It’s been a week since my last email, and while not a whole lot has happened, I thought I should check in ahead of next week’s class. First, if this is the first email you are reading, then you should catch up with the earlier one, which are available at the link below:

If you are wondering about the logistics (exams, projects etc.), we will start the first class with the syllabus, which will also lay out the themes for the class:

As you go through the syllabus, you will notice mention of a project and you can find the details of that project here:

Once we are through the syllabus in session 1, we will turn to an introductory packet (of about 20 pages). The link to that package is below:

Please have this ready for the first session. The rest of the class will be covered in the lecture note packets, and I sent you the link to the first one last week (but here it is again):

https://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/valpacket1spr25.pdf 

Having drowned you with all of that stuff, let me hit with you some pre-class reading (and I don’t think it is too painful). I don’t do much academic research and am supremely uninterested in writing for an echo chamber. Much of what I have written that is original or different has be initially (at least) on my blog.  I spend the first few weeks of each year, talking about the data that I update on my website:

The first update is on my blog and the second one will be up in the next day or two. Please browse through them, because they are relevant for class:

The first class will be a week from today (Wednesday, January 22, from 3.30 pm - 4.45 pm, NY time) in Paulson Auditorium. Please do come, if you can. If you are unable to, the session will be recorded and accessible by later that day. I am looking forward to seeing you next week. Until next time!

I hope that this is not the first email that you are getting about this class, but if it is, you may want to check out the previous emails that I sent out at this link:

https://pages.stern.nyu.edu/~adamodar//New_Home_Page/eqUGemail.html 

As for tomorrow, we will meet at 3.30 pm in Paulson Auditorium. I assume that you know where that is, but if you do not, it is the UC level of Tisch (I think the room number is UC 50). I really, really would like to see you in person, but if whatever reason you are unable to make it, this zoom link will put you in the class live:

If you are unable to make the class live, a recorded version will be on YouTube later tomorrow night.

As for what you should bring to this class, bring your syllabus, project description and the Valuation Intro slides (all links available in the webcast page above). 

First things first. The links to yesterday’s class are now fully up and running. If you were not at the class, or mentally absent, please do watch the class. Each week, I will use the Thursday email to prod, nag and bug you about the project. So, without further ado, here is where you should be this first week:

This is the first week, and you should not be (hopefully) lost yet, but I thought I would start you on the newsletters. The first newsletter is attached, and as you can see, there is very little news. That said, here are some things you should be working on this weekend.

1. Find a group

2. Pick a company

3. Download the introductory slide packet as well as packet 1 for the class.

Have fun the rest of this weekend, because I have diabolical plans to ruin the rest of your weekends this semester. 

Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online on the webcast page for the class. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. 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. We will start the next class with both the time horizon and catalyst questions, but there is one group of investors that may be able to provide the catalysts for market corrections: activist investors (people like Carl Icahn, Bill Ackman(. If you are interested in getting a sense of who these investors are, take a look at this site, which lists the biggest ones (and the names of the entities that they use as vehicles… 

In the meantime, if you have not been getting the emails (and you are checking this on the email chronicles, it is probably because you are checking under the wrong email address. Everyone who takes a Stern class is given a @stern.nyu.edu address, and you may not be aware of it. You can head over to 'start.stern.nyu.edu' to activate your account.You can also go to this website to see how to to h access your emails:

It is time for the valuation of the week, and I had initially planned on making it Nvidia. But after an eventful weekend, I will have to revisit my story and valuation for Nvidia, and I promise it is coming in a future week, sooner rather than later. Instead, I am going to do a valuation that may allow you to answer the question I asked most in market interviews: Is the market in a bubble? Is it overvalued? Given there is so froth in this response, I value the S&P 500 index at regular intervals, and at the start of 2025, after two very strong years for US equities, I valued the S&P 500 index and wrote about in my second data update post for 2025:

I am not going to claim that it is scintillating reading, but I don’t think it is that boring, and I would like you to start with that. In the post, I also share the spreadsheet that contains my valuation:

Please download that spreadsheet, and here is what I would like you to do. In the spreadsheet, there are four levers that drive the index value:

1. T.Bond rate; At the start of 2025, it was at 4.58% and I have left it at that level (since I am terrible at forecasting interest rates), but if you feel that rates will move (in one direction or the other), I let you change the rate (change the answer on the cell below to yes, and enter your target rate).
2. Equity risk premium: I used an equity risk premium of 4.50%, higher than it has been historically, but lower than the premiums we have seen since 2008. (The worksheets containing the equity risk premiums, implied and historical, are a worksheet). If you have a macro story to tell, and believe that story contains risks that demand a higher equity risk premium, replace my premium with your estimate, either as a direct input, or using one of my calculated choices)
3. Earnings: The cash flows come from estimates of earnings for future years from analysts who track the index. I have their earnings for 2025 and 2026 as a default, and the subsequent year earnings build off that. If you feel that earnings estimates may be too optimistic or pessimistic, I give you the option of changing them, by applying a discount (-10%, -20% etc.) to the earnings or a premium (+10%, +20%) to the number.

If your response is that you really don’t have a point of view, leave the number as is. When you are done, go to this Google shared spreadsheet, and enter your numbers. 

https://docs.google.com/spreadsheets/d/1ICGB1xcqQHYsiltPq7c2MNbRkuoJlpadpWoaVWdJoiE/edit?usp=sharing 

The last column of the spreadsheet will compute how under or over valued you find the market, and the table to the right will give you the crowd judgment. Clearly, with 500 people in the two valuation classes (undergraduate and MBA), that willl be a big crowd, if you chose to partake, but I have also made this spreadsheet open to the public, and the tribe may multiply. It should take just a few minutes of your time, and I think it will be worth it. 

We started class by completing the discussion of approaches to valuation, talking about pricing and real options, at least in a big picture sense. We then began our intrinsic value discussion by talking about the weapons of mass distraction. If you want to read the blog post I have on the topic, try this link:

We then spent some time setting up the process of discounted cash flow valuation, arguing for consistency in discounting. If the cash flows that you are discounting are cash flows to equity, estimated either as dividends or as potential dividends, the discount rate should be the cost of equity. If the cash flows that you are discounting are pre-debt cash flows, i.e,, cash flows to the firm, the discount rate has to be the cost of capital. Done right, the value of equity should be equivalent with both approaches. We also introduced “The IT propositon’ arguing that for it (control, synergy, AI or ESG) to affect value, it has to affect either the cash flows or the discount rate. 

Try the weekly challenge that I will send out on Wednesday, if you do not believe me. Next session, we will start with a discussion of risk free rate, a foundational number that will drive the rest of our calculations. I have attached a post class test for today, with the solution, but I think that four of the questions relate to risk free rates, which we have not covered yet. So, if you want to wait until Wednesday’s class, you might have an easier time. 

By now, you should have a company picked, and if so, you can start thinking about at least the first piece of your discount rate calculation, a risk free rate. Currency is a choice and you can choose to value your company in any currency, though the currency in which your financials are reported is a good place to start. Of course, if that currency happens to have a 100% inflation rate, you may rethink your choice. Next week, we will start with how to estimate a riskfree rate in any currency, and if you want to get a jump on that process, try to find a ten-year government bond rate in the currency of your choice. That is of course trivial, if you are working in US dollars, since the 10-year treasury bond rate is available almost everywhere (including on the entry page to the Wall Street Journal). If you are working in Vietnamese Dong, this will be trickier, but this site is pretty good on that front:

If you cannot find your currency on this list, don’t worry. There are only about forty currencies with government bonds, and we will address how to estimate the riskfree rate for currencies with no government bonds.

Hope that helps.

Finally, I am glad to see many of you are trying your hand at the S&P 500 index valuation (https://docs.google.com/spreadsheets/d/1ICGB1xcqQHYsiltPq7c2MNbRkuoJlpadpWoaVWdJoiE/edit?usp=sharing). The shared spreadsheet now has about 57 valuations. Let’s see if we can get that number to a couple  of hundred by the end of the week. 

A few quick notes. The first is that I did put up an a tools webcast today.on collecting data. The link is below:

https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/gettingdata.mp4

We started the class by completing a big picture perspective on discounted cash flow models, noting that while the way we get  cash flows, growth rates and discount rates will vary, they are not only tied together with the same principles but require internal consistency. We started then with a discussion of risk and how it plays out in discount rates, before embarking on an assessment of riskfree rates, and with a discussion on whether the Fed sets rates and how to get riskfree rates in currencies where the government has default risk. I did mention, in passing, the possibility of negative riskfree rates and I do have a post on that:

http://aswathdamodaran.blogspot.com/2016/03/negative-interest-rates-unreal.html 

If you want to see my updated perspective on risk free rates, try my blog post from this week::

Some of this post covers what we will do next week in class, but it is still a good big picture perspective.  Also, the post class test and solution for today are attached. 

In this week’s valuation of the week, I am focusing on Nvidia, a company that I have the most selfish of reasons to value, which is that I have owned shares in it since 2018, and have been a beneficiary of the AI boom. I would start with this post from 2023, just as the AI boom was taking form, where I grappled with the AI market, as seen then.

I would then move on to my 2024 post on the Nvidia valuation, where I try to value the AI story, and explain why, even though I found Nvidia to be overvalued,, after a bad earnings report:

You can follow this up with the post that I did on DeepSeek at the end of last week, where I look at how DeepSeek changes the AI story, and by extension the valuation of Nvidia:

In the context of that post, I revalued Nvidia, and my updated valuation of the company is at the link below:

Here is what I want you to focus on. There are many pieces to the Nvidia story, but I would like you to look at four of them:

1. AI chip market size: In my January 2025 valuation, I reassessed my total market size for AI chips to be $300 billion (down from $500 billion), because of how I see DeepSeek affecting the end game for AI. You are welcome to disagree, from believing that DeepSeek will devastate the AI market profitability (which will make the market for AI chips even smaller), that it will have no effect (leave the market at $500 billion) or even that it makes the market bigger (with a market size greater than $500 billion)

2. Nvidia Market Share of Chip Market: Nvidia currently has an 80% market share of the market, and over time, while competition will increase, it will remain a dominant player (with a 60% market share). You may believe that this assumption is too optimistic (giving them a share less than 60%) or too pessimistic (share >60%)

3. Nvidia’s operating margin: Nvidia has nosebleed profit margin - close to 80% gross margins and 70% operating margins. I have assumed that there are three forces that will bring margins down - increased competition, attempts by TSMC to claim a larger share o the spoils and pushback from its four biggest customers (all big tech companies), but that the target margin will stay at 60%, since it is a design company.

4. Nvidia’s cost of capital: I use Nvidia’s characteristics on risk, debt mix and operating risk to arrive at a starting cost of capital of 11.79%, which I scaled down over time to a median cost of capital for US companies, You may be more optimistic than me about operating risk, and given them the median cost of capital (close to 8.5%) today.  

Change what you feel comfortable changing, using my spreadsheet, and then report your estimated value in the Google shared spreadsheet below:

https://docs.google.com/spreadsheets/d/1KgHLfJ-fkGMIA05UOQemoSAhZyD3MwhDfDQDFeQgMlY/edit?usp=sharing 

We started the class by completing the last loose ends on risk free rates, before turning our attention to equity risk premiums and what they purport to measures. We looked at historical risk premiums and their limits and then extended the discussion to estimate equity risk premiums for countries without much historical data. If you want to look at the historical returns on stocks, bills, bonds, real estate and gold in the United States, you can get the historical data at:

https://pages.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xlsx 

We will come back talk about alternatives to historical risk premiums in the coming sessions.

If you are interested in seeing what the equity risk premiums look like, by country, take a look at the spreadsheet at the link below:

https://pages.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xlsx 

On the riskfree rate front, I have done many posts on why I think the Fed’s power to set interest rates is overrated. You may want to try these two:

1. https://aswathdamodaran.blogspot.com/2013/06/the-fed-and-interest-rates-lessons-from.html 
2. https://aswathdamodaran.blogspot.com/2024/09/fed-up-with-fed-talk-central-banks.html

Attached are the post class test and solution for today. Finally, I have also attached the spreadsheets with the latest sovereign CDS spreads and ratings to this email. Until next time!

By now, you should have a company picked, and if so, you can start thinking about at least the first two pieces of your discount rate calculation, a risk free rate and an equity risk premium. 

1. Company Choice: I know that I have asked you this multiple times, and if you have responded already, I apologize, but if you have not picked a company to value yet, please do, and if you have, enter your company into the master list for the class: https://docs.google.com/spreadsheets/d/1uX8W1Eu8f9B3dEVcUfJLkurMGbmb86IwcS9BFSvSPLc/edit?usp=sharing 
2. Equity Risk Premiums: I went through my calculation of country risk premiums in class,  with implied equity risk premiums as a chaser. In case, you are truly bored over this long weekend, you can read an annual update paper that I write on equity risk premiums every year. I am still working on this year’s version, but you can download the 2024 version by going to the link below: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4751941
3. Company ERP: If you get the breakdown of revenues for your company by country or region, you can complete the process of computing the ERP for your company. You are welcome to use my country ERP estimates ( https://www.stern.nyu.edu/~adamodar/pc/datasets/ctryprem.xlsx), as long as you understand the mechanics. 
4. Lecture note typos: There were typos on pages 10 and 12 of your lecture notes that I wanted to fix, where the numbers were not in superscripts. The corrected version is attached.

1. It is time for some news (not really), but this is the third newsletter for the class.

How’s the Super Bowl Party shaping up? While you enjoy yourself, you may want to think about valuation questions. For instance, how much would you pay, if you were a network, for the rights to carry the Super Bowl in perpetuity? (Think of the questions you have to address to do this valuation, starting with whether the football can outlast its CTE challenge and continuing on to whether technology will allow watchers to completely bypass ads…) And if you are a company built around subscribers, say Amazon Prime or Netflix, would you outbid the ad-driven networks because you will use the Super Bowl to sign up new subscribers? As for the ads, will any of them match to the crypto ads that starred Larry David and Matt Damon in the Super Bowl a couple of years ago? And what does the Taylor Swift presence add to the value of an NFL franchise (not just the Chiefs)?  Now that I have sowed those seeds that may prevent you from watch Patrick Mahomes throw the ball with his left hand while lying on his back (how does he do that?), a preview of he week to come...

This week, we will turn our attention tomorrow to implied equity risk premiums, a forward-looking and dynamic way to estimate equity risk premiums  and then to betas, and alternative to beta as a risk measure and regression betas. It would help if you are able to find a beta estimate for your company (from a service like Yahoo! Finance or a Bloomberg terminal, if you can find one) and bring it to class with you. 

For this week, I thought I would switch gears and value a very different company from the last few.  I look at Aramco, a company that became the most valuable public company (in terms of market cap) over night, when it had its IPO in 2019. The place to start this valuation is with the Aramco IPO, a document written by bankers for bankers, and hence thoroughly boring:

https://www.saudiaramco.com/-/media/images/investors/saudi-aramco-prospectus-en.pdf?la=en&hash=8DE2DCD689D6E383BB8F4C393033D8964C9F5585 

You can follow up with two posts that I wrote at the time of the IPO:

1. http://aswathdamodaran.blogspot.com/2019/11/a-coming-out-party-for-worlds-most.html

2. http://aswathdamodaran.blogspot.com/2019/11/regime-change-and-value-follow-up-post.html 

This week, I have two webcasts, one on the implied equity risk premium and another  on the mechanics of estimating bottom up betas. 

I use United Technologies to illustrate the process and I go through how to pull up companies from Capital IQ. Even if you don't get a chance to watch it after the quiz, it may perhaps be useful later on. Here are the links:

Webcast: http://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/BottomupBeta.mp4 

United Technologies 10K: http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Bottomupbeta/UT10K.pdf

Spreadsheet to help compute bottom up beta:  http://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Bottomupbeta/bottomupbeta.xls

The last spreadsheet has built into it the industry averages that I have computed for different sectors in the US in 2015. You can get the updated version from 2024 here:

https://pages.stern.nyu.edu/~adamodar/pc/bottomupbeta.xlsx 

It uses the US industry average, but you can replace them with the global, European, Japanese, Chinese, Indian and Emerging Market beta averages, which are all are on my webpage.

I hope that you are enjoying the long weekend. It is a good time to catch up. If you have picked a company, it is time to start digging and estimating numbers (risk free rate, equity risk premium, beta etc.). In the meantime, the newsletter for this week is attached. Next week, we have class on both Tuesday and Wednesday.

Attachments: Issue 4 (February 15)

As some of you may have undoubtedly read in the news or heard, Starbucks is going through a tough time on multiple dimensions:

1. Corporate Governance/Management: Starbucks is struggling with its corporate governance, cycling through CEOs, with Howard Schultz lurking in the background.

2. Business Model: The story that has brought Starbucks as far as it has seems to have broken down, and there is no easy way back.

3. Politics: For fair or unfair reasons, Starbucks seems to have been caught in the headlights of the politics of the Middle East.

Not surprisingly, the market has turned on the stock, with the stock price about where it was four years ago, though it has recovered from its lows in September 2024.

And to top it all off, the Chestnut Praline latte is no longer in season.

The big question, for Starbucks as a business and for investors in the company, is whether the story is broken and Starbucks is entering into decline, or whether this is a temporary problem that can be fixed by adding new offerings, changing store setup or entering new geographies. I may be wrong, but I think that the Starbucks story is broken, as Howard Schultz’s original story of a cafe culture with customized offerings has run its course, stymied by saturation in its core market (US) and by intense completion in its second largest market (China), and a COVID shift in customer behavior to online ordering that is wreaking havoc on baristas and the cafe model. (Next time, you go into a Starbucks, especially during rush hour, check out how many people are waiting to pick up online orders and how few are actually staying in the store. I wrote about this and two other companies (Walgreens and Intel) that are also facing the aging cliff.

I have updated the valuation that you will see in that post to reflect two additional quarters of data that I have for the company:

Updated 2025 financials for Starbucks: https://pages.stern.nyu.edu/~adamodar/pc/blog/Starbucksfinancials2025.xls 

Updated 2025 valuation for Starbucks: https://pages.stern.nyu.edu/~adamodar/pc/blog/Starbucks2025.xlsx 

If you have been intimidated by the companies that we have valued so far because you cannot quite grasp a market (the first valuation of the S&P 500), are not tech savvy (Nvidia) and are not an oil person (Aramco), Starbucks is a good company to started on your voyage of understanding the connection between story and numbers, and one that you can relate to personally. If you try your hand at the Starbucks valuation (using my spreadsheet to construct your valuation, please enter your estimate of value for the company into the shared Google spreadsheet below:

In this session, we began by continued with our discussion of why we capitalize lease commitments and R&D expenses, and how they affect valuation inputs. We continued our discussion of cash flows, by first putting to rest some final issues on earnings, including the tax rate to use in computing after-tax cash flows and dealing with money losing companies. In the process, we did look at what to do about accounting fraud, and while the answer is not much, there may be a role for forensic accounting. To be honest, most forensic accounting books are designed for valuation morticians, but here are a couple that you may find useful:

1. http://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071703071/ref=pd_sim_b_8
2. http://www.amazon.com/Creative-Cash-Flow-Reporting-Sustainable/dp/0471469181/ref=pd_sim_b_2

I am going to skip the nagging next week, since you have a quiz a week from Monday (March 3), and your time will be better spent preparing for it. Again, remember that understanding something in the abstract in the classroom is very different from being able to do the same thing in practice. Thus, there is no substitute for working through past quizzes, getting stuck (as you will sooner or later), figuring out how to get unstuck and solving problems. Watch the quiz review along the way and don’t forget to test your self too. Here is a rough guideline on how to approach the past quizzes:

Time constraint severe: Do most recent two quizzes with solutions as crutch, Do prior two with solutions as a fall back and take two quizzes without looking at solutions and with 30 minute timer.

Time constraint average: Do most recent three quizzes with solutions as crutch, Do prior three with solutions as a fall back and take three quizzes without looking at solutions and with 30 minute timer.

Time constraint not binding: Do most recent four quizzes with solutions as crutch, Do prior four with solutions as a fall back and take  four quizzes without looking at solutions and with 30 minute timer.

What time constraint? Work through every quiz since 1998 and I hope that you come out with your sanity intact. 

On the earlier quizzes, you will notice that I don’t provide an ERP in problems, and that 5.5% shows up in the answer. That is because I expected people to look up the ERP in their lecture notes, and it was roughly 5.5% then, but I have learned my lesson the hard way and provide the ERP in the problem in recent year. Also, some of the earlier quizzes have questions on growth and that will not be part of your first quiz. So, pick your battles wisely and don’t freak out. Incidentally, if you have any trouble with downloads from my webpage, switch browsers and see if it does the trick

This week in class, we will finish our discussion of cashflows first, and then move on to talking about growth, starting with historical growth before looking at how (badly) analysts estimate growth and why growth should be tied to fundamentals.  During the course of the week, I hope you have a chance to start preparing for the first quiz. I won’t send you the links to the past quizzes and review sessions again (since I have sent them to you a few times already), but I will have extended office hours this week:

• Monday and Wednesday (in person): 9.15-10.15, 12.15- 1.15
• Sunday (zoom): 5 pm - 7 pm, link: https://nyu.zoom.us/j/99520086506

First things first! The quiz is next Monday in the first 30 minutes of class, and there will be class afterwards. If you signed up with the Moses Center for extra time and/or accommodations, you will be taking your exam at the Moses Center. They have the exam already, and you should be all set. On a different note, today is the day that you get the valuation of the week. Rather than hit with you another company valuation, I thought I would try something lighter.So, let’s have some fun. I have always been a Star Wars fan, and like other fans, I was a little worried when Disney bought Lucas Films (and with it the rights to the Star Wars franchise) for $4 billion a few years ago. Disney was explicit about its plans at the time, and said that it planned to produce three major Star Wars movies, continuing the story, and three side stories (like Rogue One) filling in history. I went to see Force One in December 2015 and wrote this post on my blog about what I thought the value of Star Wars was at the time;

In today’s session, we continued with our discussion of sustainable growth, by looking at growth in net income and operating income, using versions of the reinvestment rate and accounting returns for each. We then moved on to building cash flows in a general case, starting with revenue growth, moving on to operating margins and reinvestment, with a sales to capital ratio. With each, we looked the determinants, with Airbnb as an illustrative example. In the final part of the class, we started the discussion of terminal value, by noting that using a terminal multiple undercuts an intrinsic value by making it a forward pricing. Next session, after the quiz, we will complete the discussion of terminal value. I have also included a weekly challenge, if you are in the mood for one, on sustainable growth. 

Attachments: Post class test and solution

I seldom get a chance to nag on two fronts at the same time, but this email may do it. We are done with the cost of capital calculation in class, and it is an important part of both your project and the upcoming quiz. While nothing in the calculation is complex, there are so many moving parts, that it is easy to lose sight of the end game. So, if you are preparing for the quiz or working on your project, here are some quick review points:

1. Riskfree rate: Since the riskfree rate that we aspire to estimate has to be long term and default free, to estimate it in any currency, we start with the government bond rate in that currency. If the government is viewed as default free (Aaa rated), that government bond rate becomes the riskfree rate, and it is what we do with the Swiss Franc, Australian and Canadian dollars and the Scandinavian currencies, and continue to do (with a little more ambivalence) with the US dollar. For governments with default risk, we have to clean up the government bond rate, by netting out a default spread, which we estimate with a sovereign rating or sovereign CDS spreads. The key rule is that the currency choice that determines risk freer rates, not where a company is incorporated or where it operates.
2. Equity risk premium: The equity risk premium is a function of where a company operates. I know that we went through multiple ways of estimating the equity risk premium, with the default spreads, a scaled up version (with equity market volatility) of the default spread or the lambda. While all three are acceptable, work with what you are given in a problem. Thus, if you are given relative equity market volatility, use it. The equity risk premium is generally a weighted average of the countries you get revenues from, with weights based upon revenues. If it is a natural resource company, the weights may be based on production.
3. Beta: While regression betas remain the conventional approach to estimating betas, I (strongly) recommended that you use bottom up betas, where betas are computed as weighted averages of the betas of the businesses that you operate it, with the weights preferably being value weights. Of course, to control for differences in leverage, it is always good to unlever betas first, before weighting them, and then taking the company’s debt to equity ratio into consideration.
4. Cost of debt: The cost of debt is composed of the risk free rate and a default spread (of just the company, if it is incorporated in a AAA rated country, or the sum of the default spreads of the company and the country, if it is incorporated in a risky country). That default spread can be estimated from a bond rating, if one is available, or from a synthetic rating, based on an interest coverage ratio, when you don’t have a bond rating.
5. Tax rate: The tax rate you use to compute an after tax cost of debt is always the marginal tax rate, because interest saves you taxes at the margin.
6. Weights: The weights for debt and equity should be market value. While the latter is easily observable for public companies, the former is more difficult to get, since most companies have some of their debt in the form of bank loans. In those cases, it is best to convert the book value of debt using a bond pricing equation (see your lecture notes to see this process)

In doing all of this, the overriding rule in discounted cash flow valuation is to remember to match up your discount rate to your cash flows - in terms of currency, claim holders (cost of equity for cashflows to equity and cost of capital for cash flows to the firm), risk and nominal/real. 

As you work through past quizzes, please do try not to check the solutions too soon. Part of what I hope you get out of the practice quizzes is coping mechanisms that you can use when you get stuck, to work through the problem on your own. I am in Portugal for the next couple of days, but will make it back to New York by mid afternoon on Sunday to have office hours from 5 pm - 7 pm that day on zoom.  https://nyu.zoom.us/j/99520086506

I am testing your patience at this point, but I am going to go on anyway. In the session after the quiz (yes, there was class after the quiz), we looked at the link between fundamentals and growth, and in particular, at how much of a role accounting returns (ROE and ROIC) have on assessing both growth rates and the value of growth. The scariest aspect of these numbers is that they are entirely driven by accounting choices, which can create biases.  In this webcast, I look at the process of estimating accounting returns, using Walmart as my example:

Attachment:Issue 6 (March 1)

I know that there is some confusion about the quiz ttomorrow and I take the brunt of the responsibility for this development, as some of the rules on the webpage for the class reflect times past, not that long ago, when people bought or printed physical copies of the lecture notes and used abacuses to do calculations. So, at the risk of creating more confusion, here are the final rules (and since I have pope-like status on this front, these override all existing rules and can be amended and altered only by me):

1. Quiz Logistics: The quiz will be in-person in the first 30 minutes of class (1.30 - 2 pm) tomorrow, in 2-60 for everyone in the class.  If you have signed up with the Moses Center for additional time or other accommodations, please go to the Moses Center to take your quiz. There will be class after the quiz. So, if you finish early, you can take a quick break but come back for the rest of the class. I will try to make it riveting!

2. Quiz Coverage The quiz will cover everything through cash flows (intro packet + Packet 1 through page 160),  but will not include growth. Note that some of the earlier quizzes do have questions about growth that you can ignore for this quiz,

3. Quiz rules: It is open book, open notes, but remember that with only 30 minutes to do the quiz, you cannot afford to be looking for equations or answers to questions in the notes during the quiz. Since many of you have your slides on tablets or on a PC, you can use either device to look at your notes, but you cannot use Excel, Numbers or any other laptop tool in your work. Please bring your calculators (physical or digital) to the quiz with you, and if you have your calculator on your device, you can use it, but just as a calculator. 

4. Quiz work: The quiz will be four pages long, with one question on each page, and space below to answer the question. Show your work in that section, rather than on scrap paper,, since I will be grading the quizzes (don’t harass the teaching fellows, since they bear no responsibility) and I give partial credit. Since I want to give you credit for things you know, showing your work in a neat and orderly manner. 

5. Missing the Quiz: If you will be missing the quiz, let me know ahead of the quiz. While you may not receive an acknowledgement, I will check after the quiz to make sure that I have heard from you ahead of the quiz, if you missed the quiz. If you do miss the quiz, the 10% will get reallocated over the rest of the exams in the class. So, if you miss quiz 1, your second and third quiz will be worth 12% apiece, and your final will be worth 36%. You will also lose the option of having your worst quiz score replaced by the average. 

Finally, if you are having trouble opening the past quiz links, try a different browser. A final reminder that the zoom session will be at 5 pm today, and I will record it.