with every session of this class, there is a post-class test (with a solution). I have also attached the answers to the bias test that we started the class with. By the time, I got to scenario 7, I am sure that you lost track of what we were finding. Attachments: Bias test solutions, Post-class test and solution. |
| 9/9/14 | The valuation of the week is ready to go. It is of a company that many of you might not be familiar with. So, start with the back story: https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaBackStory.pdf Then, download the key financials: Annual Report: https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaAnnualReport2013.pdf Quarterly Report: Arca: Quarterly Report (Second Quarter 2014): https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaQuarterlyReport2014.pdf Bloomberg financial summary: https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaBloomberg2014.pdf Once you have those, you can check my valuation: My valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaValuation2014.xls It may be a little overwhelming. So, take a look at the picture instead: https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaValuationPicture.pdf The part of the valuation that I would like you to pay the most attention to, because it is a precursor to what is coming in these next three sessions is the cost of capital. Here is a little explanation: https://www.stern.nyu.edu/~adamodar/pc/blog/ArcaCostofCapital.pdf Finally, if you can try your hand at the spreadsheet, go ahead, and then input your values into the shared Google spreadsheet: https://docs.google.com/spreadsheets/d/1t3YNAcH-OV4gyeB29ZUaexk_kDLlF9HLUskwCvA5hH8/edit?usp=sharing That is about it. |
| 9/10/14 | Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. We then laid the foundations for valuation and how your viewpoint on what you are valuing (equity or business) can alter how you estimate cash flows and view risk. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate. I have a paper on riskfree rates that elaborates on the discussion in class today. It is really not a painful read, if you can spare the time. You can get to it by going to: The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where they stand: Attachments: Post-class test and solution, CDS Spreads, ratings & other riskfree rate stuff: September 2014 |
| 9/11/14 | By now, I hope that you have found a group and picked a company. If you have not, please do so soon! If you have picked a company, your assignment for the week is to get a risk free in the currency of your choice. We started on this discussion yesterday in class, and my valuation tools webcast will take you through the process. It will be easier in some currencies than others, but it is a process well worth mastering. I have reattached a handout that I sent yesterday with more details on what it contains and how you can use it to get a risk free rate. So, here is your guided tour: 2. The third page is the Emerging Market bond box that shows up in the Financial Times each weekday. The key to reading this table is to recognize that these are dollar and euro denominated bonds issued by emerging markets. Compare the bid yield on these bonds (fourth from last column) to the US treasury rates of equivalent maturity and the Euro bond rates to the German Euro bond rate of the same maturity. For instance, the Brazil 1/20 bond is roughly a 5 year bond and the bid yield is 2.84%. The five-year US treasury bond rate is about 1.74%, giving you a default spread of 1.10% for Brazil. 3. Pages 4-5 are the sovereign ratings for countries on Moody's. You can get them yourself at http://www.moodys.com. Note that there is a foreign currency rating and a local currency rating for each country, and focus on the latter. Use that rating in conjunction with the ratings/default spread table on page 9 to estimate a default spread for the country of your choice. Thus, for Brazil, with its rating of Baa2, the default spread you would use is 1.90%. 4. Pages 6-8 are sovereign CDS spreads from September 9, 2014, for the countries which they are available. It is an alternate measure of the default spread. For Brazil, it was 1.99%. If you use a Bloomberg terminal, you can get these by typing in SOVR. Here is how you would use it to get a risk free rate. Take Brazil. From (1), you would get a government bond rate in nominal reais of 11.43%. You have three measures of Brazil's default spread: 1.10% from (2), 1.90% from (3) and 1.99% from (4). Use one or an average of these numbers. Try this for Mexican pesos or Indian rupees and if you have questions, ask me or watch the webcast tomorrow! Until next time! Attachment: Risk free rate data from September 2014 |
| 9/12/14 | In yesterday's email, I went through the process of estimating a risk free rate in any currency. In today's webcast, I reproduce a link from a webcast I sent you during the corporate finance class on how best to estimate risk free rates. Start with the webcast: www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4 Also, download the presentation that goes with the webcast https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt Finally, use the updated numbers I sent you in yesterday's email attachment to get a risk free rate in any currency. https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/riskfreerateSept14.pdf Have a great weekend! |
| 9/13/14 | Hope you are having a great weekend! Just a reminder that your first weekly challenge is still open until tomorrow at 6 pm. I have reattached it to this email. Please give it a shot, then go into NYU classes and submit your answer. I will be putting the answer up online tomorrow. I am also attaching the newsletter for the week! Attachments: Newsletter # 2 (September 13) |
| 9/14/14 | I hope your weekend was fun! If you did have a chance to try the weekly challenge, I have attached the solution. Even if you did not, you can still take a look at both the challenge and solution. On a different note, this week, we will complete our discussion of risk free rates and then move on to talk about equity risk premiums, betas and cost of equity. With equity risk premiums, we will first start with a contrast between historical and implied premiums and the implications of using each. We will also look at the question of country risk and whether you should have different equity risk premiums for different countries, and if so, how best to estimate these premiums. With betas, I will not stick to dogma and draw lines in the sand for the CAPM but focus instead on measuring the relative risk in an investment. See you in class tomorrow! Attachments: Weekly Challenge #2 solution |
| 9/15/14 | We are little more than halfway through the discussion of equity risk premiums but the contours of the discussion should be clear. b. Country risk premium: The last few months should be a reminder of why country risk is not diversifiable. As you see markets are volatile around the world, I think you have a rationale for a country risk premium. You can get default spreads using one of the three approaches that I described last week (in my session on risk free rates). If you are interested in assessing and measuring country risk, to get from default spreads to equity risk premiums, you need two more numbers. The first is the standard deviation for the equity market in the country that you are trying to estimate the premium for. Try the Bloomberg terminal. Find the equity index for the country in question (Bovespa for Brazil, Merval for Argentina etc.) and type in HVT. This should give you the annualized standard deviation in the index - change the default to weekly and use the 100-week standard deviation. Do the same for the country bond in question. The two standard deviations should yield the relative volatility. If you have trouble finding either number, just multiply the default spread by 1.5 to get a rough measure of the country risk premium. If you are interested, I have attached my January 2014 update: c. Company risk exposure to country risk: My concept of lambdas for countries is a work in progress. I have a paper on the topic that you can read, if you are so inclined: d. Implied equity risk premiums: I am attaching the excel spreadsheet that will allow you to compute implied equity risk premiums. I am using the numbers that I used at the start of September to come up with an equity risk premium of 5.28%. Please try to update the implied premium, using today's numbers for the S&P 500 (easy) and the 10-year T.Bond rate (easy). Leave everything else untouched including growth rate in earnings for next five years & updated dividends and buybacks from the spreadsheet (since these were updated a month ago). Follow the instructions to get the updated equity risk premium. We will explore it further in class on Wednesday. The post class test and solution are attached. |
| 9/16/14 | This week, rather than valuing an individual company, I will try to value an index (or equities collectively). I will focus on the most widely followed index in the world, the S&P 500, but the spreadsheet that I attach will travel to any other index, in any market. Let me start with the motive, which is the talk of a bubble that surrounds us. While I would am not ruling out the presence of a bubble (there is always that possibility, especially after the market has gone up strongly for many years), I find much of the talk to be sloppy, lazy and based either on false logic or incomplete facts. Here is a classic recent bubble story: It is this bubble talk that I was responding to when I posted this on my blog: Let's see if we collectively agree or disagreee with Robert Shiller. Until next time! Attachments: My intrinsic valuation of the S&P 500 (June 14, 2014), My intrinsic valuation of the S&P 500 (September 16, 2014) |
| 9/17/14 | change over time. Other things remaining equal, lower stock prices, higher cash flows and higher expected growth all push up the ERP, whereas a higher riskfree rate pushes the ERP down. If you get a chance, please play with the equity risk premium spreadsheet to check for yourself. If after all of this, you still want to read more about equity risk premiums, here is the link to my magnum opus (or something opus), the annual update I do on equity risk premiums: As for betas, the key thing to recognize is that it is a means to an end: a way of adjusting for relative risk. So, keep your eyes on the prize and don't let your disdain for modern portfolio theory get in the way of adjusting for risk and estimating value. The post class test and solution are attached. |
| 9/17/14 | As promised in class, I am attaching the weekly challenge for the week. The first attachment contains the questions and the second has the data on equity risk premiums, interest rates and default spreads. Please post you answer on NYU classes and I will post mine on Sunday. Thank you giving it a shot! On a different note, the TAs for this class, Siddharth Agarwal (sa3117@stern.nyu.edu) and Scott Farmer (scott.a.farmer@stern.nyu.edu), have generously agreed to run review sessions every week for the next 12 weeks of class. The sessions will be an hour, from 4.30-5.30 on Thursdays in room 3-80. They will focus on working through problems from past quizzes that relate to the topics covered until that week. They will be useful for you, if you feel comfortable with the big picture but want to get your hands dirty with the mechanics. Since 3-80 fits only 40 people, Siddharth and Scott have set up a Google shared spreadsheet for you to sign up for the sessions. Spreadsheet Valuation review session sign-up sheet |
| 9/19/14 | We spent much of the week talking about equity risk premiums and most of Wednesday's class on implied equity risk premiums. This week's webcast covers the logic and measurement questions in computing implied equity risk premiums. If you are interested in the webcast, go to the link below: Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ImpliedERP.mp4 The supporting materials are below: Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/ImpliedERP.ppt Implied ERP spreadsheet (from February 2013): https://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb13.xls S&P on buybacks (from earlier this year): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500buyback.pdf S&P 500 Earnings: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500eps.xls I hope you find this useful. The best way to make sure that you get it, is to try it out yourself on the September spreadsheet. Until next time! |
| 9/20/14 | The newsletter for the week is attached. Not much news, but hope you get a chance to glance at it. The weekly challenge is online. Please give it a shot. Attachment: Newsletter # 3 (September 20) |
| 9/21/14 | I hope you had a chance to try the weekly challenge. If you did, you probably tried some statistics on the ERP/interest rate data. I don't our expect our answers to converge, but here is my solution: On a different note, in the week to come, we will begin with an assessment of measuring relative risk (beta and its cousins) tomorrow and move on to estimating cost of equity and capital. If we move at a reasonable pace, we should be able to begin on cash flows on Wednesday. Needless to say, if you still have not picked a company to value, it is time to make a choice. See you in class tomorrow! Attachment: Weekly Challenge #2a solution |
| 9/22/14 | Today's class represented the final pieces of the discount rate puzzle. We began with a discussion of bottom up betas, focusing on defining comparable firms and expanding the sample. Since you will often be the odd person out at your future job, pushing for this approach, I put together a list of questions that you may get asked about bottom up betas (why they are better, how to measure them etc.). You can find them by clicking below: |
| 9/23/14 | I confess that I love Krispy Kreme's glazed raspberry filled donuts, but this post is about the valuation of the company. Krispy Kreme, which has made a partial comeback from disaster, just announced last week that they were increasing their authorized buyback from $80 million to $105 million, raising the question of what this means to you, if are a stockholder in Krispy Kreme. To set up the discussion, start with the backstory on Krispy Kreme: To understand the contours of the discussion and how buybacks affect the value/price per share, try this very long post I had on the topic (from yesterday): Then, download the annual report, the quarterly report and my intrinsic valuation of KKD: Finally, the Google shared spreadsheet for the week is attached for you to put in your thoughts about Krispy Kreme. |
| 9/24/14 | Today's class looked at the getting the base year's earnings right and explored several issues: Here are my links for forensic accounting: Finally, I have created a Google spreadsheet for you to list your company choices and preconceptions. To preserve your anonymity partially, I have listed your Stern IDs (instead of names). Make your best judgment and please try to list your choice by this weekend. |
| 9/24/14 | Today's session may have been a little confusing with all the earnings adjustments and corrections. To get a sense of whether you get the process, try the weekly challenge for the week. Attachment: Weekly challenge #3 |
| 9/25/14 | My usual nagging email about the project. I am glad to see so many of you have filled out the names of the companies you will be following in the Google shared spreadsheet. If you have not yet, please do it soon. A good way to check your understanding of earnings and cash flows is with the company you have chosen. Try the following: 2. If your company has R&D (or like expenses that you think should be capitalized), try capitalizing them with this spreadsheet: I will be posting valuation tools webcasts on both issues tomorrow. So, if you are confused, please watch them. Until next time! |
| 9/26/14 | I know you are busy doing other stuff, but as the discussion shifts from discount rates to cash flows, the details start mounting and it is easy to get lost in abstractions. If you are interested in getting past abstractions, I have put together three webcasts for this week: How to compute trailing 12 month earnings: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012) How to convert leases to debt: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Leases.mp4 (Uses Disney in 2012) How to capitalize R&D: https://www.stern.nyu.edu/~adamodar/ podcasts/Webcasts/R&D.mp4 (Uses Microsoft annual reports from 2012 & 2011) They are all about 10-15 minutes each... and you can download the spreadsheets and supporting material by going to https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqfall14.htm I hope you get a chance (at least after the quiz) to watch one or more of these webcasts |
| 9/27/14 | I hope that you are enjoying this absolutely amazing weekend. The newsletter for the week is attached. In case you were thrown off by the mention of a quiz next week in my last email, the first quiz is a week from Monday (on October 6). That is about it. Until next time! Attachment: Newsletter #3 |
| 9/28/14 | The weekly challenge solution is attached. It is not only a good exercise in understanding cash flows but also in preparing for the first quiz. What first quiz? This is as good a time, as any, to preview the quiz: Attachments: Weekly challenge 3 Solution & Synthetic rating |
| 9/29/14 | As we enter the fifth week of class (yes, it is progressing rather quickly) and the first quiz looms (a week from today), we stayed the course of inputs into discounted cash flow valuation by closing the loop on cash flows and opening the one on growth rates. http://aswathdamodaran.blogspot.com/2014/08/the-insanity-of-us-tax-code-bad-laws.html |
| 9/30/14 | In this week's valuation, I take a look at Yahoo, a company that I first posted on in May 2014, where I labeled it a mystery, wrapped in a puzzle and an enigma, because so much of its value comes from its holding in two other companies - Yahoo Japan (35%) and Alibaba (22.1%). You can read the original post here (and my rationale for why I was buying Yahoo shares at $33.76/share) If you get a chance, try your hand on the master spreadsheet, where I bring together all of Yahoo's many pieces: |
| 10/1/14 | We did complete our discussion of growth by first looking at analyst estimates of earnings growth, arguing that they contain far less information about long term future growth than you might think. We followed up by looking at the fundamentals that drive growth. Starting with a very simple algebraic proof that growth in earnings has to come either from new investments or improved efficiency, we looked at how best to estimate growth in three measures of earnings: earnings per share, net income and operating income. With each measure of earnings, the estimation of growth boiled down to answering three questions: (1) How much is this company reinvesting to generating for future growth? (2) How well is it reinvesting? (3) How much growth is added or lost by changes in returns on existing investments? We closed the discussion by looking at how to estimate growth for money losing companies or companies where margins are expected to change significantly over time. In that context, we looked at forecasting operating income for a young growth company, with small revenues and operating losses. While we will look at full fledged valuations, where these parameters all come into play, I have attached an excel spreadsheet where you can play with the key drivers of growth and see the effect on the expected growth rate. Those of you who were in my corporate finance class may remember that I had reviews before each quiz. It has always been difficult to find the room and the time to do a review in this class. Last semester, I did put together an entirely webcast review for the quiz. I hope you find it useful. You can find it by going to: Attachments: Review presentation, Post class test and solution |
| 10/1/14 | The weekly challenge for this week revolves around fundamental growth. Try it, if you get a chance. I have also attached the post class test and solution for today's class. Hope you get a chance to give it a shot! Attached: Weekly challenge |
| 10/3/14 | I know that you are busy preparing for the quiz. So, let me start with that first. I hope you have had a chance to watch the review session webcast and tried a few practice quizzes. The quiz will be in the first 30 minutes of class on Monday, from 10.30-11. I have two rooms and please try to stay in your assigned room: This week, we focused on estimating growth from fundamentals and built growth rates from accounting returns - return on equity and return on invested capital. Accounting returns can be messy and misleading. In this webcast (that some of you may remember from the corporate finance class), I look at the process of estimating accounting returns, using Walmart as my example: |
| 10/4/14 | Last week, we completed our discussion of cash flows and growth rates. Next week brings the quiz (please check out the seating arrangement from yesterday's email) and the last pieces of the DCF input puzzle - the terminal value and the loose ends. The weekly newsletter is attached. Until next time! Attachment: Newsletter # 4 (October 4) |
| 10/5/14 | I hope that your weekend was productive and fun (they are not mutually exclusive). Three quick notes: 2. The solution to the weekly challenge #4 is attached. 3. This week, we will complete the last two pieces of the DCF input section tomorrow and cover the loose ends in valuation (and you will see that there are quite a few) on Wednesday. Attachment: Weekly Challenge $4 solution |
| 10/6/14 | We started the class with the quiz and I am truly sorry if I threw you off by not including the debt in the second problem. The quizzes are almost done and I will let you know when they are ready to be picked up (and send you the solutions, the grading template and the distribution). The heart of today's class was the discussion of terminal value. We began by ruling out using multiples to get terminal values, at least in the context of intrinsic value. To keep terminal values in check, you have to follow four basic rules/principles: |
| 10/7/14 | The quizzes are ready and can be picked up in the finance department on the 9th floor of KMEC. When you come out of the elevator, walk towards the front door to the reception, but look to your right before you go through the door. You should see the quizzes in neat piles (neat when I left them) in alphabetical order. Please take just your quiz. I have attached the solution/grading template to this email and you can check against it. The median score on the quiz was 7 and the attached distribution reflects that. Attachments: Quiz 1 solution as well as the distribution of grades for the class. |
| 10/7/14 | I am sorry to get this to you so late, but I was watching a soccer game (with my son playing in it) and did not get a chance to do it until just now. The company for this week is Petrobras. (GoPro is for next week). Start off with this background story on why I think this is an interesting company: https://www.stern.nyu.edu/~adamodar/New_Home_Page/Valuationofweek/PBRwriteup.htm Then, download the data for the company: https://www.stern.nyu.edu/~adamodar/pc/blog/PBRBloomberg.pdf Finally, download the valuation. It is a very simple model that lets you play with the inputs: https://www.stern.nyu.edu/~adamodar/pc/blog/PBR2014.xls Finally, if you get your own valuation (and try to do it before the final round for the elections on October 26), enter your numbers in Google shared spreadsheet: https://docs.google.com/spreadsheets/d/1fXFpTjQvGPIxizvhKCEGYD2L0eNp_NOYlOaxRhIxR1Q/edit?usp=sharing |
| 10/8/14 | Today's class was about the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Third, we looked at other assets and argued that you should never double count assets. In case you are interested in the Playboy mansion, click on the link below (you will not see any playmates, just the real estate...) On a different note, please do get a jump on the DCF valuation of your firm. It is due two weeks from Friday (October 24) though not for grading, but for feedback. You just have to turn in the Excel spreadsheet containing your valuation and you are welcome to use of my mine (I would recommend one of the Ginzu ones) or build one of your own. I have also attached the weekly challenge for this week and it is a good one, if you are at all uncertain about terminal value. |
| 10/9/14 | Now that you have had the requisite period to mourn, celebrate or not care about quiz 1, you should be turning your attention to the DCF valuation. Anyway, I thought I would lend a helping hand: Let me clarify, though, what I would like to get from you when you turn it in: |
| 10/10/14 | As you work on your DCF valuation (subtle nag here), you will undoubtedly encounter the big number, which is the terminal value. While we went through the four rules for keeping terminal value in check in class this week, and this week's challenge is all about it, I thought that webcast that went past abstractions would help. Consequently, I took a DCF valuation that was turned in a prior version of this class and put the terminal value under a microscope. I then set up a spreadsheet to check the terminal value for key assumptions and you can use this on your terminal value (or any others that you encounter in your life). The webcast itself is about 15 minutes long and not too painful. (Ignore the big DEMO right down the middle.) Attachments: Sample DCF valuation, Terminal value analyzer |
| 10/11/14 | Last week, we completed the grunt work of valuation by looking at terminal value and choosing the right model. Next week, we finally turn to valuations of companies. The newsletter for the week is attached. Attachment: Newsletter #5 |
| 10/12/14 | The solution to the weekly challenge is attached. This week, we will first complete our discussion of loose ends tomorrow, by examining what to treat as debt to get from firm value to equity value and then looking at equity options/restricted stock granted to employees. On Wednesday, we finally start on full valuations. See you in class tomorrow! Attachments: Weekly Challenge # 4a Solution |
| 10/13/14 | Today, we put the two final loose ends to rest. First, while we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Second, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows. In the final part of the class, we looked at the link between narrative and numbers. While this may seem like a tangent, I view it as central to doing good valuation. I have two blog posts that you may find useful. The first one is about how narratives and numbers are linked in good valuations. One more quick note. Santiago Restrepo is organizing a session on taxes tomorrow that Professor Murphy and I will be speaking at in KMEC 2-60 from 12-1. Though you have probably heard everything I have to say about taxes, do come if you are free. The post class test and solution are attached. |
| 10/14/14 | I am sorry to get to you so late, but I have a valuation of GoPro that you can take a look at. To get the back story, start here: Then, download the company's prospectus and latest 10Q: Finally, take a look at my try at valuing the company: If you do get the urge, try your hand at valuing the company and put your numbers into the shared Google spreadsheet: I am planning to post on my blog on the company and would be grateful for any feedback that you can provide me on mistakes that I may have made or big markets that I may have missed. |
| 10/15/14 | I did get a chance to complete that GoPro valuation, updating the numbers and adding a pricing. You can find the post here: I am also attaching the weekly challenge for this week. It is a good exercise to understand employee options. Finally, just a reminder (to add to the dozen you already have) about your DCF valuation, which is due a week from tomorrow (October 24). |
| 10/16/14 | In class, yesterday, we started on our first valuation, Con Ed, using a stable growth dividend discount model. To qualify to be valued with this model, we argued that a company had to meet three criteria: have a high payout ratio, have a fundamental growth rate less than that of the economy (or the risk free rate) and a beta close to one. We then valued 3M both before and after the 2008 crisis to show the impact that macro variables can have on intrinsic value. We moved on to value the S&P 500 using a dividend discount model and an augmented dividend discount model, with the latter suggesting that today's index level is defensible. We also completed our discussion of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. We then moved on to valuing mature companies, arguing that you need to value many of them twice: once with existing management in place (status quo) and once with new and revamped management. |
| 10/17/14 | In the assessments of young companies, in particular, we looked at the effect of having options outstanding on the value per share. The weekly challenge for this week zeros in on this particular aspect of valuation.. As you work on your perfect DCF valuations, employee options that your company has granted and continues to grant may be a source of imperfection. I know that we went through the mechanics in class. First, value the outstanding options, using an option pricing model. Second, subtract the value of the options from the equity value that you estimated in a DCF. Third, divide the remaining value by the number of shares outstanding (the actual number, not the diluted number). The mechanics of doing this can be tricky and that is why this week's weekly challenge is built around options (I sent it to you yesterday). After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below: Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Employeeoptions.mp4 Cisco 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/cisco10K.pdf Spreadsheet for options: https://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. |
| 10/18/14 | I hope that you get to enjoy this weekend more than the last one, now that you have the DCF valuation out of the way. I am in California, basking in 80 degree weather! I am attaching the newsletter for this week. Next week, we will be finishing off intrinsic valuation and starting on relative valuation, which is packet 2 of the lecture notes. Please download the packet online (either on the webcast page or on the lecture notes page) before next week. The direct link is below: Attachments: Newsletter #6 |
| 10/20/14 | So, we are getting through the last pieces of DCF valuation, though the principles will be reused in other parts of the class. We started today's session by looking at declining & distressed companies and how to deal with the problem of negative growth (more psychological than mathematical) and what to do when a company faces the possibility of default. We then moved on to emerging market companies and looking at the issues of country risk, corporate governance and cross holdings through those lens. We then moved on to financial service companies, which have gone from being easy to value (just discount the dividends) to being a pain in the neck to value. I suggested using the reinvestment in regulatory capital to compute potential dividends and FCFE. Attached is the post class test and solution for today. |
| 10/21/14 | As I promised in class yesterday, I am attaching the valuation the week. Start with the back story, since it includes everything you need to know about the break up: For background on why companies break up and how it might affect value, try my blog post from a couple of years ago on the topic: Finally, try the spreadsheet I have on valuing the HP breakup. It is attached to this email. |
| 10/23/14 | In yesterday's class, we finally put to rest DCF by having a discussion of the difference between value and price, why they might be different and when the gap will close. Before entering into that discussion by talking about the values of intangible asset companies and commodity/cyclical companies. With the latter, we noted the importance of keeping separate our macro views (about the economy or commodity) from our micro views, and the use of Monte Carlo simulations to deal with uncertainty. If you are interested in simulations and how to come up with statistical distributions to use, I have paper on the topic and the link is below: We ended the class by starting the discussion of multiples and comparable firms. We will continue with that discussion on Monday but this week’s weekly challenge is about consistency in multiples (the very last topic that we talked about yesterday). I will send it as a separate email. The second quiz is approaching and is next Wednesday, October 29, from 10.30-11. It will cover the rest of packet 1 (from page 145-End) and hence will include terminal value, the loose ends in valuation and all of the mechanics of DCF. THERE WILL BE NOTHING FROM PACKET 2 (RELATIVE VALUATION) ON QUIZ 2. I have put the review session up online (on the webcast page for the class) with the presentation. The links are below: You can also find all past quizzes with the solutions in the following links: |
| 10/24/14 | This is usually the day I send out my valuation tools webcast but I decided that since you have the quiz to prepare for, it is best to leave you alone. Thank you for all the DCF valuations that you have sent in already. I am back logged with about 80 DCFs that I have not looked at yet, but I will work through them as quickly as I can. If you have not sent in your DCF, there is still time. |
| 10/25/14 | A couple of quick notes. Today was a slow day for getting through valuations and I am sorry if I have not got back yours yet. And next week brings the second quiz on Wednesday. The review webcast is online, on the webcast page for the class. Finally, the newsletter for the week is attached. Attachment: Newsletter #7 |
| 10/26/14 | The solution to the weekly challenge is attached. This week, we will continue with the discussion of multiples, going through the four step process of defining, describing, analyzing and applying multiples. I know that this will not be on the quiz on Wednesday but I hope to see you in class tomorrow! Attachment: Weekly Challenge #6 Solution |
| 10/27/14 | Today’s we continued with our discussion of multiples. Using a DCF model as the basis, we restated intrinsic value as intrinsic multiples. We stared with PE ratios today and determined that they are a function of expected growth, risk in equity (cost of equity) and payout ratio/ return on equity. Specifically, argued that higher growth, lower risk and higher quality growth translate into higher PE ratios. We extended the model to look at high growth firms and concluded that the determinants don't change. However, using a hypothetical company as the base, we concluded that PE ratios become sensitive to growth surprises as interest rates become lower. We then used the drivers of PE to explain differences in PE ratios across countries and time. We closed with an assessment of PEG ratios and why they are dangerous in practice. I have attached the post class test and solution for today's session. |
| 10/27/14 | I managed to get 2-90 again for the second quiz and the seating arrangement is below: If your last name ends with Go to A - F 2-90 G- Z 2-60 The usual rules apply. Open book, open notes, open iPad (with no connectivity). No laptops. If you are going to miss the quiz, let me know before 10.30 on Wednesday. The quiz covers intrinsic valuation (or at least all the parts from terminal value to the end of packet 1). |
| 10/27/14 | By now, you should have received back your DCF valuation back. If you have not, please send it again to me. Rather than make myself into an all-knowing oracle (which I am not), t thought I would take you through the process I used to diagnose your DCF valuations. Input page checks Output page checks: https://www.stern.nyu.edu/~adamodar/pc/chgrowth.xls - If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital: https://www.stern.nyu.edu/~adamodar/pc/termvaluecheck.xls One common error to watch out for is estimates of terminal value that use the cash flow in the final year, grow it out at the stable growth rate. That locks in your reinvestment rate from your last high growth year forever. Market Price Try it out with your own DCF valuation and then offer to do it for a friend... Then, take your toolkit on the road. Pick up a valuation done by an investment bank or equity research analyst and see if you can diagnose any problems in them. You are well on your way to being a valuation guru. Attachment: Valuation post mortem |
| 10/28/14 | In this week’s valuation, I take a look at Amazon, one of my favorite companies of all time, partly because it is so different from most other retailers and partly because of nostalgia (I learned everything I know about valuing young companies by struggling with Amazon in 1998). You can start with this background: https://people.stern.nyu.edu/adamodar/New_Home_Page/Valuationofweek/AmazonValueWriteup.htm You can then follow up by downloading the 10K and 10Q for the company: Amazon 10K: https://www.stern.nyu.edu/~adamodar/pc/blog/Amazon10K.pdf Amazon 10Q: https://www.stern.nyu.edu/~adamodar/pc/blog/Amazon10Q.pdf Finally, you can pull up my valuation of Amazon: Amazon valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/Amazon2014.xls If you get a chance to value Amazon, visit the shared Google spreadsheet and enter your numbers: https://docs.google.com/spreadsheets/d/1Vy8qGXAbRxn-M4oTNKRLu82yBVcqFcj1HP1k2IgR37M/edit?usp=sharing |
| 10/29/14 | The quizzes are done and can be picked up in the usual spot. The solution and grading distribution are attached. The usual rules apply: please don’t mess with the order, don’t browse and come and talk to me, if you think I have been unfair. (I promise that it is nothing personal. I just might have over looked something profound). Attachments: Quiz 2 solution as well as the distribution of grades for the class. |
| 10/29/14 | I hope that you had a chance to pick up your quiz. If not, it should still be there tomorrow and the day after. So, take your time. There was class after the quiz today and for those of you who were there, thank you. We continued our discussion of the analytics of multiples, starting with price to book ratios, them moving on the EV/ Invested capital, EBITDA and revenue multiples. In the process, we did develop a short-cut for finding the companion variable for a multiple, dividing the net income by the denominator for equity multiples and after-tax operating income by the denominator for enterprise value multiple. We then moved on to the last phase of relative valuation, where we look for comparable firms and control for differences across companies. We will continue and complete our discussion of relative valuation next week. Have a great weekend (and you will hear from me, I am sure)! |
| 10/31/14 | One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post: http://aswathdamodaran.blogspot.com/2013/06/a-tangled-web-of-values-enterprise.html Then watch the webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/multiplecalc.mp4 You can download the presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/multiplecalc/multiplecalc.pdf And the spreadsheet that goes through the calculations: https://www.stern.nyu.edu/~adamodar/pc/multiplecalculator.xls Hope you find it useful! |
| 11/1/14 | On this dark and wet weekend (which makes me yearn for Southern California), I hope that you have great and wondrous plans. In case you don’t, here is the newsletter for the week, with its usual gripping and exciting news about the class. Last week brought the second quiz and more discussion of pricing, starting with the descriptive and analytical tests of multiples, where we extracted the variables that determine and multiple, and ending with application. The essence of what we are trying to do is come up with the right questions to ask when confronted with a company that looks cheap on a multiple. Next week will bring us to completion on this process and begin with a look at asset-based valuation models and private company valuation. Attachment: Newsletter #8 |
| 11/2/14 | This week, we will continue and complete the discussion of relative valuation and start on asset-based and private company valuation. In the mean time, if you get a chance, please check out the solution to the last weekly challenge. Attached: Weekly Challenge#7a solution |
| 11/3/14 | As promised (or threatened), the mystery project is ready for you. It is a group project, due on Friday, November 14, at 5 pm (I had originally scheduled it for November 7 but that does not give you much time). You can find the description at the link below and I am attaching the data to this email. Attached: The mystery project, Data for project |
| 11/3/14 | In today's class, we closed the book on relative valuation by first talking about how to do relative valuation in sectors filled with unstable or young companies by either using proxies to capture what investors in that sector are pricing in or using forward values for revenues/earnings. We then extended relative valuation from looking at companies in a sector to companies across the entire market, using a market regression. We finished by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. Here, for instance, is an article in the New York times that takes itself way too seriously: |
| 11/4/14 | I just put up my valuation of the week, and as promised, it is the EBay valuation. Start with the back story: https://www.stern.nyu.edu/~adamodar/New_Home_Page/Valuationofweek/EBaybackstory.htm Then, download the 10K and the 10Q for EBay 10K: https://www.stern.nyu.edu/~adamodar/pc/blog/ebay10K.pdf 10Q: https://www.stern.nyu.edu/~adamodar/pc/blog/ebay10Q.pdf Finally, take a look at the spreadsheet that contains the valuation of the broken up units: https://www.stern.nyu.edu/~adamodar/pc/blog/ebaybreakupvaluation.xls You can change the parameters that you think determine EBay’s break up value and look at the impact and examine the pricing effects. If you do get a chance, please put your numbers into the shared Google spreadsheet: https://docs.google.com/spreadsheets/d/1U5KFhUWA9-_X3m3vNhodA1vlCRaKGZpM4geHMv0PQ2k/edit?usp=sharing |
| 11/5/14 | At the start of the class, we looked at the process of a sum of the parts valuation, taking United Technologies through both a relative and a DCF sum-of-the-parts valuation. We then turned to private valuation. Private company valuation is almost an art form, at least in the way in which it is practiced, filled with 'arbitrary" discounts on value. In today's session, we brought private company valuation into the DCF framework, though we did note that the discount rate for a private business valuation can reflect the buyer's diversification status and that the value itself may have to be adjusted for illiquidity and key person losses. The key, though, is that motive matters in private company valuation and the same private company can have different values to different buyers. I have attached the post class test and solution for this week, as well as the weekly challenge. |
| 11/7/14 | For the moment, I expect that you are working on the mystery project. I don't have much specific advice for you on the project, but remember that your mission is to do a relative valuation (not an intrinsic value). That gives you a lot more leeway in how you deal with items. For instance, if your were doing DCF valuations, you would have to value the employee options, using option pricing models, and subtract from the value of equity to get to value of common stock. With multiples, you may adjust for options much more casually (adjusting the number of shares for options outstanding, for instance). It will also mean that if you do not have the data to do something correctly, you may have to settle for an approximation. In case, the confusion about the due date is still persisting, the mystery project is due on November 14 at 5 pm. I have also put up a webcast that is more statistics than finance about how to look at data and try to evaluate relationships between variables. I use the banking sector to illustrate my case but I hope that you find it useful for both your mystery project as well as for your overall project. If you are solid on your statistics, you can skip this webcast, since you already know everything that I am saying. If you need a quick review of the process, I think it will be useful. |
| 11/8/14 | I hope that your weekend is going well. Last week, we started on the challenges associated with valuing private companies and the newsletter reflects where we are in the class. Next week, we will get started on packet 3. Since I don’t find the bookstore to be timely in getting packets ready, I would be grateful if you can download the packet from the link below and print it off for yourself: Attached: Weekly Newsletter #9 |
| 11/9/14 | Tomorrow, we will complete our discussion of private company valuation by looking at how to cost out illiquidity and value companies for IPOs. We will then start on real option valuation and while I am sure that you remember your option pricing models, I will assume nothing and do a quick review of option pricing before jumping into the fun stuff. I hate to be a nag but please print off the third lecture note packet soon. Here is the link: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valpacket3fall14.ppt |
| 11/10/14 | In today's class, we put the finishing touches on private company valuation by looking at valuing IPOs. In particular, the question of what happens to the proceeds from an offering can affect value per share, and the offering price itself is subject to the dynamics of the issuance process, with investment bankers more likely to under price than over price offerings. We then started on the mechanics of option pricing by looking at replicating and arbitrage. In particular, we argued that while real options add a premium to DCF valuation, they should be used sparingly and only if you pass the three tests: Is there an option embedded? Does the option have significant economic value? Can you use an option pricing model? I am attaching the post class test & solution for today. Until next time! |
| 11/11/14 | I know that you are busy with the Mystery project, but this week’s valuation of the week is a fun exercise, especially if you are a sports fan. It was a triggered by an annual event, Forbes publishing its list of most valuable NFL franchises, with the Dallas Cowboys at the top of the list at $3.2 billion, followed soon after by a speculative piece in Business Insider upping that value to $ 4.8 billion. You can get the full story by going to this link: There is not a whole lot of information on these teams and doing a full intrinsic valuation may not be possible, but there is information that you can use to price sports franchises. If you want an extended discussion of this process, please read my blog post on valuing the Clippers at: You can pick your sport of choice and download the raw data. Pick your favorite team and value it. |
| 11/12/14 | In today's session, we tried applying (with mixed results) option pricing to value a patent. We argued that the fact that a patent is not viable today does not imply that the patent is not valuable. Valued as an option, patents have values in excess of their discounted cash flow value, though the magnitude of the premium can be a function of how competitive the market place is. In general, you are on pretty weak ground in using option pricing to value viable patents but it may be more useful in valuing non-viable patents in risky businesses.I have attached an option valuation spreadsheet that you can use to value patents as well as the post class test & solution. Until next time! Attachments: Post class test and solution, Patent valuation spreadsheet |
| 11/12/14 | Sorry to hit you with a second email on the same day! I know that I have piled a lot on your plate this week, with the mystery project and the quiz. If you are interested, there is a review session up for the third and final quiz, which will cover lecture note packet 2: Webcast for review session: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz3review.mp4 Presentation for the review session: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz3review.pptx Past Quiz 3s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf Past Quiz 3 solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xls Please ignore any option problems that you may see on these quizzes. They are not covered on your quiz 3. And if you get a chance, try tthis week's challenge. It can help you at least on the private company valuation piece. |
| 11/13/14 | I hope that your mystery project is progressing. The deadline remains tomorrow at 5 pm. When you do submit your project, though, please follow these guidelines: 1. Electronic format: Please try to create a pdf file of your submission. It is easier for me to work with, comment on and grade. 2. Cover page: On the cover page, please include the names of everyone in your group (in alphabetical order) and the following information: the multiple or multiples you used, your five cheapest stocks, your five most expensive ones and your buyout target. 3. Format: Please keep your write up short and to the point. Explain why you picked the multiple that you used, how you used that multiple to find cheap and expensive stocks and what process you used to find your buyout target. Should not take more than 2-3 pages. 4. Excel spreadsheets: You don't have to add on all of your excel spreadsheets and worksheets. 5. Mail subject: In the subject, please enter "No mystery here", when you send your submission. Thank you ! |
| 11/14/14 | I know that you have absolutely no time for this, but just in case, I have a webcast on valuing patents as options: For the quiz on Monday, we will again have two rooms, and here is my attempt to be even handed and spread the room burden. If your last name starts with Go to |
| 11/15/14 | By now, you should have your mystery projects back. If you have not, please send it to me again. Looking over your analyses, here are some of the overall impressions I have: 1. Multiple used: The two most widely used multiple was EV/EBITDA, followed by PE. In making your choices, the following factors seemed to come into play: (a) the regression R-squared (higher R-squared) (b) differences in accounting standards across markets (led people to choose Revenue or EBITDA over EPS) (c) Number of firms that you would lose in the sample (steered away from multiples that cost you too many firms) and (c) EV/EBITDA neutralizes differences in capital structure. I think that these are all legitimate factors. A few groups mentioned that they were using equity multiples because you were equity investors. I don't think that is necessarily the case. Equity investors can use EV multiples and back into a value for equity... There were two groups that used combinations of multiples and figured out creative ways to reconcile their choices. There were also a few groups that ran separate regressions within each sector and picked under and over valued companies on that basis. Two caveats, if you do this. The first is that some sectors have only 20-25 firms and you have to be careful about not having more than one or two variables in your regression. The second is that if you use equity multiples in some sectors and enterprise values in others, it can create a bit of a mess since you cannot percentage value differences directly, if some are equity value differences and some are enterprise value. The cleanest way to do this (and a pain to do) is to use the enterprise value multiples to get estimated enterprise values and then add cash and subtract debt to get to equity value. 2. Regressions: Almost everyone followed the script and ran the regressions... One thing I did notice is that some of you chose to stick with all of the variables in the regression, even when there was no statistical significance. Sometimes, taking a variable out rather than leave it is the better choice. About 20% of the groups reported regressions with dummy variables for emerging markets. Six groups ran the regressions by sector or used sector dummies. While this makes sense, you have to be careful to make sure that you have enough data within each sector to sustain the regression. 3. Recommendations: When picking under and over valued companies, what matters is the percentage and not the absolute difference. In other words, a company that trades at a PE of 10 with a predicted PE of 15, is more undervalued that a company that trades at a PE of 40 with a predicted PE of 50. As I checked through the lists, I was struck by how little commonality there was across the lists. Each of you had your own idiosyncratic list, which tells me that there are no clearly under or over valued companies that stick out, across all approaches and multiples. Good to know, but perhaps not surprising. However, there were some companies that showed up more frequently than others. For the overvalued companies, here were the most common choices: 4. LBO candidate: A good target for a leveraged buyout will be under valued, under levered, easy to takeover and badly managed. Almost all of you focused on finding an under valued company (which is good), an under levered company (makes sense) and a company easy to takeover (low takeover defenses), but the search on the fourth dimension (bad management) was all over the place. Some of you were looking for companies with high margins and others with stable cash flows. There was a scattering of companies that were choses. Only one company, Micron Technologies, was picked by more than two groups (three). As a general rule, control requires inputs that you can change and that indicates a firm with below-average margins. There was almost no overlap between the groups with no company being picked more that twice. I have a paper on LBOs that fleshes out what you may want to look for in a LBO candidate. If you get a chance, please browse through it. Thank you for the work you put into this project. I appreciate it. |
| 11/15/14 | Hi! Attachment: Newsletter #10 |
| 11/17/14 | Your quizzes are done and can be picked up in the usual spot. I have also attached the solution and the distribution. If you have any questions, I will be in tomorrow. Drop by! Attachments: Solution as well as the distribution of grades for the class. |
| 11/18/14 | In case you are still interested in valuation, this week I venture into the darkest reaches of valuation where country, company, currency and commodity risk all co-exist as I value Vale (a Brazilian mining company) and Lukoil (the Russian oil company). You can start with this post: And if you are interested enough to give it a shot, enter your numbers in the Google shared spreadsheet: |
| 11/19/14 | In today's class, we looked at equity in a publicly traded company as an option, and argued that the optionality increases as the company's earnings health deteriorates and its debt increases and becomes more long term. In the process, we rethought what it means to go bankrupt, how to direct investments in distressed equities and how risk affects value. We then started the discussion of acquisitions, with the depressing evidence that most acquiring companies don’t gain from acquisition either at the time of the acquisitions and in the aftermath. If you are interested, I did a series of posts on acquisitions in December 2012 on my blog: |
| 11/20/14 | As promised, here is your to-do list on the rest of the project. It is a long email but I hope it helps. 1. DCF Valuation 2. Relative valuation 3. Option valuation (Wednesday's class) 4. Bringing it all together 5. Numbers to me!!!! 6. Final Project write up And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters. 7. Celebrate, but remember that your final exam is four days later (on December 12, 2014) |
| 11/21/14 | If your company is the one that meets the equity-as-option test (losing money, lots of debt), you are probably not happy. However, it is really not an involved exercise. To assist you, I did put up my latest valuation tools webcast, on valuing distressed equity as an option. I used Jet India, an Indian airline with a history of losses and a mega debt load to illustrate the process. You can start with the webcast below: Also,I know I have been harassing you with emails all semester. You will get no emails until next Saturday (I promise)! |
| 11/29/14 | Welcome back! I kept my side of the bargain. No emails for an entire week, but I will have to make up for it in the next few days. I am attaching the newsletter to remind you more of where we are in the class than to report news. We are into the home stretch of the last lecture note packet. On Monday, we will talk about acquisitions and the valuation or misvaluation of synergy and control. On Wednesday, we will take a different perspective and examine how we can change the value of a business. I hope that you will find that useful, especially if you are planning to run your own business or be in consulting. Finally, I don't meet to touch any sore spots, but if you have not been working on your project, it is time to turn your attention to the to-do list I sent before the break that I am reproducing below: 1. DCF Valuation 2. Relative valuation 3. Option valuation 4. Bringing it all together 5. Numbers to me!!!! 6. Final Project write up And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters. 7. Celebrate, but remember that your final exam is four days later (on December 12, 2014). |
| 11/30/14 | I think that thanksgiving week is now officially over and I can go back to inundating you with emails. First, and on the very remote chance that you actually tried the weekly challenge, I have attached the solution (with the challenge, in case you have forgotten both). I am also sure that you are looking forward to being back in class (NOT!!! But let's make believe!)... In tomorrow's class, we will look at acquisition valuation. Rather than have a start of the class test, like we usually do, the test will run through the entire class. While the questions that will be posed are straight forward, it may be helpful to take a look at the questions before class. Should take only a few minutes of your time and will give you a head start on the class. Attachment: Weekly Challenge #10 Solution |
| 12/1/14 | Just a reminder, in case you missed it yesterday. In today’s class, we will be looking at acquisition valuation. If you get a chance, please take a look at the attached set of questions. They should take only a few minutes to do and will help frame the class. Attachment: Acquisition Tests |
| 12/1/14 | I am sorry if you found today's session to be a downer. Don't get me wrong. Acquisitions are exciting and fun to be part of but they are not great value creators and in today's session, I tried to look at some of the reasons. While the mechanical reasons, using the wrong discount rate or valuing synergy & control right, are relatively easy to fix, the underlying problems of hubris, ego and over confidence are much more difficult to navigate. If you get a chance, take a look at a big deal and see if you can break it down into its components. |
| 12/2/14 | I know that there is little chance that you will be able to look at this valuation, but if you still have questions connecting narrative to numbers, I hope it will help, The company is one that I have valued before, Uber, and it is fascinating simply because it so early in the process with so much possibility and potential that you can write almost any narrative you want. Start with this blog post that I had on Uber back in June, when a VC capital infusion valued it at $17 billion: You can download the spreadsheet that contains the valuation by clicking below: |
| 12/3/14 | In today's class, we completed our discussion of acquisitions by looking at the types of acquisitions most likely to create value. To start our discussion of value enhancement, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don't) and why there is a minority discount in private company transactions. I have attached the post class test and solution. |
| 12/4/14 | I know exactly what you are working on and will not waste too much of your time. As you get ready to pull your numbers together, here a few last notes: When your summary is ready, please send it in (I am attaching the spreadsheet again) to me with the subject “The end is near”. While I would like the summary for the entire group, I will take what I can get. So, if three of a group of five already have the numbers, send me the three as soon as you can and the two others can send their summaries later. When the final project is ready for submission, please send it in with the subject “The Grand Finale” on it. |
| 12/5/14 | The first few summaries are coming in and I thank you. Through the rest of the weekend, I will keep you updated on the progress, partly to keep you in the loop and partly to nag you to get your numbers in, if you have not already. As I mentioned in class on Wednesday, I need the numbers to pull together the last session, where you will see the results of your valuations, including the ten most under valued and over valued company. I hope to have the presentation ready by Sunday midnight and get it to you before class on Monday. Even if you have been taking the class virtually for the last few weeks, please do come to class on Monday. Summaries received: 9 Number to come: 163 |
| 12/7/14 | We are almost there, with 142 summaries in and 30 to go and I am sure that I will get most of them by tomorrow morning. I plan to wait until my commute tomorrow to pull the numbers together and prepare the final presentation. I will send the presentation to you by 9 am and try to make copies before class. Please, please come to class tomorrow, even if you have become used to the webcasts. I hope to make the class memorable and it will one part review of the material, one part assessment of what you found and one part philosophical closure. |
| 12/8/14 | Thank you very much for sending your summaries in. I have almost the entire class in the final spreadsheet, which I am attaching. I am also attaching the presentation for today. The good news is that I was able to make copies for everyone who will be in class (and I hope that you are going to be there). Attachments: Closing presentation, Project summaries |
| 12/8/14 | Thank you for being at the closing class.The closing presentation and the summaries of your valuation findings (for the entire class) are available on the webcast page. If you are on the list of the ten most undervalued companies and are buying your recommended stock, please let me know. I may very well join in. On a different note, the exam is scheduled for Friday from 1-3 in two rooms, with the following seating arrangements: If your last name begins with Go to J- P KMEC 2-90 A- I, Q-Z KMEC 2-60 I have a review session I put together focusing primarily on real options, acquisition valuation and value enhancement which will be 60% of the final exam. You can find it by going here: Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valfinalreview.mp4 Presentation: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valfinalreview.pptx All of the past finals and solutions are online. You can find them by going to: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.pdf https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/finals.xls |
| 12/9/14 | Your projects are waiting in my inbox and you should be getting them sequentially as I finish grading them. In the meantime, two quick notes. The first is that Media had trouble with yesterday’s class and the webcast is still not up. They are working on it and the link will be up as soon as it is ready. The second is a reminder to get your CFE for the class done. You have a short window, from today through Thursday at midnight. Since it will take you only a few minutes to do, please do it now: Login to https://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password. |
| 12/9/14 | The link to the closing session webcast is up but there is some bad news. Due to a recording snafu, the first 25 minutes did not get recorded. I am sorry but you can still pick up on the fourth layer of hell (if you have no idea what I am talking about, check the presentation for the class). http://nyustern.mediasite.com/Mediasite/Play/5a0d3ee0d4b845f799793f7c755cc76f1d |
| 12/10/14 | I think all the projects have been graded and returned by now. If you have not got yours back, check with your group (since some of you did not cc everyone in the group). If no one has got it back, just let me know and I will check through my emails. I know that you are busy and I hate to be a nag, but please do remember to do your CFEs. The instructions are below again: Login to https://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password. Select the CFE that you wish to complete. Also, just in case you missed it, here are the seating arrangements for the final exam: On a different note, the exam is scheduled for Friday from 1-3 in two rooms, with the following seating arrangements: If your last name begins with Go to J- P KMEC 2-90 A- I, Q-Z KMEC 2-60 |
| 12/11/14 | The final exam is almost here and a few last notes. 3. Calculators, iPads and Normal Distributions: It is open book, open notes and you can use your iPad for reviewing lecture notes but not for running Excel. I know that the option problems require you to use a cumulative normal distribution but a paper version of the distribution will be provided to you. In case you are wondering what I mean by a paper version, see the attached. You can use the nearest number on the table to get your N(d). Thus, if you get d1 = 0.18, you can use N(d1) = 0.5793, corresponding to N(.20). Your answers will be off by a little, but I am okay with that. |
| 12/15/14 | The final exams are graded and can be picked up in the usual spot. If you don’t know where that is, I don’t think you will be picking up your final anyway. The solution is attached, with the grading template. Just a couple of quick notes about the exam questions. Attachment: Final exam solution |
| 12/15/14 | I hope you are done and are out celebrating. However, just in case you still care about grades, yours just went online. Since many of you are graduating, this will be my last email to many of you. I want to to wish you the very best with whatever you plan to do with your lives. I hope your "job" brings you as much joy as mine has to me. If you enjoy what you are doing, you will never have to work a day in your life. I mean it when I say that you have my email address for life and you can bounce off any questions, queries or issues that you have with corporate finance, valuation or the most valuable sports franchises in the world (the answer to the last is always the "Yankees"). It has been a pleasure having you in my class for the last semester or two. And just in case, you need a valuation fix... here are some links: If you have any questions about your grade, use the attached spreadsheet to see where you ended up. Have a wonderful holiday season and a serene break! |