The emails for this class will be collected in this file.
August 25, 2008
Subject: Welcome to the Class
Hi!
I am sure that you are finding that summer is passing by way too fast, but the
semester is almost upon us and I want to welcome you to the Valuation class.
Note that this class was called Equity Instruments and Markets for the last
20 years that I have taught it but it was always about valuation. So, finally
I get to rename a class... One of the best things about teaching a valuation
class is that valuation is always timely. As auction rate securities blow up
around us, investment banks claim not to know the value of what they own and
everyone wonders how best to come up with a value for Lehman Brothers, our
work is cut out for us. Anyway, 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
http://www.stern.nyu.edu/~adamodar/New_Home_Page/equity.html
The syllabus for the class is available and there is a google calendar for the
class that you can get to by clicking on
http://www.google.com/calendar/embed?src=4n3btdf506fn4si0nnlh0ef39k@group.calendar.google.com&ctz=America/New_York
For those of you already setting up your calendars, it lists when the quizzes
will be held and when projects come due.
The first set of lecture notes for the class should be available in the bookstore
by mid-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
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqlect.htm
Please download and print only the first packet on discounted cashflow valuation.
I will be updating the other two packets (yes, there are three...) to make them
more timely.....
The best book for the class is the Investment Valuation book - the second edition.
(The first edition won't be as useful... Sorry!) You can get it at Amazon or
wait and get it at the book store... Alternatively, you can use "Damodaran
on Valuation" - again, make sure that you are getting the second edition.
http://www.stern.nyu.edu/~adamodar/New_Home_Page/public.htm
I am looking forward to seeing you next week - Wednesday at 10.30 at KMEC 2-60
to be precise (and I am not kidding).. I think we are going to have a lot of
fun. Until next time...
Aswath Damodaran
adamodar@stern.nyu.edu
September 3, 2008
Subject: Lemmings anyone?
Hi!
So, 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:
1. Please do find a group to nurture your valuation creativity, and aÊcompany
to value soon. If you are ostracized, please let me know...
2. Once you pick a company, collect information on the company. I would start
off on the company's own website and download the annual report for the most
recent year (probably 2007) and then visit the SEC website (http:www.sec.gov)
(for US listings) and download 10Q filings... If you can, also try to get to
a Bloomberg and see if you can print off the following pages for your company-
BETA, DES (first 10 pages) and FA (income statement, cash flow and balance sheet
numbers). If you have never used a Bloomberg, try the write-up I have on my site
on using a Bloomberg:
http://pages.stern.nyu.edu/~adamodar/pdfiles/Bloombergfull.pdf
3. The web cast for the first class is up. You can get to it by going to
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqfall08.htm
If you did not get the syllabus, project description and the valuation intro
in class this morning, they are all available to print off from this site.
Just to restate what I said in class this morning, you can pick any publicly
traded company anywhere in the world to value. You can even analyze a private
company, if you can take responsibility for collecting the information. Until
next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 4, 2008
Subject: Bias in valuation
Hi!
In yesterday's class, I made the claim that the biggest enemy of good valuation
was bias, induced both the preconceptions we bring to our valuations and the
biases added by the process. You may have dismissed my statements as hyperbole,
but I would like you to think about how bias impedes the process by considering
the following hypothetical scenarios, where you are the valuation analyst.
In each case, i would like you to consider the direction of the bias (High
value, low value) and the reason:
1. You are valuing your own business for sale to a third person.
2. You are valuing your own business for divorce court; half of your estimated
value will go to your spouse (soon to be ex-spouse).
3. You are an appraiser, working for the owner, valuing a business for tax purposes.
(Your estimated value will be used to assess estate taxes)
4. You are an appraiser, working for the IRS, valuing the same business for tax
purposes. (Your estimated value will be used to assess estate taxes)
5. You are a sell side equity research analyst, valuing a company with the intent
of putting a buy or sell recommendation on it.
6. You are an M&A analyst, working for the investment banker for the acquirer
in a friendly takeover, valuing the target company.
7. You are an M&A analyst, working for the investment banker for the target
in a friendly takeover, valuing the target company.
8. You are an M&A analyst, working for the investment banker for the acquirer
in a hostile takeover, valuing the target company.
9. You are an M&A analyst, working for the investment banker for the acquirer
in a hostile takeover, valuing the target company.
10. You are buy-side analyst, valuing a company for your portfolio manager, who
already happens to own a million shares of its stock.
11. You are buy-side analyst, valuing a company for your portfolio manager, who
already happens to have shorted a million shares of its stock.
My answers tomorrow, and we can check.. Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 7, 2008
Subject: Bias: My thoughts
Hi!
I do not know whether you had a chance to think about the bias questions that
I emailed you on Thursday. (I hope you got them). Here are my thoughts (not
necessarily the final answers)
1. You are valuing your own business for sale to a third person. High value:
You want to get the best possible price for the business.
2. You are valuing your own business for divorce court; half of your estimated
value will go to your spouse (soon to be ex-spouse). Low value: My guess is that
you are not on the best of terms.
3. You are an appraiser, working for the owner, valuing a business for tax purposes.
(Your estimated value will be used to assess estate taxes): Low value: Duh! Unless
you really love to pay taxes.
4. You are an appraiser, working for the IRS, valuing the same business for tax
purposes. (Your estimated value will be used to assess estate taxes): High value:
Unless the appraiser happens to be your cousin.
5. You are a sell side equity research analyst, valuing a company with the intent
of putting a buy or sell recommendation on it.: High value: It makes so much
life easier for you with the company (and investors have short memories anyway)
6. You are an M&A analyst, working for the investment banker for the acquirer
in a friendly takeover, valuing the target company. High value: The deal has
to go through, no matter what.
7. You are an M&A analyst, working for the investment banker for the target
in a friendly takeover, valuing the target company. High value: The deal has
to go through, no matter what.
8. You are an M&A analyst, working for the investment banker for the acquirer
in a hostile takeover, valuing the target company. High value: You have to convince
the acquiring company's stockholders that you are not paying too much.
9. You are an M&A analyst, working for the investment banker for the acquirer
in a hostile takeover, valuing the target company. Even higher value: You have
to convince the target company stockholders that the price is not high enough.
10. You are buy-side analyst, valuing a company for your portfolio manager, who
already happens to own a million shares of its stock.: High value: What portfolio
manager wants to be told he is wrong?
11. You are buy-side analyst, valuing a company for your portfolio manager, who
already happens to have shorted a million shares of its stock. Low value: What
portfolio manager wants to be told he is wrong?
Some prep for tomorrow's class. We will be setting the table for everything that
is to come and spend about half the session finishing the Introduction to Valuation
handout from last session (If you have lost it, it is onine). We will also be
starting on packet 1. Please print off the packet or buy it before class tomorrow!
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 9, 2008
Subject: First steps in DCF valuation
Hi!
At the risk of repeating what I said in class (but it might have been missed
since it was in the first few minutes), here is a rehash:
1. Email chronicle: All emails sent in this class will be collected in an email
chronicle, which you can access by going to the website for the class.
2. Weekly newsletter: You will get a very short weekly newsletter for the class,
starting this Friday/Saturday. The newsletter will keep you updated on where
we are in class, where we plan to be in the next week and where I would like
you to be on the project.
3. Weekly challenges: Each Wednesday, you will get a weekly challenge. These
will not be graded but I think that they will help not only reinforce what was
done in class that week but make you move beyond the material.
4. Webcasts: I will keep you updated on the efforts to create podcasts of the
lectures that are portable.
Returning to the material covered in class, we have begun a marathon through
the process of discounted cash flow valuation. Tomorrow, we will put to rest
the question of firm versus equity valuation (at least for the moment). One of
the first principles in DCF valuation is that cashflows and discount rates should
be matched up: cash flows to equity should get discounted at the cost of equity
and cashflows to the firm at the cost of capital. Violating this principle can
cause catastrophic mistakes (I love doomsday language). Anyway, I have attached
a table from a Harvard case on acquisitions to this email. I would like you to
focus on how the cash flows are being estimated in the table, and whether these
cashflows are to equity or to the firm. (Remember that cashflows to equity are
after debt payments, whereas cashflows to the firm are before). These cash flows
are to the target firm in the acquisition (a company called Carborandum). I would
also like you to think about which of the following discount rates is the right
one to use on these cashflows:
Cost of equity of Kennecott (the acquiring company): 13%
Cost of capital of Kennecott (the acquiring company): 10.5%
Cost of equity of Carborandum (the target company): 16.5%
Cost of capital of Carborandum (the target company): 12,5%
One final note. We will be beginning our discussion of riskfree rates and risk
premiums also tomorrow. If you are rusty on the basics, I would suggest that
you read chapters 7 and 8 in the investment valuation book (or the appropriate
chapters in the applied corporate finance or Damodaran on Valuation books) before
class. Until next time!
September 10, 2008
Subject: Weekly challenge and other stuff
I hope that you have a great weekend planned.. I know, I know. it's only
Wednesday, but it is never too early to plan. Anyway, a few things to keep
you potentially busy:
1. First weekly challenge: As promised, the first weekly challenge is attached.
It relates to our discussion of equity versus firm cash flows. Give it your
best shot. I will put the solution up on Saturday.
2. Class today: The webcast for the class is up. In addition, I have posted
the Congoleum cashflow exhibit on the site. For those of you who did not get
the attachment in your email yesterday, this should fill the gap.
3. Default spreads: A lot of today's class revolved around default spreads.
For India, for instance, the default spread I used was 1.15%, given its rating.
I also mentioned in class that I pulled these spreads off the CDS market. If
you are not familiar with this market, it is a market where people price and
trade default risk on entities (governments and corporations). Thus, it gives
you a market price for default risk at the moment. If you have access to a
Bloomberg terminal and want to see what the spreads look like right now, try
this
1. Type in WCDS as the Bloomberg command
2. A CDS page should open up. Go to the top right hand corner of the page and
select "Government". You should get current default spreads on different
governments, with the Fitch sovereign rating for each government.
Aswath Damodaran
adamodar@stern.nyu.edu
September 13, 2008
Subject: Weekly challenge and Newsletter
Hi!
I hope you are having a great weekend. Two very quick notes:
1. The first weekly newsletter is attached to this email. Please browse through
it when you get a chance. If you have trouble opening it, it is also available
online at
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/newsletters.html
2. I hope that you have had a chance to at least look at the weekly challenge
I sent out on Wednesday. In case, you have not, it is also attached and available
online at
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/wkchallenge.html
I will hold off on sending you the solution until tomorrow...
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 14, 2008
Subject: Solution to weekly challenge and notes for next week
Hi!
I am sure that you have worked out the solution to the weekly challenge (and
global warming while you are at it...). Just in case, you have any doubts,
I am attaching my solution to the challenge. Please take a look at it when
you get a chance.
Moving on, here is the agenda for next week. We will be finishing up our discussion of equity risk premiums and moving on to betas, costs of debt and costs of capital. It would help if you have picked your company already. It would be even more useful if you can print off the beta page for your company from Bloomberg and bring it to class with you. If you have not picked a company, just print a beta page for any company you want... Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 15, 2008
Subject: Implied equity risk premiums
Hi!
We do live in interesting times... Building on what is going on in markets right
now and today's session, here are a few thoughts:
1. Country risk: A day like today should be a reminder of why country risk is
not diversifiable. As you see markets tumble around the world, I think you have
a rationale for a country risk premium. You can get default spreads for country
bonds on my site under updated data. 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. As for other sites that look at country risk, here is one that
you may want to look at. It is the site maintained by Professor Campbell Harvey
at Duke who does very good work on country risk:
http://www.duke.edu/~charvey/Country_risk/couindex.htm
2. Company risk exposure to country risk: My concept of lambdas for countries
is a work in progress. I have a paper on the topic on my website that you may
want to read, if you are so inclined:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/papers.html
Check down the list of papers...
3. Implied equity risk premiums: A day like today is perfect for thinking about
implied equity risk premiums. As promised, I am attaching the excel spreadsheet
that will allow you to compute implied equity risk premiums. I am using the numbers
that I used in class today to arrive at an equity risk premium of 4.54%. Give
it your best shot and keep updating the implied premium as you go through the
next few weeks. All you have to do is updated the S&P 500 and the T.Bond
rate and use the solver function built into excel.
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 17, 2008
Subject: Paper on equity risk premiums
Hi!
I know the last thing you want to do with the rest of this week is to read a
75 page paper but I am attaching my paper on equity risk premiums. I think
it is particularly relevant today, but it is a central input into valuation
models always. If you can read it, great... If not, the world will not end.
If you do read it, please send me any comments/corrections you may have. This
is the first draft but I am fine tuning it for launch soon... Thank you! Until
next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 19, 2008
Subject: Newsletter and a prod on weekly challenges
Hi!
In all my years watching financial markets, I don't think I have seen a week
like this one. The S&P 500 started Monday morning at 1250 and ended the
week at 1255... Nothing much happened, right? Well, let's chronicle the seismic
shifts that we saw this week:
1. The ranks of investment banks shrunk dramatically and the notion of a stand-alone
investment bank was questioned. By the end of next week, there may be only one
left standing (Goldman). Not good news for you (as prospective hires) and it
will have significant reverberations for the next few years.
2. The Government was the biggest player on equity markets this week and from
the looks of it, is here for the duration. Who would have thought this possible
a couple of years ago?
3. Classroom discussions of risk and return and equity risk premiums miss the
essence of risk. We saw risk in its purest form this week - danger and opportunity
mingling - and also why we demand equity risk premiums in the first place.
I think you should put your thoughts down, while the events are fresh, and read
them a few years from now, when markets have settled down and a young trader
comes up to you and claims that he has market all figured out. Two final thoughts:
a. I have attached this week's newsletter to this email.
b. Please try out the
weekly challenges (they are online)... I will send out the solutions tomorrow.
c. After years of fighting the idea, I have decided to start a blog. Nothing
profound yet (and maybe never). Let's see how long I can keep it going.
http://aswathdamodaran.blogspot.com/
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 20, 2008
Subject: Market is flat today...and solution to weekly challenge
Hi!
Now we know why keeping markets open 7 days a week, 24 hours a day, is a bad
idea. We need some rest. Anyway, I have attached the solution to the two weekly
challenges. If you get a chance, please take a look at both the challenge and
the solution. On a different note, I am sure that you were estimating equity
risk premiums every day last week. I was and I have updated the numbers on
the blog. Here is what I got:
Sept 15 (start of day) = 4.54%
Sept 15 (end of day) = 4.75%
Sept 16 (end of day) =4.67%
Sept 17 (end of day) = 4.90%
Sept 18 (end of day) = 4.70%
Sept 19 (end of day) = 4.52%
The market moved more in one day than it did in all of 2006 and 2007....Hope
that next week is a little more peaceful... Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 24, 2008
Subject: Weekly challenge
Hi!
Sorry about the scare this morning. Your quiz is not until October 6.. Since
you have all this time on your hands, I have two suggestions:
1. Try the newest weekly challenge. It is attached.
2. Get started on your DCF valuation. Here are some suggested steps, if you
need a helping hand
a. Find a group
b. Pick a company
c. Get its financial statements
d. Pick a currency to do the analysis in
e. Find the riskfree rate in that currency
f. Estimate an equity risk premium for the parts of the world where the company
operates.
g. Estimate a bottom up beta (and lambda, if necessary for your company)
h. Estimate an actual or synthetic rating for your company
i. Get a cost of debt
You get the picture, right?
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 27, 2008
Subject: Newsletter, quiz preview and bottom up betas
Hi!
Hope this wet and dreary weekend is still fun! Anyway, I have a few very quick
notes to add to get the weekend started:
1. Quiz: After numerous iterations on the date, where I managed to screw up every
single time, i hope that the final date is now etched in stone. The first quiz
is in the first 30 minutes of class on Monday, October 6. It is open book and
open notes and will cover everything we do through Monday. In terms of chapters
in the book (Investment Valuation), the chapters covered will be 7-11 (much of
chapter 11, but not all). Thus, the quiz will cover discount rates (riskfree
rates, risk premiums, betas, cost of debt, estimating debt), cash flows (earnings
and adjustments, cap ex, working capital etc.) and growth rates (historical,
analyst and some fundamental).
2. Newsletter: The newsletter for this week is attached. Hope you get a chance
to look at it. (It is also online)
3. Project: I know that the project seems a long way off, but please get the
estimation process started. (That will mean you have to pick a company first).
One of the first things you will be doing is estimating a bottom up beta for
your company. I am attaching a document I have on bottom up betas, why we use
them and estimation questions. Hope it helps!
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu
September 28, 2008
Subject: Weekly challenge solution
Hi!
Note that I did not nag you yesterday about the weekly challenge. I am attaching
the solution to it to this email (and putting it online). If you had a chance
to look at the challenge, you can check out the solution now. if you have no
idea what the challenge was, please look at the challenge first before you
look at the solution.
Aswath Damodaran
adamodar@stern.nyu.edu
September 29, 2008
Subject: Week to come... and first quiz
Hi!
The webcast is up (though the audio quality probably still sucks).... We have
no class on Wednesday but there is a quiz next week. Here are some thoughts
on it:
1. The quiz will cover through slide 140 in the lecture notes.. Hence, it will
include all of chapters 7,8,9, 10 and a big portion of 11 (in the investment
valuation book). In terms of topics, it will cover cashflows, discount rates
and growth rates.
2. If you have not checked it out already, every quiz that I have every given
in this class is online in the website for the class, as is the solution.
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/eqexam.htm
Download quiz 1 and try as many as you can out. Remember that you will be operating
under a time constraint (30 minutes). The quiz 1s from previous semesters will
cover much of the same material, though I might have gone further ahead in some
of earlier quizzes and fallen behind in the last few.
3. No. There is no review session for this class. I did try to give a review
session, but I discovered that most people were not interested. If there is interest
(or you really have trouble with the first quiz), I will reconsider and offer
a review session for the second quiz.
Have a great week (and I am not being sarcastic)... Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu