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If you are
stuck here.. |
Try this.. |
And for more, go hereÉ |
1. I have not picked a company |
Pick one (even randomly) |
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2. I cannot decide what currency to use in my
analysis |
Generally, pick the currency in which your
financials are reported. This will be usually be the local currency though
some non-US
natural resource companies report in US dollars. But check (3) .. |
|
3. I cannot get a riskfree
rate |
The riskfree rate is a
long-term default free rate. If there is no long term
government bond rate in the currency, switch to a different currency. If
there is a long-term government bond rate, but the government has default
risk, net the default spread from rate. |
Session
3 of lecture |
4. I am having trouble with estimating the equity
risk premium. |
For mature markets (AAA rated countries), you can
use the historical risk premium for the US (4.79%). For non-mature (<AAA) markets, you have to estimate a
country risk premium. Alternatively, you can use the implied equity risk
premium in any market. |
Sessions
3-4 |
5. I do not know whether I should estimate a
lambda. |
Estimate a lambda only if you have a company that
is an emerging market and gets a substantial portion of its revenues from
developed markets. |
Paper
on company risk exposure to country risk (has average revenue exposure by
country) |
6. I do not know where to find a bottom-up beta. |
You can use the betas that I have for different
businesses on my site or come up with your own comparable firm list and
estimate a beta. (Remember to lever up the beta using your companyÕs D/E
ratio |
Ten
Questions on bottom-up betas |
7. I am having some issues getting a cost of debt |
The cost of debt is the current long-term borrowing
rate. If your company is rated, use the default spread based on the rating.
If not, use a synthetic rating. If you have a money losing company with no
rating and debt, use a BB rating and move on. |
Session
5 |
8. I do not know what to include in debt in the
cost of capital. |
Include all interest bearing debt and the present
value of lease commitments. Do not include accounts payable or supplier
credit or unspecified long term liabilities. |
|
9. I am having trouble deciding which model –
dividends, FCFE or FCFF – to use in valuation. |
If you are working with a financial service
company, go with dividends. For other firms, take a look at the current debt
ratio. If you feel that it may change in the future or are unsure, go with
FCFF. If you feel that the debt ratio is stable and will not change, go with
FCFE. |
Session
10 |
10. I cannot find a spreadsheet to use. |
You can build your own spreadsheet or use one of
mine. If you are absolutely sure about model specifics (2-stage, 3-stage
etc), you can go with a specific model. It is generally safer to go with one
of the ginzu models. |
Dividend ginzu spreadsheet |
11. I
am entering the numbers in the spreadsheet but I am having trouble deciding
which numbers to use. |
Always use the most current numbers you can get for
every input, even if it means that they do not match up. For market numbers,
this will be todayÕs numbers. For accounting numbers, it will be trailing
12-month for those inputs where you can get them and the last annual report
numbers, where you cannot. |
The spreadsheets will allow you to capitalize leases and convert R&D (in the firm value spreadsheets). You will have to decide whether you have to normalize some of the numbers to adjust for the volatility over time. |
12. I now have a DCF value.
I have no idea what to do about cash and cross holdings. |
If you are doing an
equity valuation, you may already have valued the cash and the cross
holdings, if you used unadjusted net income. If you are doing a firm
valuation or an equity valuation based upon adjusted net income, you should
be adding the cash and marketable securities to it. You should also be adding
the estimated market value of minority holdings in other companies and
subtracting out the estimated marekt value of the minority interests. |
|
13. My company has
granted options to its managers over time, and there are millions of them
outstanding. I am not sure wha to do with these. |
Value the equity
options outstanding and subtract from the overall value of equity. If your
company is continuing to grant options, think of it as compensation expense
and reduce your operating margins looking forward. |
Session 12 |
14. I have a value of
equity but it look weird. |
Revisit your inputs
and make sure that your units are not off. Check your assumptions about
growth, reinvestment and risk to make sure that they are consistent. |