I confess. I send out a lot of emails and I am sure that you don't read some of them. Since they sometimes contain important information as well as clues to my thinking (deranged though it might be), I will try to put all of the emails into this file. They are in chronological order, starting with the earliest one. So, scroll down to your desired email and read on...
January 15, 2010
Happy new year! I hope you have have a wonderful break and that you will come back tanned, rested and ready to go.... This is the first of many, many emails that you will get for me. You can view that either as a promise or a threat...
I am delighted that you have decided to take the corporate finance class this spring with me and especially so if you are not a finance major and have never worked in finance. I am an evangelist when it comes to the importance of corporate finance and I will try very hard to convert you to my faith. I also know that some of you may be worried about the class and the tool set that you will bring to it. I cannot alleviate all your fears now, but here are a few things that you can do to get an early jump.
a. Get a financial calculator and do not throw away the manual.
b. The only prior knowledge that I will draw on will be in basic accounting, statistics and present value. If you feel insecure about any of these areas, I have short primers on my web site that you can download by going to
c. If you are taking the Foundations in Finance class simultaneously, don't panic. There will be 150 others in the same position and you will not be at any special disadvantage.
d. If you are taking Valuation with me as well, you will be sick and tired of me by the time the semester ends...
And trust me... We will get through this together...
Having got these thoughts out of the way, let me get down to business. You can find out all you need to know about the class (for the moment) by going to the web site for the class:
The syllabus has been updated and you will be getting a hard copy of it on the first day of class but the quiz dates are specified online. If you click on the calendar link, you will be taken to a Google calendar of everything related to this class.
You will note references to a project which will be consuming your lives for the next four months. This project will essentially require you to do a full corporate financial analysis of a company. While there is nothing you need to do at the moment for the project, you can start thinking about a company you would like to analyze and a group that you want to be part of.
Now for the material for the class. The lecture notes for the class are available as a pdf file that you can download and print. (Please do not use the printers at school. I get the blowback) I have both a standard version (one slide per page) and an environmentally friendly version (two slides per page) to download. Make your choice.
If you prefer a copied package, the first part (of two) should be in the bookstore in about a week.
There is a book for the class, Applied Corporate Finance, but there is a little timing problem. The copy that you can buy at Amazon.com or your local bookseller is the second edition and the third edition is being printed as we speak; it should be out in a couple of weeks. While I have no qualms about wasting your money, I think I would be doing you a disservice if I asked you to buy the second edition and have the third edition hit you in a few weeks. So, here is my compromise solution (just don't let my publisher in on this email). I have put the entire book online for the moment. You can download the pdf version of the chapters by clicking below:
Download the first few chapters. You can either leave them on your computer or print them off. When the book comes out, you can buy it (or not).
One final point. I know that the last year and a half have led you to question the reach of finance (and your own career paths). I must confess that I have gone through my own share of soul searching, trying to make sense of what is going on. I will try to incorporate what I think the lessons learned, unlearned and relearned over this period are for corporate finance. There are assumptions that we have made for decades that need to be challenged and foundations that have to be reinforced. In other words, the time for cookbook finance (which is what too many firms, investment banks and consultants have indulged in) is over.
That is about it. I am looking forward to this class. It has always been one of my favorite classes to teach and I would like to make it the best class you have ever, ever taken... I know that this is going to be tough to pull off but I will really try. I hope to see you in a few weeks in class. Until next time!
January 22, 2010
By now, most of you have probably made your way back to New York. While the rest of the country counts down to the NFL championship games and the Super Bowl, I want to start the countdown to the first corporate finance class. Here we go:
1. How do I know if I am registered for the class? If you are getting this email, you are in the class (at least according to the computer). if you were not supposed to be in this class, think of it as destiny... If you think you should be registered in this class, but are not getting this email (here it an interesting logical question: how are you reading it then?), do something about it. I don't quite know what... but don't just sit there.
2. What is this class all about? I cannot give away the secret yet, but you will find out soon enough. The last email should have given you a flavor of what was coming... What last email you ask? You are already behind in the class and it has not even started. You can read the last email by going to
3. Can I take a peek at the syllabus? Of course! I aim to please. In fact, you can browse through the entire syllabus by clicking on the link below. It describes in excruciating detail my plans to take over your life and dominate your weekends for the next 15 weeks (insert devilish laugh track in here...). Read and enjoy!!
4. I have heard that there is a group project for this class. What is that all about? Since you asked so nicely, i think I should oblige. I have attached the description of this project. Warning: As you read this, you may feel a massive sense of inadequacy. "I cannot do this. I am not even a Finance major" may be your wail. Never fear. You too can do it. This class will be to CFD (corporate finance disfunction) what Viagra is to ED.... just more effective, without the warning about four hours and an emergency room (If you have no idea what I am talking about right... go back and watch the commercial).
Just a note. You will be getting hard copies of both the syllabus and the project in class. Please, please don't print these documents off. The rain forests of New Jersey (there are a couple in the malls.. though I think they are restaurants) cannot take any more wasted paper...
5. Who else will be in this class? I have some good news. All those people you liked in your block are in this class. I have some bad news. All those people you despised are also in as well. As for that loser block you could not stand, the whole block is in there with you. As of last count, there were 420 students registered in the class, 95% of whom were first year full time MBAs. Since there were only about 430 first time MBAs, everyone who is anyone will be in the class. This will be like the Oscars... Party, party, party..
6. What do I have to do before the class? I would spend the weekend, doing silent meditation or participating in a triathlon. If you think these do not sound like good ideas, let me suggest some things that you should not do. Do not consume more than a keg of alcohol, get less than 2 hours of sleep of stand in the line at the Starbucks across the street just before class (since you will never make it to class). Please do get the lecture note packet (or print off the packet) before class. For those of you who have never been in Schimmel, this will be an eye opening experience. Think of it as Carnegie Hall without the acoustics, the charm and the history, and you pretty much have it.
Enough said... See you at 10.30 am on Monday... Until next time!
January 25, 2010
I promised you with a ton of emails and I always deliver on my promises... Here is the first of many, many missives that you will receive for me.....
1. Please finda group as soon as you can: In picking the group, try to keep the following in mind. Find people you like/trust/can get along with/ will not kill before the end of the semester. The group should be at least 4 and can be up to 8 (if you can handle the logistics). This group will do both the case and the project.
2. Get started on picking companies: In picking (Avoid money losing companies, financial service firms and firms with capital arms like GE and GM). Once you have your group nailed down, let me know the names of the people in your group and, if possible, the companies you have picked. I will set up a Blackboard group account for you and you can exchange data and files. In picking a company, pick a theme that is fairly broad and pick companies that match this. Thus, if your theme is entertainment, you can analyze Sony, Time Warner, Netflix and even Apple. I would encourage getting diverse companies in your group - large and small, focused and diversified, and non-US companies. (In other words, you don't want five companies that are carbon copies of each other. There is little that you will interesting to say about differences across companies, if there are none)
3. Once you pick your company, you can start collecting the data. You should begin by accessing basic data on your company . Much of it comes from the Bloomberg terminals (there is one on the second floor in the reading room and there should be one downstairs in the computer room) and if you have never used a Bloomberg before, it can be daunting.... Let me know if you get stuck (You can also get a manual on using Bloomberg data written by yours truly u on my web site.)
Look under Collecting Data... it is towards the top of the page.
4. If you do pick a company by Wednesday, print off the HDS (If you have no idea what an HDS page is, never fear. Read the Bloomberg handout first) page for your company on the Bloomberg terminal (just page 1 will do) for your company and visit the SEC site at
and print off the latest 14-DEF for your firm. If you cannot pick a company by then, just pick a company that you are interested in and print these two items off for the class...
5. The web cast for the first class is not up yet, but it should be soon. When it is, you should be able to find it at:
Try it out and let me know what you think. I have been told that it come through best if you have a 50 inch flat panel TV and surround sound. You will also find the syllabus and project description in pdf format to download and print on this page. The lecture note packet is also on this page.
6. I know this is a large class but I would really like to meet you at some point in time personally. So, drop by when you get chance... I don't bite....
7. Please bring the first lecture note packet to class on Wednesday.
Until next time...
P.S: If you have registered late for this class and did not get the previous
emails, you can see all past emails under email chronicles
on my web site
January 27, 2010
First, on the question of picking companies for your group, some (unsolicited) advice: (1) Define your theme: If you are going to do airlines, pick Continental Airlines, Southwest, Ryan Air, Travelocity and Embraer.... Three very different airline firms, a travel service and a company that supplies aircraft to the airlines.
(2) Do not worry about making a mistake: If you pick a company that you regret picking later, you can go back and change your pick.... If you do it in the first 5 weeks, it will not be the end of the world.
(3) If you are leery about picking a foreign company, pick one that has ADRs listed in the US. It will make your life a little easier. You should still use the information related to the local listing (rather than the ADR).
(4) If you want to sound me out on your picks, go ahead. I have to tell you up front that I think that there is some aspect that will be interesting no matter what company you pick. So, do not avoid a company simply because it pays no dividends or has no debt.
(5) If you want to kill two birds with one stone, pick a company that you already own stock in or plan to work for or with .....
Second, once you have picked your company, start by assessing the board of directors (and making judgments on how effective or ineffective it is likely to be). To help in this process, I am attaching the original article in 1997 that covered the best and the worst boards as well as a more recent article detailing what Business Week looks at in assessing boards.
There are a number of interesting sites that keep track of directors and their workings. I have listed a few below:
http://www.corpgov.net/links/links.html : This is a general site listing corporate governance links
http://www.ecgi.org/ : Covers corporate governance in Europe
Yahoo! finance reports corporate governance scores for individual companies...
Type in the symbol for the company that you want to look up and check under profile.
Here is a fun site that allows you to look at individuals who sit on multiple boards.
Type in George Mitchell, for instance, and see which boards of directors he sits on...
Until next time...
P.S: If you have trouble with the attachments, check under readings (under the corporate finance class) for the articles. (Even if you can read the articles, check under readings for more articles...)
January 28, 2010
First things first. I did check on the final exam date and it is May 7 from 10-12 (and not on May 5). I have made the change in the Google calendar and in the online syllabus. On a different note, I mentioned a couple of things in class today that I wanted to follow up on.
The first is the book on Disney. It is called Disney war and is written by James Stewart. Here is the Amazon link:
It is a fun book to read... a little gossipy (but that's what makes it fun)
The other is one of my favorite movies, Other People's Money. I know that most of you don't have the time (or the inclination) to watch the movie. However, the part of the movie that I referred to is on YouTube.
It is short and to the point. (Take a look at the stereotyping as you watch Danny Devito and Gregory Peck on screen)
On a final note, if you are dying to get started on the class, you can download and read chapter 1 of the Applied Corporate Finance book (third edition). If you have the lost the link, here it is again:
I am also playing matchmaker for orphans, without groups.... If you are without a group, or a group looking for more people, I will gladly broker your transaction. Until next time!
January 29, 2010
I had mentioned in class that I would be sending you a newsletter at the end of every week for the entire semester. I am sure that you have been waiting with bated breath for the first newsletter and I am obliging you by attaching it to this email. Make sure you read this absolutely dazzling, mind-blowing screed. It could change your life forever (not!)
On a different note, I am going to take advantage of the fact that this is probably a slow weekend for you since most of your instructors have probably been humane enough to leave you alone for the moment. Not me! I had suggested that you download chapter 1 and read it in my last email. I think you should now download chapters 2 and 3 of the book and read them ahead of next week's class. Believe it or not, we will be done with both chapters probably by the end of the week. In case, you want the link to the manuscript again...
Until next time!
January 31, 2010
A few notes before tomorrow's class.
1. Group formation: I hope you have found a group. I have just a couple of unattached people in the class and if any of your groups have room for an extra person, please let me know.
2. Company selection: I know that this seems like a monumental decision. Relax. The world will not end if you pick the wrong company and I am not sure that there is a wrong company. I would rather that you pick a company and change your mind later than play Hamlet for the next few weeks and not pick a company....
3. Corporate governance: If you have picked a company, here is what we will be doing in class tomorrow and you can start the process on your company. We are going to explore how much or how little power we have as stockholders in a company. I will be using Disney, Tata Chemicals, Aracruz and Deutsche for my analysis and you can do the same on your company. I will be looking at
- the top stockholders in my company (this is in the HDS page in Bloomberg but it is also available on Yahoo! Finance, at least for US companies, under major holders
- a corporate governance score if one exists for my company (For US companies, this score is also accessible in Yahoo! Finance
- qualitative factors based upon news items on the company's top management and relationship to stockholders
You can wait until we have done the analysis in class to begin your own or you can get a jump on the process by reading chapter 2.
4. The book: In the last couple of emails, I had pointed you to the link for downloading the book. A couple of you had emailed back saying that the 2-page format did not work very well with your Kindles. I have added a single page formatted version on the same link towards the bottom of the page. I hope that works with your Kindle (or iPad)
Until next time!
February 1, 2010
Just a couple of notes about class today. First, the webcast is up and running and it has a link to the holdings presentation that I used in class today. I am also attaching it to this email. Second, I will stop harassing you about finding a group and picking a company but do it.... and I would really, really like you to do the analysis of the top 17 holdings in your company, using the framework we developed in class today.
Relating back to clas I have a couple of items on the agenda and neither requires extensive reading or research. I would like you to think about market efficiency without any preconceptions. You may believe that markets are short term, volatile and over react, but I would like you to consider the basis of these beliefs. Is it because you have anecdotal evidence or because you have been told it is so or is it based upon something more concrete? i also want to think about how managers in publicly traded companies can position themselves best to consider the public good, without being charitable with other people's money.
We have spent a couple of sessions being negative - managers are craven, markets are noisy, bondholders get ripped off and society is unprotected. In the next class, we will take a more prescriptive look at what we should be doing in this very imperfect world. As always, reading ahead in chapter 2 will be helpful... Until next time!
February 2, 2010
I told you that you would be sick and tired of your emails by the time you were done with the class. I am trying to make this happen sooner rather than later. Here are a few notes ahead of tomorrow's class:
1. Where does the power lie? When I analyzed Disney in class yesterday, I considered the sum total of all the evidence that I had on Disney from the construction of its board of directors to an assessment of investors in the company to external measures of corporate governance. When you try this on your company, do not expect certitude. The data is often contradictory and you will have to make your best judgments.
2. Activist investors: One factor that shifts power to stockholders is the presence of activist investors and hedge funds. I threw a couple of names out there - KKR and Carl Icahn - but there are other activist investors that you may never have heard about. Robert Wienke, who is in this class, works for a company that tracks activist investors. He was kind enough to share the link:
Take a look when you get a chance. Not only does it providing interesting information about these investors but I think it can be useful in both corporate finance and valuation.
Ahead of tomorrow's class, it would help if you could take a look at your
company with any eye on the following:
1. Information dissemination: Your company may be tracked and followed by one, two or dozens of analysts. You can find out who tracks your company by going to:
Type in your company's symbol and check under estimates. While managers in the company may like to control the flow of information to markets, the presence of analysts does weaken their control.
2. Social consciousness: Is your company socially conscious? This is a tough question to analyze because it depends on who is looking at the company. If your companies lies at the extremes, your analysis is easy. (The very worst companies are easy to find... the very best companies make the rankings as most admired companies.)
February 3, 2010
Disgusting image, right? But quite a few of you have shared this link with me in the last day. Thought I should share it with the rest of you
Until next time!
February 3, 2010
As we take baby steps towards measuring risk, I want to review where we stand. The objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? I have attached an article on stock price maximization and alternatives to it. Third, take your objective (and the measurement device you have developed) and ask yourself a cynical question: How might managers game this system for maximum benefit, while hurting you as an owner? In the long term, you may almost guarantee that this will happen.
Building on the theme of social good and stockholder wealth a little more, there are a number of fascinating moral and ethical issues that arise when you are the manager in a publicly traded firm. Is your first duty to society (to which we all belong) or to the stockholders (who are your ultimate employers)? If you have to pick between the two and you choose the former, do you have an obligation to be honest and let the latter know? What if you believed that the market was overvaluing your stock? Should you sit back and let it happen, since it is good for your stockholders, or should you try to talk the stock price down? On the question of socially responsibility, I mentioned that there were groups out there that ranked companies based upon social responsibility. I have listed a few below, but they are a few of many:
Calvert Social Index: http://www.calvert.com/sri-index.html
Dow Jones Sustainability Index:http://www.sustainability-index.com/
And this is just the tip of the iceberg. Environmental organizations, labor unions and other groups all have their own corporate rankings. In other words, whatever your key social issue is, there is a way to stay true (as a consumer and investor).
If you have picked a company, there are two orders of business you have for
a. How much power do you as an individual stockholder have over the management of this company?
To make this assessment, you want to start by looking at the board of directors and examining it for independence and competence. I know that there are lots of unknowns here, but work with at least what you know - the size of the board, the appearance of independence, the (perceived) quality of these directors. With US companies, you can get more information about the directors from the DEF14 (a filing with the SEC that you can get from the SEC website). With non-US companies, you may sometimes find yourself lacking information about potential conflicts of interests, but what you cannot find is often more revealing than what you can find out; it points to how little power stockholders have in these companies. Also look at subtle ways in which power is shifted to managers at the expense of stockholders including anti-takeover amendments (poison pills, golden parachutes), if you can find reference to them.
b. Are there other potential conflicts of interests between inside stockholders and outside stockholders?
In some companies, you will find that there are large stockholders in the company who also play a role in running the company. While this may make you feel a little more at ease about managers being held in check (by these large stockholders), consider who these large stockholders are and whether their interests may diverge from yours. In particular, the largest stockholder in your company can be a founder/CEO, a family holding, the government or even employees in the company. What they might want managers to do may be very different from what you would want managers to do... Look for ways in which these inside stockholders may leverage their holdings to get even more power (voting and non-voting shares for inside stockholders, veto powers for the government...)
While it may seem like we are paying far too much attention to these minor
issues, I think that understanding who has the power to make decisions in a
company will have significant consequences for how the company approaches every
aspect of corporate finance - which projects it takes, how it funds them and
how much it pays in dividends. So, give it your best shot... On a different
note, we will be beginning our discussion of risk on Monday. As part of that
discussion, we will confront the question of who the marginal investor in your
company is. Assuming that you have picked your company, could you please take
a couple of minutes and go to Yahoo! Finance and look up the percent of stock
in your company held by institutions:
Enter the symbol for your firm and click on major holders. Please take note of the percent of stock in your firm held by institutions and insiders and bring it to class with you on Monday. If you have a non-US company, you may not be able to get this information but that is okay.
P.S: I had mentioned a paper that related stock prices to corporate governance
scores in class today. You can find the link to the paper below:
Until next time!
Febryary 4, 2010
Some sundry thoughts about the last session and what is coming up next week:
1. Good corporate citizenship and economic value: One of the aspects of this class that I truly enjoy is that everything is grist for the mill and that everything that happens in the market has an application somewhere. A story that is playing out in the headlines relates to Toyota's belated response to problems with gas pedals and brakes (As someone who has driven a Prius for five years, the story does strike close to home...). There is an interesting article in the Financial Times about the economic consequences to Toyota of this disaster.
Note also that the Toyota family remains firmly in control of Toyota. Ties in neatly into the link between corporate governance and responsiveness.
2. Anti-takeover amendments: One of the the areas where managers and stockholders
can find their interests in conflict is how they react to hostile takeovers.
Managers dislike them for obvious reasons and stockholders like them also for
obvious reasons. Managers often tip their hand by adopting anti-takeover amendments.
Does your company have anti-takeover amendments? Tough to tell, right? Try
this site out.
It requires a registration (which probably means that they want you to pay) but you may be able to get some useful information based upon the public information.
3. Getting prepared for risk: We will start on our discussion of risk next
week. If you have picked your company (and I hope you have or will very soon),
here are some good starting points for getting ready for the discussion:
Get on a Bloomberg terminal, find your company and type in
- HVT - Historical standard deviation on your stock
- BETA: That will give you the beta page for your company
February 5, 2010
Since it has been almost 24 hours since my last email, I thought that you may be needing your corporate finance fix and here it comes:
1. Newsletter: The thought provoking newsletter for the week is up online and is attached to this email. Please take a look at it when you get a chance.
2. Conflicts: I have been made aware of the conflicts that have come up between planned events in this class and other events. For instance, I know that the first quiz review falls on the same day that some of you are going to the Met with the Core Marketing class and that the second quiz is in the same week as Passover. I will make sure that the quiz review is webcast for those of you in the core Marketing class. I am working on a equitable solution to the Passover conflict problem... More to come...
3. Teaching assistants: I know that I have not been very good about publicizing this over the last couple of weeks but there are four TAs for this class and they are all amazing (no kidding...)
Michele Rozzi <email@example.com>
Marcela Giraldo <firstname.lastname@example.org>
Davide Tararbra <email@example.com>
Robyn Underwood <firstname.lastname@example.org>
4. Lecture note packet 2: You will not need this for a few weeks but the second lecture note packet is now ready to download online.
For those of you who prefer to pay for your notes, the packet will be available in the bookstore some time next week.
February 7, 2010
I am sure that you have seen more than your share of Super Bowl Previews already, but here is one more with a uniquely corporate finance twist :
1. Who will win?
I am sure that there are some diehard Colts and Saints fans in the audience... And all week, we have been listening to the experts tell us which team is going to win. I don't attach much weight to experts - talk is cheap.. I am much more inclined to listen to what the markets are telling me. There is an interesting article in the Journal today about sports betting/investing:
Small problem. Betting on the Super Bowl anywhere other than Nevada and a few other pockets of legalized gambling is illegal... but you can still check out the odds, right?
Notice how the bet is structured as a 50:50 game. In other words, rather than betting on the Colts to win, you have to bet on the Colts to win by at least 4.5 points... Baseball is the only sport in the United States where you bet on a team to win... Basketball and Football are structured as point differentials... As for hockey, I don't think that there are enough bettors to bother... (Don't take this as an inducement to bet... Just offering the odds...)
Market versus Maven.. Let's see who's right.
2. What will the market do next year?
This is an easy one, right? If the Saints (the NFC team) win, the market will go up and if the Colts (the AFC team) win, we are sunk... Before you Colts fans chase me down and kill me, here are the facts. In 32 out of the last 43 Super Bowls, this indicator has worked. Most notably, it did not work last year when the Steelers won, or the year before, when the Giants, the NFC team, won and the market did anything but go up......
3. If I go to a Superbowl party, can I miss class tomorrow?
Some final thoughts. If you are in a group and have found a company and have been able to print off the BETA page from Bloomberg for your company, please bring it to class with you. So, have fun... Until next time!
February 8, 2010
Some of you may be regretting the shift from the soft stuff (objectives, social welfare etc.) to the hard stuff, but trust me that it is still fun.. If it is not, keep telling yourself that it will become fun. Anyway, here are a few thoughts about today's class.
1. The Essence of Risk: There has been risk in investments as long as there have been investments. If you have the time, pick up a copy of Against the Gods by Peter Bernstein, John Wiley and Sons. It is a great book and an easy read. If you want more, you should also pick up a copy of Capital Ideas by Peter as well... That traces out the development of the CAPM....
2. More on Models: If you want to read more about the CAPM, you can begin with chapter 3 in the book. It provides an extended discussion of what we talked about in class today....
3. Diversifiable versus non-diversifiable risk: The best way to understand diversifiable and non-diversifiable risk is to take your company and consider all of the risks that it is exposed to and then categorize these risks into whether they are likely to affect just your company, your company and a few competitors, the entire sector or the overall market.
One final note. If you can, try to make your assessment of whether the marginal investors in your companies are likely to be diversified. Look at both the percent of stock held in your company and the top 17 investors to make this judgment. If your assessment leads you to conclude that the marginal investor is an institution or a diversified investor, you are home free in the sense that you can now feel comfortable using traditional risk and return models in finance. If, on the other hand, you decide that the marginal investor is not diversified, we will come back in a few sessions and talk about some adjustments you may want to make to your beta calculations. Until next time!
February 10, 2010
I know that you are looking for a reason to stay home today but I will be in class. I entirely understand if you don't make it, especially if you live in New Jersey or Connecticut. if you live in the city, don't be a wimp... or you may find yourself in Buffalo or Fargo in you next life...
February 10, 2010
For those of you who were in class today, thank you for slogging through
the slush to get to class. For those of you who were not, a consolation prize:
housing is really cheap in Buffalo. I hope that you are gearing up for an extended
weekend of fun (and catching up on corporate finance.. but the two are not
mutually exclusive). I have several orders of business:
1. Riskfree rates: The riskfree rate should be the easiest of all inputs to get, but as I noted in class this morning, it is not that easy to get in markets like Brazil and Russia. I had mentioned the riskfree rate in Euros and how different governments issues ten-year bonds denominated in Euros, but with different rates. The Financial Times has these numbers and I have attached the numbers from this morning:
If you are truly interested in delving deeper on the topic (you must be sick),
I have a paper (I know that I need some psychological counseling) on risk free
rates that you can read this weekend:
This is a truly spell binding piece, one that will keep you up at nights..... or put you to sleep... Close call!
2. Risk premiums: We started on our discussion of risk premiums today, I had mentioned survey premiums in class and two in particular - one by Merrill of institutional investors and one of CFOs. I have attached the links to both:
Merrill survey: http://newsroom.bankofamerica.com/index.php?s=43&item=8619
CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1405459
We also talked about historical risk premiums. To see the raw data on historical premiums on my site (and save yourself the price you would pay for Ibbotson's data...) go to updated data on my website:
On the same page, you can pull up country risk premiums for about 90+ countries.
More to come in my next email...
Until next time!
February 11, 2010
In yesterday's class, we considered a forward looking estimate of the equity risk premium, i.e, the implied equity risk premium. In effect, we look at the level of equity prices today (S&P 500 Index) and expected cash flows from dividends & stock buybacks in the future to back out an internal rate of return on stocks. Subtracting out the riskfree rate gives you the implied equity risk premium. As you review your notes (and I hope you have been able to watch the webcast, in case you missed the class), here are some questions that may come up:
1. How do get the expected cash flows from stocks?
Unlike a bond, stocks do not come with promised cash flows. All you can do is look at the past and make your best estimates for the future. That is, in effect, what I did in my implied equity risk premium computations for January 2008 and January 2009. For January 2008, I averaged out the 2001-2007 dividends and buybacks (4.02% of the index) and used this average to compute the starting cash flow (4.02% of 1468.36), since the 2007 cash flows seemed unusually high. I then looked up the growth rate that equity research analysts were estimating for earnings for the next 5 years (5%) and used it to get expected cash flows for the next 5 years.
The best source for the cash flows on the S&P 500 is S&P. Every three months, they release an update on dividends and buybacks on the S&P 500 stocks. Here, for instance, is their December 15, 2009 update.
The next update will be on March 15, 2010.
The best source for expected growth on the S&P 500 is zacks.com, a service that collects and reports on analyst estimates of growth for companies. While the premium edition requires a paid subscription, there is enough on the site which is free, for you to get this input.
2. What happens after year 5?
Stocks, in theory, can generate cash flows forever. However, since we are looking at the largest companies in the market, the growth rate has to subside to the nominal growth rate of the economy. I used the riskfree rate as a proxy for this growth rate. Here is my reasoning:
Nominal growth rate in economy = Expected inflation + Expected real growth rate in economy
Riskfree rate= Expected inflation + Expected real interest rate
In the long term, expected real interest rate = expected real growth rate. To deliver a real interest rate of 2%, the economy has to generate 2% more in goods and services or it will operate at a deficit.
3. What next?
Once you have the expected cash flows and the current level of the index, it is trial and error to arrive at the internal rate of return. Alternatively, you can use the solver function in excel.
I know that the concept is complex but it is well worth understanding. If you are up to it, try computing today's implied equity risk premium in the attached spreadsheet (which has the implied premium from January 30, 2010).
Initially just update the index and the ten year treasury bond rate and follow the instructions in the spreadsheet to solve for the implied premium. Leave all of the other inputs untouched. Then, you can get inventive and start playing with the inputs.
February 13, 2010
I hope you have a great extended weekend planned. If you don't have too much fun stuff to do, please do catch up with your corporate finance material. The pace will be picking up - you probably did not notice but it did last week already - and we will be moving into more dangerous territory. The best pre-work you can do is to start reading ahead to chapter 4 in the book; if you have not read chapter 3 already, you may want to do that first. Chapter 4 is an exceptionally long (and some say torturous) chapter but it is the heart of the book. So, read it in small chunks and try to work through some of the problems at the end of the chapter as you go through. I know it sounds like its a long time off, but the first quiz is two weeks from Monday... and it will cover much of chapter 4 (the entire cost of equity section).
Two more things. One is that there is no class on Monday. The other is the newsletter for the week, which is attached to this email. Until next time!
February 16, 2010
After the long weekend, it is back to work. First, do try to estimate the implied equity risk premium, using the spreadsheet that I sent you last week. In case, you cannot find it, here it is again:
Just update the S&P 500 and the treasury bond rate and solve for the implied
equity risk premium.
Second, we will be starting on a two-session discussion of betas. To get ready for this, please try to read ahead in chapter 4. In addition, please try to find a Bloomberg terminal and print off the BETA page for your firm. It looks like this:
The default regression on Bloomberg is two years of weekly returns against the local index. If you get a chance, and only if there is not a long line behind you, use the tab button and change the period from Weekly to Monthly (making your weekly regression into a monthly regression) and the starting point in the Range to 1/1/04. Print that page off as well and please bring it to class. (This all assumes that you have picked a company.. ) Until next time!
February 17, 2010
I hope I did not panic you by mentioning the quiz, but in case you are panicked, I want to take full advantage. One of the best ways to prepare for your quiz is to try to do for your company what we did for Disney this morning; take the regression apart to estimate beta, Jensen's alpha and R-squared. Here are the steps:
1. Pick your company
2. Find a Bloomberg terminal and get on
3. Click the Equity button
4. Find your company (preferable the local listing) online
5. Type BETA. Print the two-year weekly return (default) and five-year monthly return (by changing the defaults)
6. Check out the obvious output:
6.1. The raw beta is your regression beta
6.2: The adjusted beta = 2/3 (Raw beta) + 1/3 (1). Thus, if your raw beta is 1.20, the adjusted beta will be (2/3) (1.20) + (1/3) (1.00) = 1.13
6.3. The R-squared should be listed in decimals. Thus a 0.30 R-squared tells you that have an R-squared of 30%.
7. Compute your Jensen's alpha
7.1: Start with the intercept on the beta page. It is already in percent. Thus, an intercept of 0.22 is 0.22% (Notice the inconsistency with how R-squared is reported)
7.2: You need the average T.Bill rate (see the spreadsheet that is attached to this email) over the period of your regression; the average of the one-month T.Bill rate for last 2 (5) years if you have a 2-year (5-year) regression
7.3: Convert the T.Bill rate (which is always reported in annualized terms) to a weekly or month riskfree rate by dividing by 52 or 12.
7.4: Jensen's alpha = Intercept - Riskfree rate (`1- Raw Beta). Keep your units straight.
Once you have done all of this, you may want to check your numbers to make sure that they are right. I have attached a spreadsheet which will do the ocmputations for you. Please don't use it as a crutch. Do the number crunching on your own first.
Until next time!
February 19, 2010
Hope your week went well. A couple of notes before next week:
1. Newsletter: The newsletter for this week is attached. Hope you get a chance to look at it:
2. Next week's material: Next week, we will move past regression betas to
compute what I call bottom up betas - betas based on the businesses in which
you operate. While I don't expect you to compute these betas (or even know
what I am talking about) already, it would help if you could browse through
the annual report for your company and find a business breakdown for your company..
In addition, please try to work through the regression diagnostics for your
3. Quiz 1: The first quiz is a week from Monday. Before you check out the past quizzes which are online on the website for the class, try to review your lecture notes and the problems at the end of each of the first four chapters of the book. The solutions fo these problems are online at:
Until next time!
February 21, 2010
A few notes for the weekend and ahead of tomorrow's class:
1. Regression analysis: If you have not had a chance to complete the regression analysis of your company (based upon its Bloomberg beta page) and checked out the solution, please do so. I am attaching the riskchecker spreadsheet just in case you cannot find the last one. Please bring it to class with you tomorrow.
2. Getting ready for the quiz: A few of you seem to have made the jump to get ready for next week's quiz. Here are a few guidelines on the early preparation:
a. Read the chapters in the book - chapters 1 through 4.
b. Review the lecture notes
c. Try out the problems at the end of chapters 2 and 4. You can skip the problems at the end of chapter 3 because they relate to the derivation of the CAPM and the statistics you need to get there. (Note that this material should have been or will be in your Foundations class.....)
d. Start working on the practice quizzes.
This week is a critical one and the next two sessions will carry a disproportionate weight on the quiz. Not trying to scare you or anything... Just a head's up!
3. Equity risk premiums: For those of you who are not completely bored with equity risk premiums, I do have an extended discussion of the topic in a paper that I just posted online:
It may be over kill for this class, but I think you may find it useful if you plan to work in corporate finance and valuation. Until next time!
February 22, 2010
I first want to spend this one talking about the determinants of betas. Before we do that, though, there is one point worth emphasizing. Betas measure only non-diversifiable or market risk and not total risk (explaining why Harmony can have a negative beta and Philip Morris a very low beta).
1. Betas are determined in large part by the nature of your business. While I am not an expert on strategy, marketing or productions, decisions that you make in those disciplines can affect your beta. Thus, your decision to go for a price leader as opposed to a cost leader (I hope I am getting my strategic terminology right) or build up a brand name has implications for your beta. As some of you probably realized today, the discussion about whether your product or service is discretionary is tied to the elasticity of its demand (an Econ 101 concept that turns out to have value)... Products and services with elastic demand should have higher betas than products with inelastic demand. And if you do get a chance, try to make that walk down Fifth Avenue...
2. Your cost structure matters. The more fixed costs you have as a firm, the more sensitive your operating income becomes to changes in your revenues. To see why, consider two firms with very different cost structures
Firm A Firm B
Revenues 100 100
- Fixed costs 90 0
- Variable costs 0 90
Operating income 10 10
Consider what will happen if revenues rise 10%. The first firm will see its operating income increase to 20 (an increase of 100%) whereas the second firm will see its operating income go up to 11 (an increase of 10%)... that is why looking at percentage change in operating income/percentage change in revenues is a measure of operating leverage.
3. Financial leverage: While we did not get to look at this in class today, we will begin by looking at why debt affects betas on Wednesday and how to explicitly compute the effect.
All in all, please do think about betas as more than statistical numbers. When companies make production, operating and marketing decisions, they are affecting their betas. More to come in the next few days. Until next time!
February 24, 2010
If you remember, we looked at the beta for Disney after its acquisition of Cap Cities. The first step was assessing the beta for Disney after the merger. That value is obtained by taking a weighted average of the unlevered betas of the two firms using firm values (not equity) as the weights. The resulting number was 1.026. The second step is looking at how the acquisition is funded. We looked at an all equity and a $10 billion debt option in class and I left you with the question of what would happen if the acquisition were entirely funded with debt. (If you have not tried it yet, you should perhaps hold off on reading the rest of this email right now)
Debt after the merger = 615+3186 + 18500 = $22,301 million ( Disney has to borrow $18.5 billion to buy Cap Cities Equity and it assumes the debt that Cap Cities used to have before the acquisition)
Equity after the merger = $31,100 (Disney's equity pre-merger does not change)
D/E Ratio = 22,301/31,100= 0.7171
Levered beta = 1.026 (1+ (1-.36) (0.7171)) = 1.497
Note that I used a marginal tax rate of 36% for both companies - that is where the 0.64 on the page 143 comes from
2. As you start working through past quizzes, you will find that the last question - about betas and what happens after firms restructure - is always the toughest one. A couple of suggestions that may ease your passage. First, separate the effects of changes in business mix from changes in financial leveral. For the former, you work with unlevered betas and firm values. For the latter, you look at debt to equity ratios. For instance, divesting a business changes your business mix because it replaces an operating asset with cash. Paying that cash out as a dividend will affect both your business mix (by taking cash out of the business) and reducing your equity. We will spend a lot of time in the review session tomorrow on this issue.
3. Finally, here are two other questions about past quizzes that seem to keep coming up:
a. Why is 5.5% the risk premium in past quizzes and problems?: As you work through a lot of the past exams, you have probably noticed that a 5.5% risk premium magically pops up when you look at the solutions. This is why. If you are not given a risk premium for equity in a problem, you should look it up in your notes and use the historical premium or the implied equity premium and specify what you did. If you were doing that today, you would be using 4.29% (which is the geometric premium for stocks over T.Bonds) or 4.36% (implied equity premium); check your lecture notes to see where these numbers come from. At the time that these quizzes were worked out, that historical premium was closer to 5.5%.
b. Is it possible that some of the problems lend themselves to multiple interpretations? If you read a problem and are not sure about something, make an assumption and state it. When grading the quiz, I will consider your assumption.
As I noted in class today, we will be having two review sessions - one tomorrow
from 12-1 in KMEC 2-60 and on the day after from 11-12 in Schimmel. I am also
attaching the presentation for the review session tomorrow. If you are coming
to either session, please make a copy and bring it with you.
3. Seating for the quiz: As I mentioned, I have found additional space for
the quiz. While the other two quizzes will be spread over four rooms, this
one will be in only two rooms - Schimmel and KMEC 2-60. I have allocated about
a third of the class to KMEC 2-60 and the rest to Schimmel. For those of you
who have concerns about the unfairness of the room you have been assigned to,
I will rotate through the people through the alternate rooms on the three quizzes.
If your last name begins with Go to
A - O Schimmel
P - Z KMEC 2-60
The quiz is scheduled from 10.30-11 on Monday. Please be on time. There is class after the quiz. So, please do come to Schimmel right after you finish your quiz in KMEC 2-60.
Until next time!
February 25, 2010
I know that yesterday's class was full of details and I would not be surprised if some of the details skipped by you. While each piece is not complicated, the combination of pieces that you need to reconstruct the beta of a company like Disney can make your head spin. Since this process is so critical not just for the quiz but also for your project and future in corporate finance, I thought it might make sense to give you some crutches that you can use to make sense of why and how best to estimate bottom up betas.
1. Disney numbers: While I provided you with the summary numbers for Disney, you can look at the underlying data of the companies used in each business line and how I came up with the final numbers by going to the website for the book and clicking on the illustration that has these numbers worked out. To save you the trouble of multiple clicks, I am listing the final link below:
Go to chapter 4 and click on 4.7.
2. Underling questions: Even after you work through the numbers, you may be unclear about why we go through this torture. I have put together a list of the top ten questions on bottom up betas that I hope answer every conceivable question you may have about the process.
After you have gone through both, you may still be unconvinced about the utility of this process. I completely understand. However, do not throw the baby out with the bathwater. In other words, just because you think this bottom up beta process is cumbersome does not mean that you should not be adjusting your hurdle rates within a company for businesses of different risk. So, hold on to that principle and come up with your own (perhaps simpler) ways of computing those hurdle rates. Until next time!
February 25, 2010
First, the first review session went off smoothly today. The webcast for the session can be found here:
Second, there will be another review session tomorrow, as long as the weather cooperates in Schimmel from 11-12. Until next time!
February 26, 2010
I am on the train in from new jersey (and have been on for quite a while. I just got the email about classes being canceled. While I will make it in, it will be difficult to get logistical support(AV, projector etc). Therefore, having the session might not be feasible. I am sorry but you will have to settle for the webcast. If you have any questions, email me. Until next time!
Sent from my iPhone
February 26,, 2010
I did get a few questions repeatedly yesterday and I think it makes sense to answer them publicly:
1. Why do we use past T.Bill rates for Jensen's alpha and the current treasury bond rate for the expected return/cost of equity calculation?
The Jensen's alpha is the excess return you made on a monthly basis over a past time period (2 years or 5 years, depending on the regression). Since you are looking backwards and computing short-term (monthly or weekly) returns, you need to use a past, short-term rate; hence, the use of past T.Bill rates. The cost of equity is your expected return on an annual basis for the long term future. Hence, we use today's treasury bond or long term government bond rate as the riskfree rate.
2. When do you use the arithmetic average risk premium over T.Bills as your risk premium?
Only when you are asked to compute the expected return over the next year (a one-year number). You will never use it to compute a long term cost of equity.
3. Why do you use the US historical risk premium for European stocks?
The US historical risk premium is used as the premium for any mature market, because the US has the longest uninterrupted historical data on stock and treasury bond returns. Most European markets are categorized as mature markets. Hence, it makes sense to use the US premium.
4. How do you adjust for the additional country risk in emerging market stocks?
If the country you are analyzing is not AAA, you should adjust for the risk by adding an "extra" premium to your cost of equity. The simplest way to do this is to add the default spread for the country bond to the US risk premium. This will increase your equity risk premium and when multiplied by your beta will increase the cost of equity. A slightly more sophisticated approach is to adjust the default spread for the relative risk of equities versus bonds (look at the Brazil example in the notes) and adding this amount to the US premium. This will give you a higher cost of equity. (See the Mexico example in the review session). If you are given enough information to do the latter, do it (rather than use just the default spread).
5. How do you estimate a riskfree rate for a currency in an emerging market?
If you are doing your analysis in US dollars or Euros, you would use the riskfree rates in those currencies. In the local currency, you should start with the government bond rate in the local currency and take out of that number any default spread that the market may be charging (see the Mexico example in the review packet)
6. Why do you use the average debt to equity ratio in the past to unlever betas?
The regression beta is based upon returns over the regression time period. Hence, the debt to equity ratio that is built into the regression beta is the average debt to equity ratio over the period.
7. What is the link between Debt to capital and debt to equity ratios?
If you have one, you can always get the other. For instance, the Fall 2006 quiz gives you the average debt to capital ratio over the last 5 years of 20%. The easiest way to convert this into a debt to equity is to set capital to 100. That would give you debt of 20 and equity of 80, based upon the debt to capital ratio of 20%. Divide 20 by 80 and you will get the debt to equity ratio of 25%.
8. How do you annualize non-annual numbers?
The most accurate thing to do is to compound. Thus, if 1% is your monthly rate, the annual rate is (1.01)^12-1.... if 15% is your annual rate, the monthly rate is (1.15)^(1/12) -1... If you have trouble or get stuck, just go with the simpler computation; multiply or divide by 12.
9. Why do you not annualize betas?
As some of you have noted when asked for a cost of equity, I almost always compute it in annual terms. To obtain that number, I take an annualized riskfree rate, an annualized risk premium and the beta from a regression which may be a weekly or monthly regression. This struck some of you as inconsistent (after I harangued you about being consistent on the Jensen's alpha computation). There is a simple reason, Unlike the intercept, the beta has neither a currency nor a time interval attached to it. Thus, a beta of 1.2 is 1.2 in dollar terms or peso terms and 1.2 in weekly, monthly or annual terms. Here is a simple analogy to illustrate why. Beta is a relative number. Thus, if I walk twice as fast as you, that statement would apply whether I computed your speed in miles or kilometers per hour (the currency analog) and whether I was talking about the distance you walked in an hour or a day (the time analog).
That is about it... Hope I have not added to your confusion. Relax.. and I will see you soon. Until next time!
February 27, 2010
I know what you have planned for this weekend, and you will test the proposition that corporate finance is fun!! Anyway, I want to keep this short and sweet. The newsletter is attached.
Until next time (which will be really, really soon)!
February 28, 2010
Well, I guess I have pretty much ruined your weekend and I am sorry.
Anyway, I hope that the quizzes a re getting a little easier as you
keep at them and that the skies are starting to open up. In fact, the
theme for this song should be emerging:
I am just hoping that it is not this one:
Do hold out one exam and take it in real time (without the solutions
next to you). Relax and don't stress out too much! Until tomorrow!
P.S: In case you still need a reminder, the quiz is in the first 30
minutes of class and your room assignments are as follows:
f your last name begins with Go to
A - O Schimmel
P - Z KMEC 2-60
If you have trouble figuring out what letter your last name starts with, you need some sleep.
P.S,2: There will be class after the quiz... Please do come to it.... we will start at 11.05.
P.S. 3: If you are going to be missing the quiz, you need to let me know before 10.30 am tomorrow (by email).
March 2, 2010
The deed is done.. The quizzes are outside the front door to the finance department on a table.. They are in alphabetical order and face down. Please pay heed to what I said in class yesterday. Take your quiz and only your quiz. Do not browse... and please do not get the quizzes out of alphabetical order. I have attached the solutions to both quizzes to this email. Note that if you had the South African operations, you have quiz a and if you have the Peruvian operations, you have quiz b. The distribution is also attached but don't spend too much time on it. We are only 10% into the class and the fact that you are at the bottom of the distribution (or the top) is of little consequence... Until next time!
March 3, 2010
If you have been looking ahead on your Google calendar or the syllabus, you have probably noticed that there is a case due on March 29. While I normally would not hand it out until next week because it requires content that we will cover in the next 3 sessions, I decided to get it to you earlier since many of you are planning long trips over the spring break. I am attaching the case and an excel spreadsheet containing just the last exhibit (so that you do not have to enter it by hand). The rules on the case are simple:
1. Stay within the confines of the case. This is for your own protection. The last thing you want is get into a data war.
2. The case is a group project and there will be one submission and one grade per group.
3. If you need to make assumptions to keep moving forward, do so. I will check for reasonableness but give you leeway.
4. The case is online, if you are not able to open the attachment.
5. The case is due before class on Monday, March 29.
Good luck! Until next time!
March 3, 2010
Now that you have had a chance to pick up your quiz (you have, haven't you?) and gone through the requisit celebration/ mourning period, it is time to get back to work. One small notes before I get into the topic for the day. I sent the case and the exhibit out this morning by email and it is also available online. The due date is scheduled to be March 29. .. Bummer, because it hangs over your Spring break but you can always get it done before. It is a group case and there is one grade per group.
Finally, lets talk about bottom-up betas. Here are the basis steps involved in estimating them:
Step1: You have to get a breakdown of the businesses that your firm is in. You can get this by downloading your firm's 10K from the SEC web site.
Once you have it, browse through it (I would say read it but that would be a painful exercise) to find the breakdown of your firm's business. Usually, the company will give you at least revenue and operating income by business. If you have a non-US company, you should be able to find this information in their annual report.
Step 2: Estimate bottom-up unlevered betas for each business. There are four routes you can follow, depending on how much time you are willing to spend on the process-
a. The Easy Route (5 minutes): You can use the unlevered betas that I have computed by business on my web site. You can get to it by going to updated data and looking for levered and unlevered betas by business- I have them as separate datasets for the US, Europe, Emerging Markets and Japan. The advantage is that it is easy to do... The disadvantage is that you will not get the wonderful experience of doing it yourself and the breakdown may not be detailed enough for you.
b. The Slightly more involved route (20-30 minutes): At the top of the updated data page, you will find the complete excel datasets of the 30000+ companies that I used to construct the industry average tables. You can download the datasets (Do it on a high-speed line because it is a very large dataset) and then create your own group of comparable firms. All of the raw data on the company is provided - betas, debt, equity and cash - and you have to construct your own unlevered beta. Try it if you have a chance.
d. The Bloomberg Way (30 minutes - 2 hours, depending): After all, real finance mavens use Bloomberg. You can get the information to estimate unlevered betas by getting on a Bloomberg terminal and typing ESRC. You can then screen across markets and industries to pick firms in particular markets. Once you have your sample ready, you can modify the output page to contain the information you need - betas, debt, equity, cash and tax rates, for example. The advantage is that you can do this for non-US stocks. The disadvantages is that Bloombergs are notoriously user unfriendly and you can get only a paper printout. (We don't pay enough for a download function)
Step 3: Compute the values of each of the businesses that your firm is in. I would recommend using revenues as the starting point. If you are not comfortable using pricing ratios, weight the businesses based on revenues. If you would like a more precise estimate, go back to the comparable firms you pulled up in step 2 and compute the value to sales ratio for the industry
Enterprise Value to Sales = (Market value of Equity + Debt - Cash) / Revenues
Multiply the revenues from each of the businesses by these value to sales ratios to get estimated values, and use them to compute weights.
Step 4: Compute a bottom-up unlevered beta for your company by taking a weighted average of the betas in step 2 with the weights in step 3..
I have more to say about the cost of debt, but this email has reached critical mass... So, have fun.. Until next time!
Until next time!
March 5, 2010
Now that you have the bottom up beta (you cannot blame me for hopeful thinking), I want to review some of what you will need to do to come up with a cost of debt and perhaps come up with market values of debt and equity to compute the cost of capital.
1. Get the raw data on interest bearing debt: In particular, take a look at the balance sheet and identify the interest bearing debt. It is not always easy to do since you will see ambiguous items such as long term liabilities. Include both bank loans and corporate bonds, short term and long term debt. (It is possible that your firm has no debt. Don't ruin your eyes looking for something that does not exist. A clue that your firm has no debt will be in your income statement if your interest expenses are zero).
2. Collect lease commitment data: For US companies, the lease commitments (if any) should be in a footnote. The current year's lease payment will be in close proximity. These lease commitments are also called rental commitments....Again, note that not all companies have lease commitments.... and you may not be able to find this table for non-US companies. (European companies break down lease commitments but give you ranges: the lease commitment for years 1-3, 4-5, and beyond. Compute an annual average, if this is the case.
3. Check to see if your company is rated by S&P or Moody's: If you have access to a Bloomberg terminal, you can do this by clicking on CORP and then typing in the name of your company. If nothing shows up, you don't have a rating. If something does, you can click on any of the bonds and look up the actual rating. Another less focused approach is to just type in the name of the company and rating in your Google search and see what comes up.
4. Get a synthetic rating: For firms without a rating, this will be your primary basis for estimating the cost of debt. For firms with an actual rating, it will give you a basis for comparison. You can continue to use the actual rating, but be aware of the synthetic rating as well. I have attached a spreadsheet that will do dual duty - estimate the synthetic rating and convert lease commitments into debt for you... It also gives you the default spread to use with the rating and thus the pre-tax cost of debt for your firm. Just make sure that the riskfree rate you are using is the same 10-year default free rate you used earlier on your cost of equity (Thank you...thank you... I aim to please) (I updated the default spreads at the start of 2010. If you want even more updated numbers, you can try bondsonline.com but you have to pay $35 for an updated table)
5. Get a marginal tax rate to use on your cost of debt: I have attached a link to the page on my website that has the marginal tax rates by country
That's about it. Have a great weekend! Until next time!
March 6, 2010
Hope you have had a chance to download the case and catch up on your project. In case, you have and are completely bored, here is the newsletter for the week.
Until next time!
March 7, 2010
I had mentioned a spreadsheet that you could use to estimate ratings and convert leases on my last email but I forgot to attach the spreadsheet. Sorry.. It is attached to this one..
Until next time!
March 8, 2010
A couple fo quick notes about operating lease commitments and converting them to debt. The first relates to the lump sum expense in year 6. That amount captures all lease commitments beyond year 6. To estimate how many years of lease expenses are embedded in year 6, I average out the lease expense over the first 5 years and divide the lump sum by the average. Thus, if the average lease expense in the first 5 years is $ 500 a year and the lump sum in year 6 is 1500, I treat it as a 3-year annuity of $ 500 (in years 6, 7 and 8). The second is the depreciation expense on the leased asset. I obtain it by taking the present value of the lease commitments and dividing by the lease life (8 years in the example just cited). That is because making a lease into a debt commitment is in effect treating the action as borrowing money and buying the asset. One final note. You need the pre-tax cost of debt to compute the lease commitment. Since your firm may not have a rating, you will need to compute a synthetic rating. Attached is the synthetic ratings spreadsheet, which also converts operating leases... If you find leases fascinating (you may be very sick) and really want to read more about the what and the why, try this paper that I have on the topic:
Until next time!
March 9, 2010
I know that you probably have one foot out of the door already, as you take off for other parts of the world. We do have class tomorrow but as a parting gift, I plan to make this email a general one about computing capital invested, the meaning of return on capital and the use of pre-debt versus after-debt cashflows. I am sure you will read the sub-text for implications for the case... We looked at return on capital in two contexts yesterday. One was to compute the return on capital for an entire firm and the other was in computing return on capital for a prospective project. The way we compute return on capital and how we use it is different under the two scenarios:
a. Return on capital for an individual project:
How it is computed: The return on capital for an individual project is computed using the projected operating income after taxes in the numerator and the projected capital invested in the project in the denominator. To compute the former, you subtract out operating expenses, including depreciation and allocated expenses, but not financial expenses (such as interest expenses on debt or lease expenses) from revenues; you multiply this number by (1- Marginal tax rate), since the project adds operating income at the margin to estimate the after tax operating income. To compute the latter, you want to stay focused on only the capital investments made in the project. In general, the capital invested in any year can be computed by taking the capital invested at the beginning of the year and adding to it any new capital expenditures made during the year and subtracting out the depreciation expense for the year. If there are working capital investments made, I would that to capital invested as well. For instance, take the Disney theme part example from yesterday (look at slides 207 & 209). There are three components to the book capital for the theme park:
1. Pre-project investment: Since the $500 million that has been spent already has been capitalized, you start the project with this as part of your book capital
2. New investments in theme parks: Any new capital expenditures will increase the book capital invested in these assets and any depreciation will reduce it.
3. Working capital investments: The 5% of revenues that comprise working capital will become part of capital invested.
Book capital at time 0 = 500 (Pre-project investment) + 2000 (Investment in Magic Kingdom) + 0 (no working capital yet) = 2500
Book capital at time 1 = 450 (Pre-project investment net of depreciation of 50) + 3000 (Investment in Magic Kingdom) + 0 (no working capital) = 3450
Book capital at time 2 = 400 (Pre-project investment net of 2 years of depreciation + 3813 (Investment in Magic Kingdom) + 63 (Working capital) = 4,275
(The 3813 in new assets = 3000 (Investment at the start of year 2) + 1000 (New Investment in year 2) - 375 (Depreciation in year 2) + 188 (Capital Maintenance in year 2))
Note that there is no retained earnings or traditional double entry stuff. Projects don't have balance sheets. Any excess cash from the project goes to the company and does not build up within the project.
You have a choice of computing return on capital based on just the capital invested at the beginning of the year or the average for the year.
(As an exercise, see if you can get to book capital at time 3)
How it is used: The return on capital is a return on the overall investment in a project and is compared to the cost of capital for the project. If the return is greater, the project looks good (at least on an accounting basis)
If you want to see all of the gory details of how the numbers get estimated, you can get them online by going to the website for the book and clicking on illustration 5.5. If you want to save time, you can just click the link below:
b. Return on capital for the entire firm
How it is computed: The return on capital for an entire firm is computed using the after-tax operating income of the firm and the capital invested in all of its existing assets. To measure the former, we usually start with the operating income in the most recent year and apply a tax rate to it. Since this is the entire operating income for the business (rather than income added at the margin), using an effective tax rate is defensible albeit dangerous if the effective tax rate is volatile; I prefer to use the marginal tax rate here as well to compute the after-tax operating income. To measure capital invested in existing assets, I go to the balance sheet and look up the book value of debt and equity in the firm, making the assumption that this must be the capital invested in the assets that generate the operating income. (We cannot use market value of equity and debt, since market value reflects growth potential and does not reflect what was originally invested in existing assets) If the company had a substantial cash balance, it makes sense to net this number out of the book value, because cash does not generate operating income.
Return on capital for a firm = EBIT (1-t)/ (Book value of debt + Book value of equity - Cash)
Here again, you have a choice of using the number from the beginning of the year or an average. Since both the numerator (operating income) and denominator (book values of debt and equity) are accounting numbers, we are risking a great deal; accounting changes can alter returns on capital and equity. However, it has become one of the most widely used numbers in corporate finance and valuation. If you are interested in delving into the details of what can go wrong with the estimate and how to fix it, I have a paper on the topic:
It is scintillating (not), deeply satisfying (yeah,,, right...) and will change your life (for the worse..)
How it is used: You can compare a company's return on capital to its overall cost of capital. If it is higher, the company, on average, has taken good investments. If lower, it has destroyed value. The caveat, though, is that you are trusting accounting estimates of earnings and capital invested.
Until next time!
March 10, 2010
Today's session was intended to deal with the nuts and bolts of valuation and I hope it worked. If you are at all uncertain about any of the topics that we covered, the best way to resolve them is to read chapter 5 (in either the paid or the free versions of the book) and look at the Disney theme park spreadsheet that I sent you in the email from yesterday. These are the issues that also animate the case and if you do have the time, see if you can read and put some work into the case before you leave for the break. Until next time!
March 21, 2010
I know.. I know.. That week went by really fast but it is time to rev up for class again. I was good, though, right? I did not sent you an email all week, but the dam has broken. Get ready for a whole string, starting on Monday. I have attached the weekly newsletter to this email. More than most weeks, this edition may be useful simply because you may have completely forgotten where we are in class .... or where we are going... or what is coming up... Until next time!
Until next time!
March 22, 2010
I know that you are struggling to get back into school mode, but a few notes on today's class. You can read the subtext for implications for the Nike case, but at your own risk.
1. Sensitivity analysis: I mentioned a book by Edward Tufte on the visual
display of information. Here is the Amazon link.
It is well worth the money.
2. Simulations: For those of you who have not tried Crystal Ball, try it in
the lab downstairs. The biggest plus is that it is very intuitive and easy
to use. In fact, the more significant problem you may face is that you are
not familiar with the listed statistical distributions. In case you are interested,
try this paper I have on statistical distributions and when to use which one:
Incidentally, if you like Crystal Ball, by it while you are still a student. The price goes up exponentially once you graduate.
3. Equity versus Firm analysis: In today's class, I contrasted the equity
analysis at Aracruz with the firm analysis in Disney. Since this is a recurring
them in corporate finance and valuation. I have a summary of the key differences/
measures with each approach:
Earnings After-tax operating income Net Income
Investment BV of capital invested BV of Equity
(Debt + Equity - Cash)
Return ROC = After-tax OI/ ROE = Net Income/
BV of capital BV of equity
Discount rate Cost of capital Cost of equity
Cash flow Cash flow to firm Cash flow to equity
= After-tax Operating inc = Net Income
+ Depreciation + Depreciation
- Cap Ex - Cap ex
- Chg in WC - Chg in WC
- Debt repayments
NPV Discount CF to firm at Discount CF to equity at
cost of capital cost of equity
The key is to stay consistent.
4. Should you hedge? With Aracruz, I noted that it made no sense to hedge
against paper prices (since the reasons investors buy commodity companies is
to be exposed to commodity price risk but that it might make sense to hedge
against exchange rate risk. If you are interested in the topic of risk management,
you may want to read chapter 10 of my book on strategic risk taking (hint!
it is under books on my website... ) Here is the link that will download just
5. Acquisition valuation: While we have not looked at company valuation yet in the class, I wanted the acquisition analysis of Sentient Technologies to illustrate a key point. When valuing a target firm for an acquisition, it is the risk characteristics of the target firm that should determine the cost of equity and capital, not those of the acquiring firm. That is why we used the beta of food processing firms, the debt ratio for Sentient and the tax rate and risk premium for the US in valuing Sentient, even though the acquiring firm is a chemical company from India.
6. NPV versus IRR: We closed class by looking at three scenarios where NPV and IRR can yield divergent rankings for mutually exclusive projects. The first is the case where projects have multiple changes in signs (negative to positive and back to negative), where you can get multiple IRRS. the solution is to stick with NPV. The second is when you have differences in scale. NPV will bias you towards larger projects and IRR to smaller projects. If you have a capital rationing constraint, go with IRR. The third is the reinvestment rate assumption, with NPV assuming you can reinvest at the cost of capital and IRR at the IRR.. the former is a more reasonable assumption. I have an extended discussion in chapter 6 of the book.
Until next time!
March 25, 2010
I know that I am jumping the gun here, but I wanted to make sure that you get this email in time. Here are some general issues for the case:
1. Case due date: March 29, by 10.30 am
2. How should it be turned in?: After some consideration, I think it makes sense to switch to an Electronic format. However, I am a little wary of multiple attachments (since I could very easily miss one). So, here is my compromise. Put together the report, as if you were going to print it off (with the excel spreadsheets as attachments). Then create one pdf file and send that file to me by 10,30 am on Monday. Please note that I would prefer one file for the report and not multiple files or excel spreadsheets.
3. What should be in the report?
Here is a list of what I would like to see in the final report:
As you work through the numbers, here are some suggestions for formatting the case report.
1. Cover page: Please include the following
- Names of group members (in alphabetical order: it makes my job of entering grades easier)
- Cost of capital used for project analysis
- NPV, IRR and ROC (for 10-year lifecase)
- NPV (for infinite or longer life case)
- Recommendation: Invest in this business or Don't invest in this business
2. Written analysis: Please keep brief, summarizing your numerical findings, key assumptions and backing for your recommendation.
3. Base Case analysis: Full print out of your forecasted earnings and cashflows by year, including details on individual items (G&A, Capacity etc....)
4. Any what-if analysis, scenarios and graphs you want to add on....
As a general rule, if you do not reference an item in the appendix in your written analysis, please have mercy and do not include it.
Finally, and this is only if you can pull it off, could you please send me
the numbers from your case analysis as soon as you feel comfortable with them...
You can do this until about 9.45 am on Monday but the earlier the better...
I can pull the numbers together for the class presentation that day..
Cost of capital for project =
Average ROC for project =
NPV (finite life case) =
NPV (project lasts beyond year 10) =
Nike should accept/reject the investment
I understand that you are still working on the case and that you may not be done until later this week If you get done in time, and can spare the extra 2 minutes, please email me the numbers for your group (One email per group will be enough)... If you don't get around to doing it, don't lose any sleep over it... Until next time!
March 26, 1010
I know you are busy but a few quick notes about the case and the quiz coming up next week.
1. Case: As I mentioned in my email yesterday, please send your case report as a pdf file to me. When you do email your case report, please put "Nike Case" in the subject head. It will ensure that I keep tabs on all of your case entires.
2. Quiz: You probably have not had a chance to even think about the quiz yet, but it will cover chapters 5 and 6. You can work though the problems in those chapters as well as past quiz 2s (which are on the website under past exams.
a. Review session: There will be a review session on Tuesday from 12.30 -1.30 in Schimmel Auditorium. It will be webcast.
b. Rooms for quizzes: On this quiz, there will be three extra rooms, which creates a bit of a logistical nightmare. Here is the seating plan:
If your last name starts with Go to
D - G KMEC 2-65
H - K KMEC 2-70
L - N KMEC 2-90
Anything else Schimmel Auditorium
The quiz will be from 10.30-11 on Wednesday and please let me know before the quiz, if you will be missing it. (If you are going to be taking it on Friday, due to the Jewsih holidays, let me know, if you have not already)
Until next time!
March 27, 2010
The newsletter for this week is attached. I hope you get a chance to browse through it. As for the case, I can tell by the volume of emails that I am getting that you are hard at work on it. Without delving into details, here are a couple of recurring issues that I would like to put to rest:
1. Timing: We have an issue with time in finance. While convenience pushes us to assume that earnings and cash flows occur at points in time, the reality is that cash flows and earnings occur over time. Take, for example, the revenues and earnings on the Nike apparel division. If the division opens on the first day of the third year, you will probably start seeing cash flows and earnings right away and all through the year. However, for convenience, we act as if all of the earnings and cash flows occur on the last day of the third year. The artificial assumptions on timing can make it difficult to even word a problem. For instance, when I say the current year or most recent year, I am talking about the last 365 days and the earnings and cash flows from that year came in yesterday (the last day of the year). In some cases, the case wording is ambiguous and can be read either way. Thus, when I say the market for apparel is $75 billion currently, some of you read it as $75 billion for the next year and some as $75 billion for the last year. I can live with either interpretation. So, don't let this become the focus of your analysis.
2. Accounting allocation versus Cash flow: I know that I am repeating what I have said in other emails but do not confuse accounting allocation judgments (which by their very nature are subjective) with cash flow estimates (which are not). Thus, you can debate what portion of the distribution expansion to allocate to the apparel project but that should not be a determinant of your cash flows.
One final piece of advice. Keep a sense of proportionality. You ultimately have to decide whether Nike should invest in the apparel project or not. The return on capital, NPV, IRR and any what-if analysis are tools that you use to make the decision. In other words, don't let discussions of small details take your focus away from the big decision. Good luck! Until next time!
P.S: Please do not forget to send your summary numbers in when you are done.
All I need is the following information:
Cost of capital =
Accounting Return (ROC or ROE) =
NPV (finite life case) =
NPV (longer or infinite life case) =
Decision on investment = Accept or reject the investment
March 28, 2010
I won't take too much of your time. Two quick notes. First, remember to get your summary data (cost of capital, ROC, NPV (finite), NPV (infinite), Accept/Reject) to me, when you get a chance. Second, when you do submit your final case report, please put "Nike case" in the subject and cc your team mates. That way, once I am done, I can reply to all of you with the graded case. Thanks! Until next time!
March 29, 2010
Hope you have recovered from the case analysis in class. I forgot to mention the review session in class this morning. It is scheduled from 12.30-1.30, tomorrow in Schimmel. I have attacjhed the presentation for the review session. (As always, it will be recorded and the webcast should be available by 2 pm or so...) Until next time!
March 29, 2010
I know the last thing you want to hear or talk about is the case, but since it is relevant for the quiz, I put some final thoughts into this email:
1. The case presentation from this morning, with the updated slides on what you found, can be obtained by going to the webcast page for the class.
2. Excel spreadsheets containing the finite and infinite life case analysis are also on the same webcast page.
3. As a final note, here is the grading guideline that I will use for the case. Don't read it too literally or you may conclude that you are going to get a zero. I am not a nit picker and I will bend over backwards to give you the benefit of the doubt (if I have any) but I think this document summarizes the key points made in class today:
When you do get your case back, you can use it to go over your numbers... Until next time!
March 29, 2010
I am sorry but to keep myself from repeating the same statements over and over again, I have put together a template, listing the issues in the case and how many points you lose for that issue. When you get your case back, the cover page should have a comment (in Adobe) that lists the items on the grading template that I thought were issues in your case. (For instance, 4b refers to a failure to allow for more capital maintenance in the infinite life case than in the finite life case) As always, it is possible that I have screwed up. If I have, bring your case in and I will fix it. Until next time!
March 30, 2010
For those of you who were at the review, I hope you found it useful. If you were not able to make it, the webcast links are below:
Direct Links to Echo:
They are also available online on the webcast page for the class. Until tomorrow!
April 1, 2010
The quizzes are done and can be picked up outside the front door to the ifnance department. Even if you feel that you bombed, you should try to pick up the quiz and check my grading. I would claim to be infallible but I am not even close. It is entirely possible that I have missed some key component of your work, especially if you write all over the page.
On a general note, more people had trouble with this quiz than the previous one. I have put out the solutions and am attaching them to this email. I am also attaching the distribution, Come in and see me if you have any questions (Don't ask the TAs. They are innocent...)
April 2, 2010
Now that you have the quiz back and most of you have your cases back (I am sorry... I am working my way through them.. Hope to be done by tomorrow), time to get back to the big project (Notice that I have not talked about it for a few weeks).
First, if you are still trying to pick a company, stop,... It is time to choose and move on. If you have picked a company and not printed off the HDS or BETA pages, please do try to get those sections done before you completely forget what you were trying to do. If you have the cost of capital for your company nailed down, you are in reasonable shape.
Section 4 can be a bit of mystery. In this section, you are asked to answer two questions: How good are a firm's existing investment project? What does a typical project for your firm look like? The answer to the first question is fairly straightforward and requires you to compute a return on capital for your firm, which you then compare to the cost of capital for your firm. Here is a quick recap:
How it is computed: The return on capital for an entire firm is computed using the after-tax operating income of the firm and the capital invested in all of its existing assets. To measure the former, we usually start with the operating income in the most recent year and apply a tax rate to it. Since this is the entire operating income for the business (rather than income added at the margin), using an effective tax rate is defensible albeit dangerous if the effective tax rate is volatile; I prefer to use the marginal tax rate here as well to compute the after-tax operating income. To measure capital invested in existing assets, I go to the balance sheet and look up the book value of debt and equity in the firm, making the assumption that this must be the capital invested in the assets that generate the operating income. If the company had a substantial cash balance, it makes sense to net this number out of the book value, because cash does not generate operating income.Ê
Return on capital for a firm = EBIT (1-t)/ (Book value of debt + Book value of equity - Cash)
Here again, you have a choice of using the number from the beginning of the year or an average.
How it is used: You can compare a company's return on capital to its overall cost of capital. If it is higher, the company, on average, has taken good investments. If lower, it has destroyed value. The caveat, though, is that you are trusting accounting estimates of earnings and capital invested.
Capital, Equity and Mismatching: The key to good investment analysis and to consistent valuations down the road is to first match cash flows to discount rates and to avoid double counting items. Thus, in the measures of returns above, we used operating income and compared the resulting return on capital to the cost of capital. Here is a simple table on consistency:
To Earnings measure Accounting Return Cash Flow Measure Discount Rate/Hurdle Rate used
Firm Operating income after-tax Return on capital Cash flow to firm (before debt payments) Cost of capital
Equity Net Income Return on equity Cash flow to equity (after interest and principal) Cost of equity
The return on equity is based on book equity invested in a project or a firm, as opposed to book capital.
The answer to the second question has to be more qualitative than quantitative, since you don't have the details on individual projects. For some firms, the answer will be easier to come up with than other. For WalMart, a typical project is a new store with a life of about 10-12 years, with leased premises, and fairly even cash flows over time. For Boeing, a typical project is probably 40-50 years long, with an initial period of 10-15 years when the company has only negative cash flows.
If you are done with section 4, great. You can even start at section 5, where you look at what financing your company has on its book - akin to what we did with Disney, Aracruz and Tata Chemicals in class on Wednesday. Until next time!
April 4, 2010
By now, you should have got your case back. (If you have not, let me know!) As always, there seems to be a great deal of angst (and I understand why) about average scores and grades. While I am loath to assign grades to scores, since this is only 10% of your overall score, I guess I have no choice but to attach the distribution (see attachment). I know you do not want to even think about the case any more, but I would like to list out the five most common issues; think of it as a Letterman top 5 list for the case). Here is the list (from smallest to largest misdemeanors; the last two may count as felonies):
5. Equity or the Firm?: While I understand the impulse to compute interest expenses on the debt in the case, doing so puts you on the pathway to computing cash flows after debt payments (or to equity). The discount rate that you then have to use is the cost of equity and the rest of your cash flows will also have to be after debt payment. (Your initial investment will no longer be $2.5 billion; it will be net of the debt you take). Needless to say, no one who embarked on this path carried it to its logical conclusion.. So, my advice. Steer away from cash flows to equity, unless you want to estimate all cash flows to debt (not just interest expenses).
4. Working capital: There were three issues with working capital. In its most diabolical form, total working capital was subtracted out from cash flows each year, rather than the change. Needless to say, this added a couple of billion in negative cash flows to your analysis and pushed the project over the edge. A much smaller problem was ignoring the change in the initial year, when your working capital increased from zero (in my analysis, this was #121 million) and counting only changes thereafter. The third issue and a very minor one (which I did not take off any points for) was putting the change in working capital in the same year as your revenues, rather than in the previous year (since working capital investments happen at the beginning of each year).
3: Project ends, now what?: In the finite life case, the project ends and all assets need to be dealt with. In other words, you need to make explicit assumptions about what will happen to working capital and fixed assets (the billion that does not get depreciated) at the end. While the easiest assumption to make is that you get book value back, you can make alternate assumptions as long as you follow through and compute the tax effect. In other words, if you assume that the fixed assets will fetch nothing, you have to show your tax savings from the capital losses. In other words, ignoring something will not make it go away.
2. Incremental all the way: The notion of incremental cash flow includes both cash you will have to spend and cash you will save yourself from spending. That is why the expansion investment generates a negative cash flow in year 6 (since it has to be spent) and a positive cash flow in year 11 (since you save money that year). While allocation is fine for accounting purposes, it has nothing to do with cash flows (even if yields a very similar answer with some allocations).
1. Forever is not free: The infinite life case does not just mean adding a perpetual growth rate on your last year's cash flow and computing an immense terminal value. If you decide that you want your project to last forever, you have to manage it to achieve this end right from the very start (not year 12). In practice, you will have to maintain your assets earning power, by replacing and constantly replenishing them. This translates into capital maintenance. Can the NPV with the infinite life scenario be lower than the NPV with the finite life? Absolutely. It is a trade off. You get lower cash flows each year for the next 10 years, but a higher terminal value. For some projects, the trade off will be negative. For this particular project, it was positive (at least with my assumptions)
I know how much work you put into this project and I really, really appreciate it. I hope it was a worthwhile exercise, and it should provide a solid foundation for any finance related work you do during the summer.
I have also attached the newsletter for this week. A reminder. If you don't have packet 2 yet, please get it before tomorrow's class. Until next time!
April 6, 2010
I know that is easy to fall behind on the project but you can get caught up fairly easily. In fact, if you want to be close to caught up by this weekend, here is what you should try to get for your company right now:
1. Unlevered beta for your company: If you can break your company's business mix down, you can use the unlevered betas that I have for each business (or compute your own) to come up with an unlevered beta for the company.
2. Market equity and debt for your company: If you have a publicly traded company, the market equity should be easy. The market debt is a little more involved and you need information on three ingredients:
a. Interest bearing debt: You need the book value of interest bearing debt, the interest expenses on these debt and the average maturity. The first should be in the balance sheet, the second in the income statements and the third in the footnotes to the balance sheet (you will find a table telling you when the debt comes due and you have to compute the average maturity).
b. Lease commitments for the future: For US companies, it should be in a footnote. For non-US companies, it may not be easy to find or even reported.
c. Synthetic or Actual rating: If you can get an actual bond rating for your company, it would help. If not, you can come up with a synthetic rating (based on the interest coverage ratio).
If you can come up with this information, I will give you a path tomorrow that you can use to be caught up with the project by this weekend. Until next time!
April 7, 2010
If you feel up to it, you can compute the optimal capital structure for your firm. Gather up your financial statements, cozy up to your computer and then do the following.
1. Go online to
Download the excel spreadsheet called capstru.xls and save it. If you are working on a financial service firm, you should download the other capital structure spreadsheet (capstruo.xls) For those of you are who have trouble, I am attaching the file, just in case...
2. Before you input any numbers, go into preferences in excel, open the calculation option and make sure that there is a check in the iteration box.
3. Read the Read me worksheet in the spreadsheet
4. Go to the input page and input the numbers for your firm. Each input box has a comment in it. Read the comment before you input the value. You can start off using the most recent year's numbers but may want to come back and normalize some of the numbers (EBITDA) later.
5. For the moment, leave the answers to the last two questions on the input page at their default levels. (Yes and Yes)
6. Go to the output page. You should see the current and optimal debt ratio for the firm as well as the current cost of capital and the optimal cost of capital.Ê You will also see the entire schedule of ratings and costs of equity for every debt ratio. I also calculate the change in value per share for your firm and do your laundry while I am it.... (Hey... What can I say? I am a full service operation)
7. If you find DIV/0 or VALUE! errors all over your sheet, go back to step 1... Sorry...
8. If you find yourself needing more help along the way, you can also try the webcast that is a companion to the spreadsheet. (It is on the spreadsheet page....)
Here is the good news for those of you who are lagging on the project. This
spreadsheet will get you caught up with your hard working teammates.. I know
this violates the "little red hen" principle but better caught up
than not. For those of you who have no idea what management book, the "little
red hen principle" is in, here is a link:
Read the book. It is a classic.
Until next time!
April 9, 2010
Two very quick notes. The first is that the newsletter for this week is attached to this email. The second is a reminder to try and run the optimal capital structure spreadsheet that I gave you a link to in the last email for your company. If you don't want to click a link, I have attached the spreadsheet to this email as well.
I have a fairly busy weekend planned (three soccer games, two baseball games and a basketball game for my kids) but I will check my email. If you have serious issues with your capital structure spreadsheet, email me the spreadsheet and I will do some diagnostics for you. No charge!!!!