Hi!
I am sure that you are finding that break is passing by way too fast, but the semester is almost upon us and I want to welcome you to the Valuation class. One of the best things about teaching a valuation class is that valuation is always timely. Is Facebook worth $ 100 billion or is that a pipe dream? Did Kim Kardashian's short lived marriage add or detract from her value? 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
https://www.google.com/calendar/embed?src=n2j2kmgf2jg4p0411ef40rb5ek%40group.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.
I don't use Blackboard but I have an alternative that I am trying out, from coursekit.com. It has all of the useful stuff from Blackboard (capacity to check your grade, online submission of assignments etc.) but in a format that also includes a more open interface and a social media connection:
http://www.coursekit.com
(Though my face is on the front page, I have no financial stake in the company though I would really like its founders to succeed.) You will shortly be getting an invite to join in the site with a code. Please do join in!!!
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). You can even download it to your iPad or Kindle. 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 my Investment Valuation book, but don't buy it. Strange advice, right? But here is why. I just finished the third edition and it is at the printer and I would rather that you not spend $100 on a second edition that will be obsolete in a couple of months. For the moment, go to this link (Don't ask questions... just do it!)
http://www.stern.nyu.edu/~adamodar/pdfiles/valn2ed/wholeenchilada.zip
Act surprised and I will preserve plausible deniability. Alternatively, you can use "Damodaran on Valuation" - again, make sure that you are getting the second edition.
http://www.amazon.com/gp/product/0471751219/ref=pd_lpo_k2_dp_sr_1?pf_rd_p=486539851&pf_rd_s=lpo-top-stripe-1&pf_rd_t=201&pf_rd_i=1118004779&pf_rd_m=ATVPDKIKX0DER&pf_rd_r=0ZMYX1FQW1RH5YTEXC01
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.
http://www.amazon.com/Dark-Side-Valuation-Distressed-Businesses/dp/0137126891/ref=pd_sim_b_13
Or, if you really don't like to read, try this
http://www.amazon.com/Little-Book-Valuation-Company-Profits/dp/1118004779
I am looking forward to seeing you in a couple of weeks.. I think we are going to have a lot of fun (or at least I am...). Until next time...

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
The countdown continues and only a week before the first class. I hope you had a chance to look at the first email I sent about a week ago. What email? If you did not see it, you can see it by going to the link below:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/eqemail.html
Please review the information in the email... I also noted in that email that I am planning to use coursekit.com as my substitute for Blackboard. I had sent out an invitation for you to join the coursekit roster. Unlike Blackboard, only those who accept the invitation can be on the Coursekit roster. Since it will make my life a lot easier if you do get on the roster, please accept the second invitation that I plan to send out in the next few minutes. It should take only a couple of clicks. Thank you and I look forward to seeing you next week! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Just a weekend before class starts.. So, enjoy it (though it looks messy out there). Just a few reminders for those who have not been checking their emails (or just ignoring what they say) for the last few weeks:
1. Coursekit registration: If you have not done so already, please go to http://www.coursekit.com and register for the class. The code is ATNSM5.
2. Class location/time: Class is from 1.30 to 2.50 in KMEC 2-60, Mondays and Wednesdays. We don't have class on February 20, March 12 and March 14. The last class is on May 7. The Google calendar has all of the details:
https://www.google.com/calendar/embed?src=n2j2kmgf2jg4p0411ef40rb5ek%40group.calendar.google.com&ctz=America/New_York
3. What you need to get for the class: The only required material is the lecture note packet. While we will be three packets, only one the first one is available (at the bookstore and online, on the website for the class).
http://www.stern.nyu.edu/~adamodar/New_Home_Page/equity.html
4. What you need to do before Monday's class: Just show up... Don't party too hard, get some sleep and I will see you on Monday.
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Depressing thought but it is time to get back to work. Just a few last notes before tomorrow's class. I will be handing out the syllabus, the project description and the lecture notes for the first two sessions in class tomorrow. If you cannot wait, the pdf versions of the handouts are online on the webcast page for the class (might as well visit it to see what's coming)::
http://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqspr12.htm
Lecture note packet 1 will become necessary by the second session. So, please buy it, print it or download it as soon as you can.

A couple of final requests before class tomorrow. First, I know that I sound like a nag, but please do visit the http://www.coursekit.com page and register in the class. I thank the 60% who have already registered. Second, I don't know whether you have name plates (you know what I am talking about.. those placards that you set in the table with your name on them....) but if you do, please bring them to class with you. The lecture note packet 1 will be necessary toward the end of the second session. So, please do buy it, print it or download it still).

Really looking forward to tomorrow! Until then!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Hope you are having a good day... We ended Monday's class with a riff on how much bias affects valuation. In most "valuations", analysts start with an assessment of value and work backwards to justify that number. Reminds me a little bit of Alice in Wonderland, when Alice is at the Queen's court and the Queen says "Verdict first, trial afterwards". While some of the bias can be attributed to the preconceptions about the company that we bring into my valuation (as is the case with my trying to value Microsoft), much of it is thrust upon analysts by their circumstances. Put differently, if your compensation/reward/upside is a function of whether you come up with a high or a low value, your valuation will reflect this.
Attached is a list of a dozen valuation scenarios. With each one, here is what I would like you to think about:
1. Given the scenario, which direction do you see bias cutting? (Is it pushing your value higher, lower or will it have no effect)?
2. As a bonus, think of the devices that you will use (consciously or otherwise) to justify this valuation? (As an example, you may decide to increase your growth rate if you want to increase value or raise your discount rate if you want to lower value... you may even attach post valuation premiums (for control, synergy etc.) or discounts (illiquidity)..
My point is not to suggest that analysts are craven and dishonest individuals, but that human beings have an infinite capacity for self-delusion... We can convince ourselves that we are not biased (and that other people are...) Continuing with the preview theme, we will look at the different valuation approaches, in big picture terms, tomorrow before starting on the first steps in intrinsic/DCf valuation. Please remember to bring lecture note packet 1 with you to class.

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Bias tests

Hi!
The newsletter for the week is ready and you can get to it by clicking on the link below:
http://people.stern.nyu.edu/adamodar/New_Home_Page/newslet/eqnews1.htm
Also, please keep working on the first weekly challenge. You have about 48 hours before the solution hits. Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
A few quick and perhaps unrelated notes. First, there is still time to get your weekly challenge solution in... I will post my solution around 6 pm, just before kickoff for the Super Bowl. Tomorrow, we will start on the nuts and bolts of DCF valuation by first establishing the consistency principle - your choice of discount rate should be consistent with how you estimate cash flows. If your cash flows are to equity investors (and thus after debt payments), you should discount the cash flows at the rate of return demanded by equity investors, i.e., the cost of equity. If your cash flows are from operating cash flows, i.e., before debt payments, your discount rate should be the weighted average of what your equity investors and lenders want, i.e., the cost of capital. The attached pre-test tries to bring this lesson home. Give it your best shot before you come to class. (If you have no idea where to start, look at how First Boston estimated cash flows for Carborandum - are they to equity or the the entire business? Which discount rate makes the most sense, given how the cash flows were estimated?) Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Kennecott numbers

Hi!
I hope that the discussion of riskfree rates a left you fairly clear about what to do next. In case, you are still confused, this is the next step in the process:

1. Pick a company (in case you have not already).

2. Determine a currency that you will value the company in. Once you have decided on the currency, find a riskfree rate in that currency. If your company is a US or European company, you just got lucky. Either take the easy way out and use the US T.Bond rate as the dollar riskfree rate and the German 10-year bond rate as the Euro riskfree rate, or adjust them for the default risk you see in each sovereign.
If you are valuing a company in an emerging market in the local currency (be brave), your job is a little more complicated.
2a. Get the longest term government bond rate you can get in the local currency. Try the Bloomberg terminals. If that does not work, get online and search... If that does not work, switch to a different currency.
2b. Get the local currency rating for the country by going to the moody's web site: http://www.moodys.com (Look under sovereign ratings).
2c. Estimate the default spread given the rating by downloading the country default spread spreadsheet that I have attached to this email. If you prefer to get CDS spreads, use the current CDS spreads that I have as an attachment (I will post both under the webcast page fand on the coursekit page as well)
2d. Riskless Rate = Government bond rate - Default Spread given rating

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:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1317436
I also have a follow-up paper on the "What if" series.. what if nothing is riskfree
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1648164
Finally, I did a post on my blog specifically on the question of the risk free rate right now being low and the implications for valuaton:
http://aswathdamodaran.blogspot.com/2011/09/risk-free-rates-and-value-dealing-with.html

The topic seems to have acquired some followers among appraisers/analysts. This article provides a reasonable synopsis of where they stand:
http://www.hl.com/email/pdf/FW_Sep2011.pdf
Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachments: CDS spreads, Sovereign default spreads

Hi!
Tomorrow, we will start our discussion of risk premiums and look at different ways of estimating these premiums. As a prelude, please take a few minutes (I swear... it will take you just 3 minutes to do) and work through the pre-test for the class. I think it will help launch the discussion in class.

Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: Risk premium test

Hi!
That time of the week again.. The second weekly challenge builds on the theme of country risk premiums that we talked about in class today. The usual rules apply.
1. Try out the weekly challenge - the sooner, the better.
2. Go to Coursekit.com, click on CALENDAR and click on the second weekly challenge
3. Submit your solution before Sunday at noon.
4. I will put up my solution by 6 pm.
5. Check your solution against mine and see if we agree. If we don't, check your answer. If your answer is right, then mine must be wrong. Let me know why.
6. Repeat this process again next week.
Until next time!

Attachment: Weekly challenge # 2

Hi!
We are little more than halfway through the discussion of equity risk premiums but the contours of the discussion should be clear.
a. Historical equity risk premiums are not only backward looking but are noisy (have high standard errors). You can the historical return data for the US on my website by going to
http://www.stern.nyu.edu/~adamodar/New_Home_Page/data.html
Scroll down and look towards the top of the table of downloadable data items.

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 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
If you want my estimates of country risk premiums, check under updated data on my website. (See website above)

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:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=889388

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 February to come up with an equity risk premium of 6.02%.

Please try to update the implied premium, using today's numbers for the S&P 500 (easy), 10-year T.Bond rate (easy), growth rate in earnings for next five years (Try to find a number on Yahoo! Finance.. If you cannot, leave it at7.18% ) and just leave the 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 Monday.
Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: ERP test

Hi!
Hope your week went well. The latest newsletter is up:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/newslet/eqnews2.htm

Browse through it, when you get a chance. And don't forget to try the weekly challenge and submit your solution on Coursekit:
http://www.stern.nyu.edu/~adamodar/New_Home_Page/wkch/wkch2.htm

Until next time!
Aswath Damodaran
adamodar@stern.nyu.edu

Hi!
Last call for the second weekly challenge. I know that the deadline was set at 12 pm, but I have changed it to 6 pm.. So, that excuse is gone.. Give it a shot and submit on Coursekit. I have also attached the pre-class test for tomorrow. It has two parts to it: the first is the implied equity risk premium spreadsheet that I sent out on Thursday and the second is a set of "what ifs" I would like you to try out on the spreadsheet. Holding all else constant, please look at what happens to the premium if
a. The S&P 500 increases by 10%? Decreases by 10%?
b. You switch from the average cash yield over the last 10 years to trailing 12 month yield?
c. The expected growth rate in earnings increases to 10% (for the next 5 years)? Drops to 5% for the next 5 years?
d. The risk free rate increases to 5%? Drops to 1%?
See you in class tomorrow! Until next time!

Aswath Damodaran
adamodar@stern.nyu.edu

Attachment: ERPtest.xls