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The Email Chronicles of Corporate Finance: Spring 2013

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...

Date Email sent out

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.
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.

I don't use Blackboard but I have been using a site developed by Lore, a young education company, that does everything that Blackboard does with a Facebook interface. You can see the site by going to
You will shortly be getting an invite to join in the site with a code. Please do accept the invitation. Once you log in, the site will remember you and you will automatically be put into the course page. In fact, feel free to post in the stream page well before class starts.

I will also be posting the contents of the site (webcasts, lectures, posts) on iTunes U. If you have never used it, here is what you need: an Apple device (iPhone or iPad), the iTunes U app on the device and you need to link to the link below:
https://itunesu.itunes.apple.com/audit/COHMND8KF3 (Enroll code: KA3-L7J-E46)
It is very well done and it is neat, being able to catch up on a lecture you missed on your iPad, while browsing through the lecture notes on it too.

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. I have both a standard version (one slide per page) and an environmentally friendly version (two slides per page) to download. You can also save paper entirely and download the file to your iPad or Kindle. Make your choice.
If you prefer a copied package, the first part (of two) should be in the bookstore next week.

There is a book for the class, Applied Corporate Finance, but please make sure that you get the third edition. You can buy it at Amazon.com or the NYU bookstore
While I have no qualms about wasting your money, I know that some of you are budget constrained (a nice way of saying "poor") . If you really, really cannot afford the book, you should be able to live without it. I can even lend you a copy around quiz weeks.

One final point. I know that the last few years 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 my favorite class to teach (though I love teaching valuation) and I would like to make it the best class you have 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 little less than ten days in class. Until next time!


I hope you got my really long email over the weekend. This one, hopefully, will not be as long and has only three items:
1. Website: In case you completely missed this part of the last email, all of the material for the class (as well as the class calendar) is on the website for the class:
Please do try to download the first lecture note packet by Monday.

2. Lore: I sent out an invitation for you to join the class on Lore. Many of you have accepted the invitation and I thank you. If you have not, please do accept the invitation. If you have absolutely no idea what I am talking about, please send me an email and I will send you a private invitation.

3. Lore follow up: If you have joined Lore, you will notice that there is a social media component to the site. I have posted the very first topic for discussion, just to get something going. Feel free to post your own thoughts/discussion ideas on Lore.

4. Apple post: Some of you have probably been tracking Apple's precipitous fall from grace in these last few months. I have been posting on Apple on my blog quite a few times. My most recent post can be found here. Feel free to comment on it.

I really look forward to seeing you in class on Monday.


Three emails and the class has not started yet... Well, you are getting a flavor of how much I intend to invade your lives over the next 15 weeks. Let me start with an every-Sunday tradition that will continue for the coming weeks - a preview of the week to come.

1. Week ahead in class
I am looking forward to seeing you in class tomorrow at 10.30 am, for the first time. Tomorrow's session will lay out the structure of the class and the logistical details (including the unpleasant stuff like quizzes, exams, projects and grading), but I hope to give you a story line. I don't think of corporate finance as a collection of models and theories (though it has more than its share) but as a narrative about how to run a business, and I hope to lay it out tomorrow. Don't worry! I don't expect you to adopt my narrative as your own, but I would like you to use the class to develop your own corporate finance narrative.
In Wednesday's class, I intend to look at the modern corporation, with its web of players (stockholders, lenders, managers, employees, customers, even society), often with competing interests, and examine how these conflicts play out in decision making. That is part of the reason I posted John Mackey's view (he is the CEO of Whole Foods) on how he sees stakeholders in the firm. I thank those of you who have already responded to that post and I encourage those of you who have not seen it to add your responses as well:
(Incidentally, if you have been ignoring my nagging and have not joined the Lore class list yet, this is your chance to do so...)

2. Week ahead - To-do list
This week should be an easy one. There are only a couple of things that you need to do. First, if you can come to class, please do. I know a few of you will be missing class, and if you do, the webcasts for the sessions should be up a few hours after the class. So, you can catch up. Second, you will be working in a group (with 4-8 members) through the semester, with each of you analyzing a company. While I will lay out the details of the project in the coming week, you can start seeking out group members right now. After tomorrow's class, you should be able to starting picking companies to follow as well.

3. The Super Bowl
I know that some of you are getting ready for the ultimate US sports event - the Super Bowl. As a New York Giants fan, I don't have any skin in this game but it is a good forum to start thinking about the two big themes of next week's classes. The first is that corporate finance is ubiquitous. The Super Bowl may be a football game, but it is one with an immense amount of money riding on it for CBS (CBS, NBC & Fox rotate carrying the Super Bowl and each more than $ 1 billion+ for the rights to carry NFL games), the advertisers (who pay $ 4 million for a spot) and the NFL itself (arguably the most valuable sports franchise in the world). The second theme is that every operating entity (a business, a non-profit, a sports team) needs a dominant objective and that you cannot run any entity with multiple objectives, fuzzy objectives or constantly shifting objectives. As you watch the Harbaughs coach on the sidelines, recognize that like John Mackey, they have multiple stakeholders - fans, players, coaching staff and the NFL. During the course of the season, each coach had to decide what his dominant objective was and make choices accordingly. If you are a football fan, think Alex Smith and Cam Cameron...If you have no idea who they are, then just eat the party food and forget about the game.

Until next time!


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.....

First, a quick review of what we did in today's class. I laid out the structure for the class and an agenda of what I hope to accomplish during the next 15 weeks. In addition to describing the logistical details (quizzes, exam, project etc.), I presented my view that corporate finance is the ultimate big picture class because everything falls under its purview. The “big picture” of corporate finance covers the three basic decisions that every business has to make: how to allocate scarce funds across competing uses (the investment decision), how to raise funds to finance these investments (the financing decision) and how much cash to take out of the business (the dividend decision). The singular objective in corporate finance is to maximize the value of the business to its owners. This big picture was then used to emphasize five themes: that corporate finance is common sense, that it is focused, that the focus shifts over the life cycle, that it is universal and that violating first principles will exact a cost, no matter who does it.

On to housekeeping details:
1. Please find a 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). Each person has to pick a company. This group will do both the case and the project.

2. Get started on picking companies: 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. 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 find 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. I would begin with the old standard, the company's annual report, which you should be able to get off the company's website. If you have a non-US company, you should be able to find an English version of the annual report on most company sites. If not, you better be able to read Portuguese or Spanish. You can also get the latest filings (10K and 10Q) for US companies off the SEC website:
You can get good summary sheets 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.... Once you find your company under Equities (and it can take a little searching), print off the following for your company: HDS, BETA, DES (all 4 pages). If you have no idea what I am talking about, just hold on until the end of the week and I will have something more for you to go on.

4. Board of Directors: If you do pick a company by Wednesday, use the annual report or 10K can get a listing of the board of directors for your company. It will dovetail nicely into our discussion for Wednesday. If you can find a mission statement for the company (on its website, from the annual report), that would be even better.

5. Webcasts for the class: The webcasts should be up a few hours after the clas ends. Please use the webcasts as a back-up, in case you cannot make it to class or have to review something that you did not get during class, rather than as replacement for coming to class. I would really, really like to see you in class. 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. Drop by: 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. Lecture note packet 1: Please bring the first lecture note packet to class on Wednesday. You can buy it at the bookstore, if you have money to spare, or download it online.

8. Past emails: 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

9. Lore stragglers: If you have not registered on Lore for the course, you will need a entry code. Please email me and I will send you the code.


I am sorry about two emails in one day, but I just needed to update you on two things. First, the webcasts for today are up and running and you can find them in all three forums:
School website: https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr13.htm
Lore: http://www.lore.com
iTunes U (you should have received a notification on your Apple device)

I also posted a very quick (and extremely easy) post-class test, with solution on all of the sites. I am attaching them to this email. Until next time!

Attachments: Post class test #1, Post class test solution #1


Before I start on today's email, yesterday's post-class test contained a faux pax that my third grade English teacher would have dragged me across hot coals for. On question 1, I had a double negative that I screwed up on... I did fix it online, but if you check your email attachment from yesterday, you will see what I am talking about.
Moving right along, I have got emails from some of you, mentioning that the lecture note packet was hanging up and not printing. After a few iterations, I think I have a version online that should download and print. I am sorry about the problem but technology sometimes works in mysterious ways. You can get the easier versions to print by going to:
While you are on the page, scan down right below session 1 and you will see the corporate finance story of the week: Dell is going private. I have the Wall Street Journal article from today linked to the story but I also have two pdf files that I would like you to take a look at, as prep for tomorrow's class. Until next time!

Attachment: Dell story of the week, Dell Questions


In today's class, we started on what the objective in running a business should be. While corporate finance states it to be maximizing firm value, it is often practiced as maximizing stock price. To make the world safe for stock price maximization, we do have to make key assumptions: that managers act in the best interests of stockholders, that lenders are fully protected, that information flows to rational investors and that there are no social costs. We then looked at what can go wrong, by starting on the manager-stockholder linkage. The two mechanisms that stockholders can use to keep control of managers, the annual meeting and board of directors, are flawed and often ineffective. As a consequence, managers often put their interests above stockholder interests.

Just a few added notes relating to the class that I want to bring to your attention. The first is the movie Other People's Money, which I mentioned as a favorite. You can find out more about the movie here:
But I found the best part on YouTube. It is Danny DeVito's "Larry the Liquidator" speech:
Watch it when you get a chance. Not only is it entertaining but it is a learning experience (though I am not sure what you learn). Incidentally, it is much, much better than Michael Douglas's "Greed is good" speech in the first "Wall Street " which was a blatant rip-off of Ivan Boesky's graduation address to the UC Berkeley MBAs in 1986 (which I happened to be at, since I was teaching there that year).

2. DisneyWar: I mentioned this book in class yesterday, written by James Stewart. It is in paperback, on Amazon:
If you are budget-constrained, you can borrow my copy and return in when you are done. (I have only one copy. First come, first served)

On the question of picking companies for your group, some (unsolicited) advice:
(1) Define your theme broadly: In other words, don't pick five money-losing airlines as your group. Pick Continental Airlines, Southwest, Singapore Airlines, 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 .....
As a final reminder. Please pick your company soon... As you can see from yesterdayy's class, we are getting started on assessing your company...

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 have posted 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 under corporate finance readings:
In fact, if you suffer from insomnia, read the Sarbanes-Oxley law, which I have also posted up there.. It will put you to sleep.

There are a number of interesting sites that keep track of directors and their workings. I have listed a few below:
http://corpgov.net/: This is a general site listing corporate governance issues and links
http://www.ecgi.org/ : Covers corporate governance in Europe
Yahoo! finance reports on corporate governance for individual companies in th US... they usually to report the score (which was more useful) but now they report only degrees of concern.
Type in the symbol for the company that you want to look up and check under profile.
Finally, if you have used Capital IQ (and you have access to it, you can download all kinds of stuff on your company's corporate governance structure). As I mentioned in class, I will be putting together a webcast on how to use Capital IQ to best effect to evaluate corporate governance.

You can find out more about your company by going to the SEC site (http://www.sec.gov) and looking up the 14-DEF for your company.. As I noted in class today, you may not be able to find a 14-DEF (or its equivalent) for a foreign company, but the difficulty of finding this information may be more revealing than any information that you may have unearthed. On that mysterious note, until next time...


As I mentioned in class on Monday, this email will serve as my weekly nag, reminding you of where you should be on the project. My hope (though it is invariably dashed) is that it will evoke enough guilt or panic that you will try to catch up. So, this week's task for me is very simple. Two questions:
(1) Have you found a group yet?
If not, please let me know as soon as you can. I will start the orphan list as soon as I hear from you. If you are a group of 3 or 4, looking for more members, please hold off on emailing me until the orphan list goes out. You may be able to find someone from that list.
(2) Have you chosen a company yet?
Please try to pick a theme as a group and a company, as an individual. Don't try for perfection and don't worry about picking the right or wrong company for two reasons. First, there have been more than 10,000 companies analyzed in this class, over time, and they have ranged the spectrum. Second, if you do pick a company that you do not like, you can always change later in the semester. It is more important that you pick a company and get started than it is to pick the perfect company.

On the lecture note packet, I am making some progress. The NYU bookstore will have some copies tomorrow and some on Monday. I have also talked to Unique Copy Center, just down the road on 252 Greene Street. They will have printed copies ready for you by this afternoon. My suggestion if you want a copy quickly is to go Unique. I am sorry about this screw up on the lecture notes. I could blame a Microsoft/Adobe conspiracy but it is my fault. I will make sure that the second packet gets to you much more smoothly.

On the TA front, I have office hours to report for the TAs. I am not trying to shunt you off to the TAs. So, please drop in and ask me questions or "fair game" me...
Kelly Brooks, catherine.brooks@stern.nyu.edu: Monday 3-5 pm
Michael Ruhno, mjr537@stern.nyu.edu: Tuesday: 1.30 pm- 3.30 pm
Cristina Olivares, <cristina.olivares@stern.nyu.edu>: Monday 1-3
And the TAs don't grade any of your stuff (exams, quizzes, projects). So, if you are pissed off at the grading, you have to take it up with me.

Finally, as I was walking in to the building today, I was handed a brochure from NYC District Council of Carpenters about TIAA/CREF (which manages my and pretty much every college teacher's pension fund in the nation). The brochure argues that the investments that TIAA-CREF is making in "construction sweatshops, tobacco companies and Killer Coke" (not my words, but the brochures) is inconsistent with their commitment to social responsibility. Since we will be talking in class about how to balance the private good with the public good (and CSR) next week, the issue of "investing" responsibly will come up and this brochure feeds right into it... (I told you that corporate finance is all around you...) I also posted an article on the lore discussion board about the teaching of ethics in business school. My intent in doing so was not to bring across my point of view on the issue but because the article seems to suggest that stockholder wealth maximization lies at the heart of corporate scandals and unethical behavior (I wonder: Was Bernie Madoff a believer in maximizing stockholder wealth? Would an ethics class in graduate school have helped him? I don't know...) . So, the floor is open (or at least the discussion board) for you to put your points of view on the topic. I will stay out of it. Until next time!


As we clean out the grocery stores and make the snow shovel manufacturers rich, a few notes for today:
1. Lecture note packets: As I mentioned in my email yesterday, Unique Copy Shop (252 Greene Street, down the block from the school) has the corporate finance lecture note packets ready. I have been told that only a couple of people have been there to buy the packet and that they have plenty more. Please get your copy before Monday's class.
2. Post-class tests: I posted post-class tests for both of this week's sessions and will continue to do so for all of the coming ones. If you have already worked through them, thank you. If not, just browse through them quickly to make sure that there are no loose ends. You will find them on the webcast page for the class ( https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr13.htm), the Lore page for the class and on iTunes U. Take your pick.
3. Orphans: I am getting straggling emails from some of you about your sad plight as orphans. Please let me know soon. The existing orphans are rapidly being adopted. (If you Russian, I might have to get Vlad Putin's okay for this....)
4. Webcast of the week: I mentioned that I would do short in-practice webcasts each week. This week's webcast is up and ready to watch. You can find in all three forums (webcast page, Lore, iTunes U) and it looks at what information to use and how to use it to assess the corporate governance structure of a company. Let me know if there are "production quality" issues and I know.. I know.. That striped sweater is not camera-ready, but I forgot... Sorry!
5. Corporate finance email chronicles: I have updated the email chronicles page to reflect all the emails sent out in this class:
If you joined the class late, have short term memory loss or are nostalgic for emails from days gone by, click on the link.
6. Einhorn's play for Apple: I just posted on David Einhorn's "value play" for Apple.
Suffice to say, that I don't see much value in it and that if is a play, it is not a very good one.

Until next time!


The snow storm arrived as advertised and I just got back from shoveling. Having grown up in a part of the world where a 85 degree day qualified as cool, shoveling is not on my top ten list of activities. Last winter, I used an excuse of writing a blog post to put off the heavy lifting and ended up with this one:
The world is full of corporate finance and investing lessons, isn't it?

Two other quick notes. The first is that the newsletter for the week is ready to read and is attached to this email. Hope you get a chance to browse through it. The second relates to the Dell buyout (the puzzle for the week). Yesterday, one of Dell's largest stockholders, Southeastern Asset Management, challenged the price on the buyout and sent a letter to Dell's board. The letter is worth reading, turning Dell's own claims over the last 5 years (especially on the success of his acquisition strategy) back on him. I have attached it as well. Both are also posted online.

Attached: Newsletter #1, Southeastern letter to Dell

2/10/13 Before I start on the preview of next week's classes, a couple of quick reminders. I think I have played successful matchmaker with the orphans that have let me know so far. If you are still an orphan and have not let me know, please do. Also, since my attempts to make lecture note packet 1 have fallen short, please do pick up a copy before tomorrow's class at Unique Copy Center (252 Greene Street) or the NYU bookstore.
Looking ahead to next week, we will spend tomorrow's session continuing to explore the dark side of "stock price maximization", beginning with all the ways that lenders can be exploited by companies and moving on the market's many perceived or real shortcomings. We will also look at the delicate balance between private and public interest, or what has now become CSR (Corporate Social Responsibility) and draw out the chasm between words and practice. We will then turn to alternatives to stock price maximization, an alternate corporate governance system or a different objective, and examine the pluses and minuses. By Wednesday's class, we hopefully will be able to come some degree of consensus on what the objective should be. It is possible that we will take the first steps on defining and measuring risk. It will be time for the "meat and potatoes" portion of the corporate finance meal. In the meantime, if you want to start reading chapters 1 and 2 of the book, it should supplement what we are doing in class. See you in class tomorrow!
Until next time!

Today's class extended the discussion of everything that can wrong in the real world. Lenders, left unprotected, will be exploited. Information can be noisy and markets can be irrational. Social costs can be large. Relating back to class, 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.

I hope that your search for a group has ended well and that you are thinking about the companies that you would like to analyze. Better still, perhaps you have a company picked out already. If you do, try to find a Bloomberg terminal (there is one in the MBA lounge and there used to be one in the basement)... If you do find one vacant, jump on it and try the following:
1. Press the EQUITY button
3. Type the name of your company
4. You might get multiple listings for your company, especially if it is a large company with multiple listings and securities. Try to find your local listing. For a US company, this will usually be the one with your stock symbol followed by US. For a non-US company, it will have the exchange symbol for your country (GR: Germany, FP: France, LN: UK etc...) It may take some trial and error to find the listing....
5. Type in HDS
6. Print off the first page of the HDS (it should have the top 17 investors in your company).

If you cannot find a Bloomberg terminal or don't have access to one, try going on Yahoo! Finance and type in the name or symbol for your company. Once you find your company, scroll down the left hand column until you get to Major Holders and click on it. You should get a listing of the top stockholders in your company. In fact, while you are on that page, take note of the percent of your company's stock held by insiders and by institutions.


A couple of housekeeping notes before I lay out the second week's issue/puzzle/question. First, please do get lecture note packet 1 before tomorrow's class. I am afraid I have to give up on the free printing option, given the trouble that people seem to be having, but I will try to fix it for the second packet. For this one, get your copy either at the bookstore or at Unique Copy on Greene Street. Second, I had sent instructions on how to use Bloomberg to get the listing of the top stockholders in your company. Alejandro Trevino (Thank you...) also offers an alternative, if you can get on Capital IQ. Here is the pathway he suggests after you find your company on Capital IQ (see my webcast from last week on finding your company...)
Company page --> Investors (left hand side column) --> Public/Private Ownership. You can sort through insider and institutional ownership.

Last week, I posted the first puzzle of the week on the Dell management buyout. The last week has been a pretty eventful one for that buyout, with at least one large institutional investor stepping up in opposition. As i mentioned when I posted the story, it brings to the surface all of the tensions we talked about in class: between managers & stockholders, between inside stockholders & outside stockholders, between lenders and firms and between firms and financial markets. I hope you had a chance to think about some of these issues. If you are interested, I did post my thoughts on this and similar deals on my website:

On to this week's issue/puzzle/question. A big factor in whether you trust market prices is what you think about market time horizons. If you believe that markets are short term, you are less likely to go along with market prices. There are many who believe that markets are too "short term" to be trusted and that companies that make decisions that are in their long term best interests often get punished by markets for doing so. That may very well be the case but if so, it cannot just be posited as a belief or supported with anecdotal evidence. At the risk of contradicting myself on the use of anecdotal evidence, Amazon is a great case study for a company where the market and managers should be in tension, if markets are short term. Jeff Bezos, the CEO of Amazon, has made it very clear that he is focused on the very long term, notwithstanding what markets may think of his actions.
http://www.nytimes.com/2011/12/17/business/at-amazon-jeff-bezos-talks-long-term-and-means-it.html?_r=3&ref=business&: The first article, by James Stewart in the New York Times, is laudatory to Mr. Bezos, precisely because of this long term focus, though it seems to leave the impression that the market has not been kind to Amazon, because of this focus.
http://aswathdamodaran.blogspot.com/2011/12/do-markets-punish-long-term-thinking.html: The second link is to a blog post that I made, in response to James Stewart's article, taking on his claim that markets were punishing Amazon for being too long term
http://hbr.org/2013/01/the-best-performing-ceos-in-the-world: The third link is to a Harvard Business Review article that highlights CEOs who have had long term visions for their companies, though it does not quite confront the question of whether markets have punished them or rewarded them as a consequence. (Taylor Haverkamp sent me this link.... and it is worth reading)
http://finance.yahoo.com/q?s=amzn&ql=1: The final link is to Amazon's financials on Yahoo! Finance. Take note of their current market capitalization and then take a look at their financial statements - look at revenue growth and net income.
Here are the key questions that I would like you to think about:
Is Amazon run with a long term focus? If the answer is yes, what do you base that conclusion on? Is there an item or items in the financial statements that you can use to back up the statement?
Is the market punishing Amazon for being long term? Again, if the answer is yes, what is the basis? If the answer is no, what is the basis?
Can you think of a company that you think is run for the long term which you believe is being punished in the market for that focus?
Can you think of an action/ event that you can focus on that would let you isolate whether markets are long term or short term? (For example, you could look at announcements of R&D investments by companies, which reduce current earnings but presumably feed into future growth, and look at market reactions to those announcements)
As always, the entire puzzle, with the links is up online on the webcast page for the class, on Lore and at iTunes U. Hope you have a chance to think about these questions. Until next time!


s 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? 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. On the theme of investor time horizon and stockholder composition, Tim Hagamen sent me this link to a blog post from Matt Levine at Dealbreaker that is fascinating (Thank you, Tim...): http://bit.ly/YrNIMX

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, there are groups out there that rank 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
Domini: http://www.kld.com/indexes/ds400index/index.ht
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). I had also mentioned CRO magazine in class and their top hundred. In case you are interested, here is the link:
Feel free to disagree.

If you have picked a company, there are two orders of business you have for this weekend:
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 continue with our discussion of risk on Wednesday (no class on Monday). As part of that discussion, we will confront the question of who the marginal investor in your company is. If you have already printed off the list of the top stockholders in your company (HDS page in Bloomberg or the Major Holders page from Yahoo! Finance), bring it with you again. If you have not, please do so before the next class. Also, watch for the in-practice webcast day after tomorrow, because I will go through how to break down the HDS page.

Finally, I had mentioned a paper that related stock prices to corporate governance scores in class yesterday. You can find the link to the paper below:

Until next time!

2/14/13 Time sure does fly, when you are having fun... We are exactly 15.38% (4 sessions out of 26) through the class (in terms of class time) and we will kick into high gear in the next two weeks. I am going to assume for the moment that my nagging has worked and that you have picked a company to analyze. Here is what you can be doing (or better still, have done already):
1. Download the latest financials for the company: You don't have to print them off. In fact, I find it convenient to keep them in a folder in pdf format, since my computer can search the document far more quickly than I can. For all companies, this will include the latest annual report and with US companies, try to find the latest 10K and 10Q on the SEC website. If you are analyzing a private business, you will need to get the most recent financial data from the owner (who hopefully is related to you and still likes you...)
2. Put the board of directors under a microscope: The first step in understanding your company is to start at the top. Take a look at who sits on the board and how long they have been sitting there. In particular, the question that you are trying to answer is how effective this board will be in keeping any eye on the top management of the company. Start with the cosmetic measures, which is what most corporate governance services and laws focus on, but look for something more tangible. Has the board shown any backbone in stopping or slowing down management? For instance, here is my assessment of the Dell's board, without knowing a single person on the board....
3. Assess the "power" structure: As Machiavelli pointed out, power abhors a vacuum (he said no such thing, but you can pretty much attribute anything to him or Confucius and sound literate). Specifically, try to find who the largest stockholders in your company are. You can get this from the Bloomberg terminals (HDS page), Capital IQ (holders) or online for free (Yahoo! Finance or Morningstar). Once you have this list, here are the questions that you should try to answer:
If you are a small stockholder in this company, do you see any likelihood that any of these stockholders will stand up for stockholder rights or are they more likely to sell and run?
Are there any stockholders on the list whose interests may lie in something other than maximizing stockholder wealth? (For instance, we talked about the government as a stockholder and how its interests may be different from that of the rest of the stockholders.. Think of an employee pension fund being on that list... Or another company being the largest stockholder...)
As I mentioned yesterday, I will be putting up a webcast tomorrow on how to analyze the "top shareholder" list, using a range of companies. Hope you to get a chance to watch it. Until next time!

I hope you have fun plans for the long weekend, but perhaps you can slip in some corporate finance in there. A few loose ends:
1. Heinz deal: As you may have read yesterday, Warren Buffet and a Brazilian partner (3G Capital) have teamed up to buy Heinz. I am sure that stockholders in Heinz are very happy this morning, but James Yuan noticed something happening on the periphery:
Looks like some of the Heinz bondholders will get Nabiscoed....

2. Lecture note packets: After dozens of attempts that got me nowhere, I think I have fixed the printing problem on the lecture notes (and I am sure that if it still does not work, you will let me know). I replaced the pdf files with the original powerpoint files. The files remain monstrously large but the flattening problem seems to have gone away and they print. I am sorry that it happened after many of you had to pay for packet 1, but I hope that you will be able to use this option for packet 2.

3. Holdings webcast: The webcast for this week is up and it is on assessing who the top stockholders in your company are and thinking through the potential conflicts of interest you will face as a result. The webcast went a little longer than I wanted it to (it is about 24 minutes) but if you do have the list of the top stockholders in your company (the HDS page from Bloomberg, Capital IQ, Morningstar or some other source), I think you will find it useful.
Webcast link: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/holders.mp4
Presentation link: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt
I have posted these links online on the webcast page, Lore and on iTunes U.


I have sent you enough stuff this week already. So, I will keep this short. The newsletter for the week is attached...

Attached: Newsletter #2

2/17/13 I know that I don't give you much of a chance to catch up, piling on more and more, just as you get close. Since we have no class tomorrow, I thought I would, in fact, allow you to catch up. So, here is where we are in the class:
Class lectures: We are four sessions into the class. I hope that you have been able to come to class for all four, but just in case you have not, you should watch the webcast of the class. I don't think it is too painful, but then again, I am biased. You can get the webcasts of the classes by going to the webcast page for the class ( https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr13.htm ), the Lore page for the class or the iTunes U site for the class. We have covered the syllabus packet and the first 71 pages of lecture note packet 1. If you don't have it yet, please get it on the webcast page for the class.
Post class tests/solutions: To test yourself on each class, I have post-class tests (with solutions). These are really 5-10 minute tests of the key concepts covered during the class. I have been remiss in not attaching these to the emails I send out after class (other than for the February 4 class) but they too are at all three sites listed above. In case, you have trouble clicking your way to them, here are direct links to the tests and solutions. I will try to email you the post-class tests for each of the remaining sessions, but even if I do not, you should be able to find them online.
Session 1: Post class test (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session1test.pdf ) and solution (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session1soln.pdf)
Session 2: Post class test (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session2test.pdf ) and solution (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session2soln.pdf)
Session 3: Post class test (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session3test.pdf ) and solution (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session3soln.pdf)
Session 4: Post class test (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4test.pdf ) and solution (https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/postclass/session4soln.pdf)
Group project: At this stage, you should be in a group and have picked a company. If you are still unattached, please let me know. Assuming that you have picked your company, you should be able to apply what we did in the first two weeks to this company: assess the company's board of directors and analyze its stockholder composition. I have put up webcasts in the three sites listed above on the two tasks:
Webcast 1: Assessing a company's board of directors
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/corpgovHP.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/corpgovHP/corpgov.ppt
Webcast 2: Analyzing a company's stockholder base
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/holders.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt
Corporate Finance Puzzles/ Stories: Each week, we will focus on a story close that week's topic and we have two postings so far:
Week 1: The Dell Management Buyout: Conflicts of Interests, Private versus Public companies (https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr13.htm )
Week 2: The Amazon story: Are markets short term? (https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr13.htm )
Readings: I know that you are busy and that there is plenty to keep you occupied. If you do have the time, though, I think it would help to read the book. We are on chapter 3 and will be moving into chapter 4 (which is a long and perhaps the most involved chapter in the book..).
As you can see, we have had a pretty busy two weeks. I hope you do get a chance to get abreast of where we are in the class, because I promise you that things will not slow down.... Until next time!

No emails yesterday.... and it must have been a relief. But it is short lived. The puzzle for the week is up and it relates to a story in today's Wall Street Journal on Google considering entering the retail business, modeling itself on Apple. If we define risk as danger and opportunity, this venture offers both and the question is whether the net effect is positive or negative. No one has the right answer, but you can put yourself in Google's shoes and start making this assessment. Initially, it may be qualitative, but try to think of ways in which you can make it more concrete and quantitative.
Story on Google: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/Googleretail.pdf
Questions to ponder: https://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/puzzle3.html

Also, for those of you who have been finding interesting stuff relating to the class and emailing the links, I am grateful and will try to forward as many as I can to the class. It may also help if you use the discussion board on Lore to post interesting links, stories and other stuff.
Until next time!


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.
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.
Finally, if you are up for the challenge, try to estimate the risk free rate in the currency of your choice. Of course, if this is US dollars, not much of a challenge... It is a good exercise to try a more difficult currency. I will be posting a webcast on Friday on doing this. So, stay tuned. I have also attached the post class test & solution for today... Give it a shot... Until next time!

Attachments: Post class test, Post class test solution


This week was a short one, but we did get started on risk free rates. At this stage, if you have picked a company, you should be able to pick a currency to do your analysis. Most of the time, the most pragmatic choice is to stick with the local currency, in which the financials are reported. Note, though, that if you have a commodity company, the conventional practice is often to report everything in US dollars, even for non-US companies. Once you pick the currency, you should try to get a risk free rate. As I promised, I do have a webcast on estimating the risk free rate that you may or may not find useful. It is posted on the webcast page for the class, Lore and iTunes U.
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/riskfree.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
I have also attached the latest Moody's sovereign ratings and updated CDS spreads.

Attachments: Moody's ratings, CDS spreads


I hope you are having a good (albeit wet) weekend. This week's newsletter does not contain much news, since we had only one session last week. But the next week is a big one. If you have the time, I would suggest that you start reading chapter 4 in the applied corporate finance book. It is not a difficult chapter but it is dense, since I tried to pack in too much into the chapter, but this is the heart of both the next quiz and what is to come in the rest of the class. Finally, I have a group of two that is now come unattached. If you have a group of three or four and would like to add two more, please let me know. Until next time!

Attachment: Newsletter #3

2/24/13 I hope that you had a great weekend! In tomorrow's class, we will begin our discussion of equity risk premiums and in Wednesday's class, we will take a closer look at how to estimate betas or relative risk measures. They are crucial building blocks to coming up with hurdle rates but there are lots of estimation issues and questions. If you have not had a chance to watch the webcast on risk free rates, please try to do so. It is only 14 minutes long and I don't think it is too painful. I am attaching the links again, in case you have nothing to do this weekend.
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/riskfree.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
Until next time!

The bulk of today's class was spent talking about equity risk premiums. The key theme to take away is that equity risk premiums don't come from models or history but from our guts. When we (as investors) feel scared or hopeful about everything that is going on around us, the equity risk premium is the receptacle for those fears and hopes. Thus, a good measure of equity risk premium should be dynamic and forward looking. We looked at three different ways of estimating the equity risk premium.
1. Survey Premiums: 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 some of the surveys:
Merrill survey: http://newsroom.bankofamerica.com/index.php?s=43&item=8619
CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2206538
Analyst survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2084213

2. Historical Premiums: 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 my estimates of country risk premiums for about 100 countries.

3. Implied equity premium: Finally, we computed an implied equity risk premium for the S&P 500, using the level of the index. If you want to try your hand at it, here is my February 2012 update:
Play with the spreadsheet. Try changing the index level, for instance, and see what it does to the premium.

Beta reminder: As I mentioned at the end of class today, please do try to find a Bloomberg terminal. Click on Equities, find your stock (pinpoint the local listing; there can be dozens of listings....) and once you are on your stock's page of choices, type in BETA. A beta page should magically appear, with a two-year regression beta for your company. Print if off. If no one is waiting for the terminal, try these variations:
1. Time period: Change the default to make it about 5 years and the interval from weekly (W) to monthly (M). Print that page off
2. Index: The default index that Bloomberg uses is the local index (a topic for discussion next session). You can change the index. Type in NFT (Bloomberg's symbol for the MSCI Global Equity index) in the index box and rerun the regression.
Bring the beta page (s) with you to class on Wednesday. Let's get the project done in real time, in class.

Attachments: Post class test and solution


We just finished our discussion of country risk, measured with default spreads and equity risk premiums, yesterday. Almost on cue, the election in Italy seems to have delivered the worst possible solution (at least as far as markets are concerned): a no-decision. In the puzzle for this week, I focus on Italian country risk through two days: February 25 and 26, as news about the election percolated to the markets. The initial news that pointed to a win by the center-left coalition caused the markets to spike, followed by the actual vote count which delivered a different message: Berlusconi is not a has-been yet. Here is the news story on the election:
I have also attached a file with charts of three markets: the Italian CDS, the Italian ten-year government bond yield and the Italian equity index (the FTSE MIB) through the two days. As you look at the charts, also see if you can address the questions that are in the other attachment. Not only is the story fascinating in its own right, but it will give you insight into country risk and how it plays out in corporate finance/ valuation.

Attachments: The Market reaction, Questions


I know that this is awfully close to class, but if you get a chance, please scan this article:

Here is Andrew Ross Sorkin's article:

If you don't know who Marty Lipton is, here is his Wikipedia page:
I won't tell what I think (until I get to class). But let's open the class with this...



Today's class covered the conventional approach to estimating betas, which is to run a regression of returns on a stock against returns on the market index. We first covered the estimation choices: how far back in time to go (depends on how much your company has changed), what return interval to use (weekly or monthly are better than daily), what to include in returns (dividends and price appreciation) and the market index to use (broader and wider is better). We also looked at the three key pieces of output from the regression:
1. The intercept: This is a measure of how good or bad an investment your stock was during the period of your regression. To compute the measure correctly, you net out Rf(1-Beta) from the Intercept:
Jensen's alpha = Intercept - Riskfree rate (1- Beta)
If this number is a positive (negative) number, your stock did better (worse) than expected, after adjusting for risk and market performance.
2. The slope: is the beta, albeit with standard error
3. The R squared: measures the proportion of the risk in your stock that is market risk, with the balance being firm specific/diversifiable risk.
Finally, we used the beta to come up with an expected return for stock investors/cost of equity for the company.

If you can get your hands on the beta page for your company, you should be able to make these assessments for your company. I had a typo on one of the slides today and I am attaching the corrected version. You can also get a guide to reading the Bloomberg pages for your company by clicking below:
Please try to strike while the iron is hot and get this section done for your company.

Finally, I have also attached the post-class test and solution for today. Until next time!

Attachments: Post-class test and solution


I hope that you have been able to print off the regression beta page for your company from Bloomberg. And for those who you who have asked, as to whether you have to run the regression yourself (by collecting stock prices and index returns for the last 60 months... )... the answer is no, unless you really, really want to. If you do decide to run the regression yourself, you will need the following:
1. Stock prices for your company every week (month) for as many weeks (months) as you want to run the regression
2. Dividends paid by your company over this period and the week (month) in which the stock went ex dividend
3. Index level each week (month) for the period of your regression
4. Index dividend each week (month) for the period of your regression
You can get all of these from the Bloomberg terminal. To get stock prices for your company, find your company on Bloomberg and type in HP. The prices will show up as daily prices, but you can change them to weekly or monthly and change the starting and ending point. You can also get the dividends paid and ex dividend dates for your stock over any time period. To get the index level and dividends, find your index. For instance, if your index is the S&P 500, the index symbol is SPX and type in TRA. Again, you will get daily index levels and dividends for your index, but you can change it to weekly/monthly over the period of your regression. Once you have this data, you can use the excel spreadsheet I have or modify it to get your own regression beta page. (It really sounds like a lot more work than it is... It will take you about an hour to enter the numbers) But do this only if you want to... it is not required.

Once you have the regression beta page, please try to answer the following:
1. Was your stock a good or a bad investment during the period of the regression? (Look at the intercept, relative to the riskfree rate (1- beta))
2. How risky is your stock and how "confident" do you feel about your risk assessment? (Look at the beta and the standard error of the beta)
3. How much of the risk in your stock comes from market sources? (Look at the R-squared)
If you are having trouble making sense of the numbers on your Bloomberg beta page, please use the handout from class yesterday. If you cannot find it, I have attached my guide to the Bloomberg printouts to this email. I will be putting up a webcast tomorrow on reading the regression beta page. If you want to wait until tomorrow to do all of this, that is okay...That's it for the moment... Until next time!

Attachments: Regression page


It is Friday and time for the weekly in practice webcast. In the webcast, I take a look at Disney's updated 2-year weekly regression (from 2011-2013). I have the Bloomberg page attached. I am also attaching the spreadsheet that I used to analyze this regression, which you are welcome to use on your company. The webcast is available at the link below:
If you have trouble with this download, try on Lore or on iTunes U.

On a different note, it has been an eventful week for corporate governance, with three companies illustrating the disquiet that investors are feeling:

Level 1: Investor are getting restive: DISNEY
Remember when Iger was the anti-Eisner. Looks like he has been CEO long enough to want more power...

Level 2: Investors are getting pissed - APPLE
Only a third voted against Mr. Cook, but you know what that means in a corporate democracy

Level 3: Investors have blown their top - GROUPON
I think Andrew Mason is a classic entrepreneur who has trouble running a company... and he has left quite a mess around.

Until next time!

Attachments: Bloomberg beta page, Spreadsheet for analysis, Disney Annual Report (2012)


Week 4 is now behind us and we are well into the discussion of hurdle rates. I know that I have been harassing you about keeping up with the class and I will continue to do so, because it is so much easier to do the project in tandem with the class. So, if you have not picked a company yet, don't wait any more. If you have, and have done nothing, you are still only a couple of hours from catching up The newsletter for the week is attached and we covered two items last week: equity risk premiums, historical and implied, and the regression beta page. In terms of chapters in the book, we are in the middle of chapter 4. If you can catch up, great. If you want to read ahead, even better. Until next time!

Attachment: Newsletter #4


I hope that you had a good weekend. As we start the new week, I hope you have had a chance to take a look at last week's material. We spent Wednesday, talking about regression betas and the process is not only statistical but antiseptic. In tomorrow's class, we will remedy that by looking at the determinants of betas. In other words, we will look at the fundamentals that drive betas and lay the foundation for not only understanding betas more intuitively but also coming up with a much better way of estimating betas for companies than running a regression against a market index. In fact, in Wednesday's class, we will come up with an alternative measure of beta for Disney that builds up from the businesses that it operates in. That process will be the one that I will advocate for all of you. For those of you working with companies where the regression betas are over short periods or don't make sense, this approach will yield more meaningful betas.

Finally, I don't know whether you have had a chance to look at the news but it looks like the Swiss are drawing the line on corporate governance:
Looks like the barbarians at the gate.. European CEOs have been put on notice. Until next time!


I want to spend this email 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 erminology 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: When you borrow money, you create a fixed cost (interest expenses) that makes your equity earnings more volatile. Thus, the equity beta in a safe business can be outlandishly high if has lots of debt. The levered beta equation we went through is a staple for this class and we will revisit it again and again. So, start getting comfortable with it.
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.

I also introduced the notion of betas being weighted averages with the Disney - Cap Cities example. I worked out the beta for Disney under two scenarios: an all-equity funded acquisition of Cap Cities and their $10 billion debt/ $8.5 billion equity acquisition. As an exercise, please try to work out the levered beta for Disney on the assumption that they funded the entire acquisition with debt (all $18.5 billion). The answer will be in tomorrow's email.

One final point. When I was talking about the effect of leverage on betas, I mentioned the going public of Blackrock, when I actually meant to say Blackstone. Blackrock is a portfolio management company, without leverage, and Blackstone is a private equity investor, involved in lots of leveraged deals. My mistake and I hope that I don't get blamed if there is a run on Blackrock.

If you are ready to get started on preparing for the first quiz, here are the links that you need:
All past Quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Solutions to all past quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls

Until next time!

Attachments: Post-class test and solution


I have posted the corporate finance puzzle of the week, though I think you may have enough on your plate, getting ready for the first quiz. But if you do get a chance, check it out. It is on Groupon's firing of its CEO, Andrew Mason.
Questions about Groupon: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles.Grouponquestions.pdf
Groupon's stock price, beta and HDS pages and the news stories related to the story (including Mason's parting message to his employees) are all online as well and you can find them at:

In the lead up to the quiz, here are some key points:
1. Quiz date & location: The quiz will be in the first 30 minutes of class (10.30-11) on Monday, March 11. To allow for more comfort, there will be three rooms for the quiz. Please go to the assigned room on Monday:
If your last name starts with Go to
A - G KMEC 2-60
H - K KMEC 2-70
L - Z Paulson Auditorium
There will be class after the quiz. So, please make your way as soon as you can to Paulson from the other rooms. We will start class at 11.05.
2. Quiz structure: The quiz will be open book, open notes. There will be no laptops allowed, but iPads are okay (as long as you use them as the receptacle for your notes and not for connectivity). It is a good idea to bring your financial calculator or any calculator to the quiz with you.
3. Missing quiz: If you are going to be missing the quiz, please let me know before Monday at 10.30. When you send me your email about missing the quiz, please put "Missing CF quiz 1" in the subject. I know it sounds anal but it is the only way I can deal with, without creating chaos. If you are going to be part of the SXSW group going to Texas, there will be a make-up quiz on Wednesday (it will be different from the Monday quiz and I cannot promise that it will be more or less difficult than that quiz) from 9.30-10 in KMEC 2-65. If you are going to be part of that group, please email me as well with "SXSW Quiz 1" in the subject.
4. Quiz coverage: We will cover everything that we finish through Wednesday. That will be all of beta and cost of equity (but not cost of debt, debt or capital). That will be all of the first 3 chapters and about two thirds of the way through chapter 4 (through page 155) in the book and slides 1-178 in lecture note packet 1.
5. Past quizzes: You can access all of the quiz 1s that I have ever given in this class by going to the links below:
Quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Solutions to quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls
6. Quiz review session: I usually try to do the review session from 12-1 but this Friday is a tough day to get that slot, with conferences scheduled. The review session will be in Paulson from 10-11 am and the review presentation will be sent to you a day earlier. I am sorry if this conflicts with other things that you have scheduled, but the session will be webcast and I will post it later in the day. The review session is most useful, if you have done some review on your own, but I know that it is prior to the weekend and you may not have had a chance. The next two quizzes are Wednesday quizzes and the review sessions will be on Tuesdays, closer to the quizzes.
Until next time!


If you remember, we looked at the beta for Disney after its acquisition of Cap Cities in the last class. 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, which was the case in 1996.

Moving right along, I know that today's class was a grind with numbers building on top of numbers. In specific, we looked at how to estimate the beta for not only a company but its individual businesses by building up to a beta, rather than trusting a single regression. With Disney, we estimated a beta for each of the four businesses it was in, a collective beta for Disney's operating businesses and a beta for Disney as a company (including its cash). If you got lost at some stage in the class, here are some of the ways you can get unlost:
1. Review the ten slides that we covered today (we covered only ten slides)
2. I have attached a new version of the extra slide I had on pure play betas in class, fixing a couple of typos (I am sorry... I put it together 15 minutes in the class and I messed up...) That will take you through the process of estimating a beta for the studio business
3. Try the post-class test and solution. I think it will really help bring together some of the mec

Attachment: Post-class test and solution


Today is usually the project update day but before I launch into what you could be doing with the project, a reminder that the review session will be tomorrow from 10-11 in Paulson. You can get the review presentation by clicking below:
If you can, please print this off or download it and bring it to class. If you cannot make the class, not a big deal. I will put the webcast up by tomorrow evening.

Now, to the project. I know that you will put it on the back burner for this week and perhaps through spring break, but if you can keep working on your project, think of it as additional preparation for the quiz. In particular, we talked about bottom up betas this week and you can start building up to bottom up betas for your firm, Here are a couple of places that you can go:
1. Everything you wanted to know about bottom up betas (and were afraid to ask): I 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!

2. Bottom up betas by sector (and across regions): As I mentioned in class today, I do compute bottom up betas by sector and across regions at the start of every year. You can get these betas by going to
Scroll down and you should see the beta section. Click on the downloadable excel files to have a copy for yourself.

3. Capital IQ: Since you have free access to Capital IQ, while you are at Stern, you should take full advantage. You do have to jump through a few procedural hoops to get your login and password, but once you do, you can screen in lots of different ways - by sector, industry, region etc.

I will put together a webcast for tomorrow on the bottom up beta process. Until next time!

Attachment: Top ten questions on bottom up betas

3/8/13 Hi!
I know that most of you were not able to make it to the quiz, but the webcast is now up online. You can get it by going to the webcast page for the class, Lore or iTunes U. Alternatively, you can try this direct link:
I have also updated the presentation to clarify some of the things we talked about during the review. So, please download this version to use along with the review:
I hope it helps... Until next time!
3/8/13 Hi!
I know that you are in no mood for in practice webcasts or working on your project, but I have a webcast on the mechanics of estimating bottom up betas. I use United Technologies to illustrate the process and I go through how to pull up companies from Capital IQ. Even if you don't get a chance to watch it today or this weekend, it may perhaps be useful later on. Here are the links:
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/BottomupBeta.mp4
United Technologies 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Bottomupbeta/UT10K.pdf
Spreadsheet to help compute bottom up beta: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Bottomupbeta/bottomupbeta.xls
The last spreadsheet has built into it the industry averages that I have computed for different sectors in the US. You can easily replace it with the global averages that I also have on my site and tweak the spreadsheet. Give it a shot! Until next time!

I won't ask you how the weekend is going, because I may be hitting a sore spot. I did put together a list of the top ten questions that I am getting in my emails. Perhaps, you have one of these questions:

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. For the long term cost of equity, if using a historical premium, you will always use the geometric average premium fo

3. Why do you use the US historical risk premium for German or French 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. If you use an implied premium, the same logic applies. If I can get the implied premium for the S&P 500, it should also apply in other mature markets (with mature being defined as AAA rated countries).

4. 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: the US treasury bond rate for US dollars and the German Euro bond for the Euro. 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). The default spread can be obtained in one of three ways: (a) The difference between the rate on a dollar (Euro) denominated bond issued by the country and the US treasury bond rate (German Euro bond rate), (b) CDS spread for the country or (c) typical default spread given the local currency rating for the country.

5. 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 Mexico example in the review) and adding this amount to the US premium. This will give you a higher cost of equity. If you are given enough information to do the latter, do it (rather than use just the default spread).

6. Why do you use the average debt to equity ratio in the past to unlever a regression beta?
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... When the number is low, as is usually teh case with riskfree rates, you can use the approximation of dividing by 12 (to get monthly) or 52 (to get weekly). But try to always compound the Jensen's alpha numbers, since they can be much bigger.

9. What is the cash effect on beta? Why does it sometimes get taken out and sometimes get put back in?
I know that dealing with cash is on of the more confusing aspects of beta and cost of equity. Let's start with some basics. If a company has cash on its balance sheet, that cash is an asset with a zero beta (or at least a very low one) and it will affect the beta for the company and the beta that you observe for its equity (say, from a regression). What you do with cash will therefore depend upon what beta you are starting with and what beta you want to end up with.
For the pure play or unlevered beta by business: You start with the average (or median) regression beta across the comparable companies in the business. To get to a pure play beta for the business, here are the steps:
Step 1: Unlever the regression beta, using the gross debt to equity ratio for the sector
Unlevered beta for median company in sector = Regression beta/ (1+ (1- tax rate) (Debt/Equity Ratio for the sector)
Step 2: Clean up for the cash held by the typical company in the sector, using the median cash/ firm value for the sector (see below for firm value)
Unlevered beta for the business = Unlevered beta for median company/ (1 - Cash/Firm value for the sector)
Note that you use sector averages all the way through this process, for regression betas, debt to equity ratios and cash/firm value

To get to the bottom up equity beta for a company: You start with the unlevered betas with the businesses and work up to the equity beta in the following steps:
Step 1: Compute a weighted average of the operating business betas, using the values of the operating businesses in the company:
Unlevered beta for operating assets of the company = Pure play betas weighted by values of the operating businesses
Step 2: Compute a weighted average of all of the assets of the company, with the company's cash included
Unlevered beta for entire company = Unlevered beta for operating assets (Value of operating assets/(Cash + Value of operating assets)
Step 3: Compute a levered beta for just the operating assets of the company, using the debt to equity ratio of the company
Levered beta for operating assets of the company = Unlevered beta for operating assets (1+ (1- tax rate) Company's D/E ratio)
Step 4: Compute a levered beta for all of the assets of the company, with cash included
Levered beta for operating assets of the company = Unlevered beta for entire company (1+ (1- tax rate) Company's D/E ratio)
It is the beta in step 4 that is directly comparable to your regression beta. Note that all the numbers in this part are the company's numbers - for values for the businesses, cash holdings and debt/equity.

10. Why do you weight unlevered betas by enterprise value (as you did in the Disney/Cap Cities acquisition) and in computing Disney's bottom up beta?
The unlevered beta is a beta fo the asset side of the balance sheet, right? So, when weighting these unlevered betas, you want to weight them by how much the businesses are worth (and not how much the equity is worth). That is why I used enterprise value weights in the Disney bottom up beta computation. I cheated on the Cap Cities acquisition by ignoring cash for both Disney and Cap Cities, but if cash had been provided, I would have used enterprise value. In case you are a little confused about the different values, here they are:
Market cap or Value of equity: This is the value of just equity
Firm value = Market value of Debt + Market value of Equity
Enterprise value = Market value of Debt + Market value of Equity - Cash (This of this as the value of just the operating assets of the company)
Thus, if a company has 100 million in equity, 50 million in debt and 20 million in cash:
Market cap = 100
Firm value = 150
Enterprise value = 150-20 = 130

I have also attached the newsletter for this week. That is about it... Hope I have not added to your confusion. Relax.. and I will see you soon. Until next time!

Attachment: Newsletter #5


A few very quick points and I will leave you to your own devices:
1. Answers to the last page of the review: I had promised you the answers to the last page on the review session and I am sorry for not getting back to you sooner, but I have attached the solution page. Hope you find it useful.

2. The bane of technology: I must have not been clear about what I was allowing/not allowing during the quiz. Just to clarify. You can use your iPads, Kindles or Nooks, as long as you don't use connectivity. No laptops, though!

3. Levered betas, unlevered beta for company and unlevered beta for the business: There still seem to be some loose ends associated with betas. Just in case you are still confused, I put together a simple example to bring it home. See attachment.

4. The age of Enlightenment or Aquarius or something: Anyway, I hope that the quizzes are 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)! Until tomorrow!

5. Seating reminder: In case you have forgotten your room assignment for tomorrow:
If your last name starts with Go to
A - G KMEC 2-60
H - K KMEC 2-70
L - Z Paulson Auditorium
Until tomorrow!


I know that it is tough to sit in on a class, after you have taken a quiz and I appreciate it that so many of you did come to class. I hope that you did find it useful as a starting point for thinking about private businesses.
In particular, I made the argument that while you can estimate a bottom up beta or even an accounting beta for a private business, using that beta to estimate a cost of equity for that private business will yield too low a value because you are considering only the portion of the risk that is market risk and assuming that the rest is diversified away. Since private business owners tend not to be diversified, I suggested expanding the beta to consider total risk rather than just market risk, which yields a cost of equity that is much higher for a private business than for a publicly traded one, with diversified investors. That, in turn, puts the private business owner at a disadvantage, relative to public companies that he or she competes with.
Lest I sound too pessimistic, there are three possible exceptions. The first is that the private business owner derives fulfillment (non financial) from running the business and is okay with earning less than she would have earned investing in a mutual fund. The second is that the private business owner has the potential to exit into the public market, if the business is successful, either by going public or selling to a publicly traded company. The third is that the private business diversifies across multiple business, thus raising the correlation with the market, and lowering the total beta.
In the final 15 minutes of class, we started on the questions of what to include in debt and the cost of debt. Debt should include any item that gives rise to contractual commitments that are usually tax deductible (with failure to meet the commitments leading to consequences). Using this definition, all interest bearing debt and lease commitment meet the debt test but accounts payable/supplier credit/ underfunded pension obligations do not. The cost of debt is not the rate at which you borrowed your existing debt at but a current, long term cost of borrowing.
I have attached the post class test & solution. Back to grading quizzes...Until next time!

Attachment: Post-class test and solution


The quizzes are done and can be picked up near the entry to the Finance department on the 9th floor of KMEC. When you get out of the elevator, head towards the front door to the reception and before you go in, look to your right and you will see the quizzes in three piles, alphabetically sorted and face down. Please take just your quiz and leave the rest in their pristine order.

I am also attaching the solutions to both quizzes (Quiz 1a is the Apple quiz and Quiz 1b is the Google quiz) and the distribution. I have left copies next to your quizzes, if you prefer a physical copy While I have attached grades to the scores, please don't read too much into them for two reasons. It is only 10% of your grade and it is very early in the game. Also, if you take all three quizzes, the worst quiz score will get replaced with the average on all of your other exams.
As I mentioned in class, I grade these quizzes and I do screw up (some times). If you think I have screwed up on your quiz, please bring it in and I will fix it. Even if you feel that you have a case on a multiple choice question, I am willing to listen. I will not be in this afternoon but I will be in tomorrow, before and after class.

Until next time!

Attachment: Solution (a or b)as well as the distribution of grades


I know.. I know.. I have taken up enough of your time already, but just in case your fascination with finance will not die down, I thought I would continue with the discussion we were having about private businesses. Though the message I sent was a gloomy one, this week's puzzle is about successful private businesses. So, you may want to start with the Forbes list of the most successful private businesses (and you have some really big ones):
Then, consider how they manage being private in a universe where their competition is public... Clearly, they have good coping mechanisms. For those of you who are thinking about being entrepreneurs, there may be lessons here. I have attached the general questions that you may want to think about but add your own.

Attachment: Questions


As promised (or threatened) in class on Monday, the case is available for your reading and analytical pleasure. A few notes about the case:
1. It is a group project, preferably (but not necessarily) int he same groups that you used for the semester-long project.
2. It is due before class on April 3. Since we will be discussing the case in class that day, there can be no late submissions.
3. The case is an assessment of whether Apple should invest in the iTV. As you get to play Tim Cook, you will be required to think about estimating earnings and cash flows on a project and coming up with a hurdle rate for the investment. Ultimately, though, you have to decide whether Apple should invest in the iTV or not. You can use whatever tools you feel are necessary to make this judgment.
4. While I understand that you may already be in spring break mode, try to read the case before you leave. It is a very short, to-the-point case. There is no strategic baloney in the case analysis and the task is a focused one. It will test you, as a group, not only on the hurdle rate concepts that we have been addressing class but also in simple model building.
I have attached the case and an excel spreadsheet with just the last exhibit (to save you the trouble of entering the numbers from scratch). Until next time!

Attachments: The case and comparables(xls)


Glad that you could make it to the last class before the break. In today's class, we brought together the last few pieces of the cost of capital puzzle. We first talked about estimating a cost of debt for an unrated company, by estimating a synthetic rating and using that rating to come up with a default spread. We also talked about what a "marginal tax rate" is and why it is the right rate to use in computing an after-tax cost of debt. We then circled back and converted leases to debt and book interest-bearing debt to market interest bearing debt. That then allowed us to estimate the debt ratios (to capital and equity), levered betas and cost of capital. While it is an abstraction for the moment, both the cost of equity and capital are hurdle rates, but which one you use will depend on whether you are comparing to a return (cash flow) to equity or to the entire business.
In the last part of the class, we turned to the basics of measuring returns, arguing for cash flows as opposed to earnings. To make the case for cash flows, we first talked about why cash flows can be (and usually are) different from earnings, and why when they are different, you should go with the cash flows.
That is about it. I will give you an email break for the next nine days.. There will be no weekly newsletter this weekend (what will you do to fill your empty days?) and no webcast this Friday but all heck will break loose a week from Friday (March 22), when I'll be back (Terminator style...)... Post class test and solution for today's class are attached.

Attachment: Post-class test and solution

3/21/13 I hope you are having a great spring break. I know that it is not quite over for you but just in case you decided to get back ahead of the weekend, I thought I would bring you up to date with what is coming up on both the project and the case.
First, on the case. I know that most of you have not had a chance to read the case, let alone analyze it, but those of you who did read it noticed a couple of glitches in it that I have now fixed. The first was on item 7, on the production facilities: the new facility that Apple will have to invest in, if it runs out of capacity on the existing unit, will have a capacity of 25 million units as well (rather than the 4 million that I had stated it to have in the case). The second was in item 13, on the lease commitments for Apple as a company: the lease commitments start in 2013, not in 2011. I have made the corrections and reattached the case to this email. So, if you have not read the case yet, read this version instead.
Second, on the project. I know it has been put on the back burner and will probably stay there until the case analysis is done. Just in case, you have some extra time on your hands, it would be great if you could get the cost of capital for your company done. This will of course require that you estimate a bottom up beta for your company and compute the market value of debt (and leases). Until next time!
3/22/13 I know that spring break is not officially over but just in case you were working on your project or the case, I thought that a webcast on estimating the pre-tax cost of debt and the value of debt would come in useful. I have used Home Depot as my example for the analysis and it does providing an interesting test of getting updated information. The most recent 10K for the Home Depot is as of January 29, 2012. While a new 10K will be out by next month, we are constrained with an old 10K for the moment. However, I can and use the October 31, 2012 quarterly report (the three quarter 10Q) to update the numbers. If you are interested, here are the links:
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/debt.mp4
Home Depot 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Debt&Cost/HomeDepot10K.pdf
Home Depot 10Q: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Debt&Cost/HomeDepot10Q.pdf
The spreadsheet for computing market value of debt (with leases & synthetic ratings) is attached. While it has the Home Depot's numbers, you can use it for any company. I hope it is useful. Have a good rest of the break and I will see you on Monday! Until next time!

Not much news to report but it has been a long time since our last class. In the week before the break, we completed our discussion of cost of capital by talking about what comprises debt and how best to estimate a cost for that debt. Towards the end of the Wednesday session, we set the theme for measuring returns in corporate finance: show me the money.

Attachment: Newsletter #6

3/24/13 I hope that you are back from spring break and I know that some of you are fighting jet lag and sheer exhaustion. In case you are actually reading your emails tonight, here is a preview of what's coming this week. Tomorrow and Wednesday, we will start on a hypothetical project, a new theme park for Disney in Rio, and you will play the role of decision maker. We will start by projecting the expected earnings on the theme park, and convert those earnings into measures of accounting return. After taking a short detour into using accounting returns to judge entire companies, we will return to the theme park investment and talk about getting from earnings to cash flows first, and then from cash flows to incremental cash flows. We will close by working out ways to time weight the cash flows and come up with time weighted, cash flow measures of return. We will then look at how the analysis would be different, if it were done in a different currency, and dealing with uncertainty in project analysis. This week's sessions will also provide a great deal of background on what you will have to do on the Apple iTV case. So, if you can read the case before the classes, I think you will be able to make the connections (if and when they occur). Until next time!

I know that it is probably tough to get back into school mode, but I hope that you are making the transition. In today's class, we started by stating our ideal measure of return: it should be based upon cash flows, focus on just the incremental and be time weighted. After defining project broadly as including any type of investment, small or large, revenue generating or cost cutting, we started on the Rio Disney theme park analysis. We laid out the initial costs for the theme park and the assumptions about expenses, both direct and allocated. We began the assessment by estimating two sets of accounting numbers: the book value of capital invested in the project and the after-tax operating income each year for the next 10 years. We then used the two to estimate a return on capital, an accounting measure of return on the project. While that assessment did not look favorable for the project, with the return on capital of about 4% being well below the cost of capital of 8.62% (reflecting both the risk of the theme park business and its location in Rio), we noted that extending the project life may change the outcome.
We then moved from earnings to cash flows, by making three standard adjustments: add back depreciation & amortization (which leaves the tax benefit of the depreciation in the cash flows), subtract out cap ex and subtract out changes in working capital. Finally, we introduced the key test for incremental cash flows by asking two questions: (1) What will happen if you take the project and (2) What will happen if you do not? If the answer is the same to both questions, the item is not incremental. That is why "sunk" costs, i.e., money already spent, should not affect investment decision making. It is also the reason that we add back the portion of allocated G&A that is fixed and thus has nothing to do with this project.
I have attached the post class test for today, with the solution.

Attachments: Post-class test and solution

3/26/13 This week, we looked at one measure of the quality of a company’s investments: the difference between the return on invested capital and its cost of capital. It seems like a logical extension to argue that well managed firms generate high positive excess returns and badly managed firms do not, but that may be too simplistic. After all, a firm can be endowed with competitive advantages (a great brand name, access to low cost raw materials and patents) that current management have done little to earn. That is partly why I think that this listing of the world’s best CEOs is interesting and debatable.
This list is based primarily on shareholder returns and here are some questions that follow:
What are the determinants of shareholder returns? (Note that you can ask the same question about Jensen’s alphas)
How much or what do CEOs contribute to these determinants and through them to shareholder returns?
What is the relationship between excess returns on projects and high shareholder returns? (Do you think that companies that generate high returns on invested capital, relative to cost of capital, will also generate high returns for stockholders?)
How much of the success at the highlighted companies can be attributed to luck, rather than management skill? How can you separate the two?
If you were constructing a list of the top CEOs, what would you use as your criteria?
I know that you are busy with the case, but since these questions will come up when you do your regular project, I thought it would be worth the time

In today's session, we made the transition fully to time weighted, incremental cash flow returns by introducing two measures: the NPV and IRR. With the Disney theme park, we brought in what happens after year 10 with a growing perpetuity to get a terminal value and as a result, both the NPV and IRR signaled a "good" project. We also looked at what would happen if we did everything in nominal reais, concluding that using adjusting both exchange rates (and cash flows) and discount rates for differential inflation would leave the NPV unchanged. Finally, we looked at three tools for dealing with uncertainty: payback, where you try to get your initial investment back as quickly as possible, what if analysis, where the key is to keep it focused on key variables, and simulations, where you input distributions for key variables rather than single inputs. Ultimately, though, you have to be willing to live with making mistakes, if you are faced with uncertainty.
I also mentioned Edward Tufte's book on the visual display of information. If you are interested, you can find a copy here:
It is a great book! I also talked about Crystal Ball in class. You have access to it as a student at Stern, at least on the school computers.
I am attaching the post-class test and solution for today's class. Give it a shot, when you get a chance.

Attachments: Post-class test and solution


know that you have lots of other stuff on your plate right now and are not really thinking about corporate finance (I find that hard to believe but then again, I am biased..) In case your fascination with corporate finance leads you to work on the case, here are a few suggestions on dealing with the issues.
a. Do the finite life analysis first. It is more contained and easier to work with. Then, try the longer life analysis. It is trickier...
b. If you find yourself lacking information, make reasonable assumptions. Ignoring something because you don't have enough information is not a good choice.
c. I think the case is self contained. For your protection, I think you should stay with what is in the case. You are of course not restricted from wandering off the reservation and reading whatever you want on apparel manufacturing and retailing, but you run the risk of opening up new fronts in a war (with other Type A personalities in other groups who may be tempted to one up by bringing in even more outside facts to the case) that you do not want to fight. And please do not override any information that I have given you in the case. (I have given you a treasury bond rate and a risk premium, for instance.)
d. There are accounting and tax rules that you violate at your own risk. For instance, investing in production capacity is always a capital expenditure. At the same time, make your life easy when it comes to issues like depreciation. If nothing is specified about deprecation, use the simplest method (straight line) over a reasonable life.
e. There is no one right answer to the case. In all my years of providing variations of this case, I have never had two groups get the same NPV for a case. There will be variations that reflect the assumptions you make at the margin. At the same time, there are some wrong turns you can make (and i hope you do not) along the way.
f. Much of the material for the estimation of cash flows was covered today and in the last session. You can get a jump on the material by reviewing chapters 5 and 6 in the book. The material for the discount rate estimation is already behind us and you should be able to apply what we did with Disney to this case to arrive at the relevant numbers.
g. Do not ask what-if questions until you have your base case nailed down. In fact, shoot down anyone in the group who brings up questions like "What will happen if the margins are different or the market share changes?" while you are doing your initial run...

As I mentioned in class, Crystal Ball is probably not going be very useful to you on this case, but you should be able to play with it on the school computers. If you want to look at the product, you can download a trial version (you can use it for 15 days) at the Oracle site:
It is really fun to use (I know that sounds sick, but give it a shot... ) It works only on a PC (one of my pet peeves). So, if you have a Mac (like I do), you have to run Parallel or Virtual PC to get it to work

3/29/13 I know that you are working on the case right now and that the project is on the back burner. When you get back to it, though, one of the questions that you will be addressing is whether your company's existing investments pass muster. Are they good investments? Do they generate or destroy value? To answer that question, we looked at estimating accounting returns - return on invested capital for the overall quality of an investment and the return on equity, for just the equity component. By comparing the first to the cost o capital and the second to the cost of equity, we argued that you can get a snapshot (at least for the year in question) of whether existing investments are value adding.
The peril with accounting returns is that you are dependent upon accounting numbers: accounting earnings and accounting book value. In the webcast for this week, I look at estimating accounting returns for Walmart. Along the way, I talk about what to do about goodwill, cash and minority interests when computing return on capital and how leases can alter your perspective on a company. Here are the links:
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/ROIC.mp4
Walmart: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pdf (This year's 10K) and https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10Klast year.pdf (Last year's 10K)
Spreadsheet for ROIC: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmartreturncalculator.xls
I hope you get a chance to watch the webcast. It is about 20 minutes long

The newsletter for the week is attached.

Attachment: Newsletter #7

3/31/13 I promise you that I will not bring up Apple, since you are probably sick and tired of the company by now. This week, we will continue to talk about measuring investment returns. We will start tomorrow by using the Aracruz paper plant to describe how an "equity" based capital budgeting is different from an overall project based capital budgeting and then talk about how acquisitions are really very big capital budgeting projects. We will then return to the roots of investment returns and contrast the time weighted investment return measures (NPV & IRR) and why they (sometimes) can give you different answers.
On Wednesday, we will start with a discussion of the Apple iTV case (hence, the deadline that the case reports be turned in by 10.30 am) and then spend the rest of the session talking about side costs and side benefits that sometimes may lead you to invest in a project that has a negative NPV. We will close with an examination of how there can be options embedded in investments (to expand, delay and abandon) that can also alter decisions.

I am sorry about the technical glitches at the start of the class.... but all's well that ends well.. We started today's class by looking at how things change when you look at a project with an equity investor's perspective: the investment becomes just the portion that is put up by equity investors, income is defined as net income (and thus after interest expenses) and the cash flows are those left over after debt payments. The measures of return also shift to return on equity and NPV/IRR to equity investors, with the cost of equity becoming the hurdle to beat. We also argued that acquisitions are just large projects, governed by the same rules that any other project is governed by.
In the second part of the session, we looked at mutually exclusive investments and why NPV and IRR may give you different answers: a project can have more than one IRR, IRR is biased towards smaller projects and the intermediate cash flows are assumed to be reinvested at the IRR. As to which rule is better, while NPV makes more reasonable assumptions about reinvestment (at the hurdle rate), companies that face capital rationing constraints may choose to use IRR...
In the meantime, you have all of the tools you need to address the Apple iTV project. Please send your group project report as a pdf file with "I want my Apple iTV" as the subject. Please put the decision you made on the investment (Accept or Reject), the cost of capital that you used and the NPV of the project on the cover page. Until next time!

Attachments: Post-class test and solution


I know that you are busy right now, but I posted my weekly puzzle for the week on sunk costs. It has three very short articles: one is on the original Concorde Fallacy, the second is from the Financial Times on how killing bad projects is the best innovation and the third is from my blog on the Yankees' A Rod problem. If you are a Yankee fan, read just the last one. If you are a Yankee hater, you will like it even more. If you don't follow baseball, give it a shot any way:
The Concorde Fallacy: http://www.forbes.com/sites/jimblasingame/2011/09/15/beware-of-the-concorde-fallacy/
The FT article on killing projects: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/killingprojects.pdf
My blog post on A Rod: http://aswathdamodaran.blogspot.com/2012/10/the-yankees-rod-problem-sunk-costs-and.html
I have some questions about sunk costs...
Questions about sunk costs: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/sunkcostquestions.pdf

On the case, I hope that you are approaching closure. If you have the numbers already, could you please email me the following?
Cost of capital used:
Return on capital: (Either finite or longer life)
NPV (finite - 10 year life):
NPV (longer life):
Thank you! Until next time!


The bulk of today's class was spent on the Apple iTV case. While the case itself will soon be forgotten (as it should), I hope that some of the issues that we talked about today stay fresh. In particular, here were some of the central themes (most of which are not original):
Theme 1: The discount rate for a project should reflect the risk of the project, not the risk of the company looking at the project. Hence, it is the beta for electronics companies that drives the cost of capital for the iTV project, rather than the cost of capital for Apple as a company. That principle will get revisited when we talk about acquisition valuation... or in any context, where risk is a consideration.
Theme 2: To get a measure of incremental cash flows, you cannot just ask the question, "What will happen if I take this investment?". You have to follow up and ask the next question: "What will happen if I don't take the investment? It is the incremental effect that you should count. That was the rationale we used for counting the savings from the capacity expansion that would have happened anyway in year 9
Theme 3: If you decide to extend the life on an investment or to make earnings grow at a higher rate, you have to reinvest more to make this possible. In the context of the case, that is the rationale for investing more in capital maintenance in the longer life scenario than in the finite life scenario. Thus, I am not looking for you to make the same capital maintenance assumptions that I did but I am looking for you to differentiate between the two scenarios.
I have put the presentation and excel spreadsheet with my iTV numbers online:
The post class test and solution for today are also attached.

Attachments: Post-class test and solution


In a little while, the first graded cases will go out. (If you submitted early, you should get it first. If not, you may have to wait longer). As you look at the case and my grading, I will make a confession that some of the grading is subjective but I have tried my best to keep an even hand. I have put together a grading template with the ten issues that I am looking for in the case. When you get your case, you will find your grade on the cover page. You will see a line item that says issues, with a code next to it. To see what the code stands for look at the attached document. In the last column, you will see an index number of possible errors (1a, 2b etc...) with a measure of how much that particular error/omission should have cost the group. I have tried to embed the comment relevant to your case into your final grade. So, if you made a mistake on sunk cost (2a, costing 1/2 a point) and allocated G&A (5, costing 1/2 a point) in your analysis, you will see something like this in your grade for the class (2a,5: Overall grade; 9/10) I hope that helps clarify matters. It is entirely possible that I may have missed something that you did or misunderstood it. You can always bring your case in and I will reassess it.

Attachment: iTV grading guidelines

4/5/13 The first note for the day is that there is an in-practice webcast up and running, just in case you feel the urge to do part 5 of the project. It involves identifying a "typical" project for your company, and unlike the other webcasts, it is not grounded in 10Ks or annual reports. It is short and not particularly intense. The links to the webcast and the slides that accompany it are below:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/typicalproject.pptx
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/typicalproject.mp4
The links are also online on the webcast page for the class.
On a different note, the second quiz is on Wednesday and will follow the same script as the first one. It will cover the material since the first quiz, which is the pretty much the rest of packet 1 (from cost of capital to investment analysis). There will be a review session in KMEC 1-70 from 12-1 on Tuesday, April 9. I know that many of you will not be able to make it to the session but it will be webcast. The quiz itself will be from 10.30-11 on Wednesday across three rooms, with the room assignments as follows:
If your last name starts with Go to
A - L Paulson
M- T KMEC 2-60
U - Z KMEC 2-70
The past quizzes are online, as are the solutions, but the links are below:
Past quiz 2s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz2.pdf
Solution to past quiz 2s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz2sol.xls
Finally, the case, as I mentioned in an earlier email, was a good practice ground for the quiz. I will try get all your cases back to you by Monday. Until next time!

The newsletter for the week is attached. I am working my way through the cases and am down to the last 15 (out of 75). I should have those back to you by tomorrow evening. Finally, the chapters in the book that apply for the quiz are the last part of chapter 4 (on cost of debt & capital), chapter 5 and chapter 6. Of course, you could blow this off and just enjoy the weather... which is what I would do... Oh... one final reminder. We will be starting on packet 2 next week, perhaps as early as Monday. So, please buy it, steal it, print it or download it... (It is on the usual places...)

Attachment: Newsletter #8


I think all the cases are done and you should have got them already. It is entirely possible that a couple slipped through my fingers. If so, please email me with your case attachment again (with no changes of course.. I will go back and find your original submission in mailbox and get it graded. I am attaching that grading code that I had sent you before, so that you can make some sense of your grade. If you feel that i have missed something in your analysis, please come by and make your argument. I am always willing to listen....

After 80+ cases, I am a little sick of Apple iTV... and I am sure you are too, but I thought that it would be a good time to talk about some key aspects of the case:
1. Beta and cost of equity: The only absolute I had on this part of the case was that you could not under any conditions justify using Apple's beta to analyze a project in a different business. However, I was pretty flexible on different approaches to estimating betas from the list of apparel firms. While I did not penalize any group for adopting a different way of estimating this apparel company beta, here are my thoughts on your choices:
a. Averaging approach: As I noted during the session, be wary of using simple averages for betas, D/E ratios and cash/value ratios when there are outliers. I used the median but I am also okay with using an aggregate debt to equity ratio (add up the total debt and divide by the total equity for the sector)>.
b. Sample size: I gave you a sample of dozens of firms but some of you chose to use a smaller sample, restricting yourself to only large cap firms, for instance. I don't have an issue with this and I did not hold it against you, if you chose this path, but you need to be careful about sample size. A few groups creates samples as small as five firms and if you do that, you start losing the benefits of bottom up betas. So, keep that in mind as you do this for your big project. It is better to have a sample of 20 firms that are different form your firm than 3 firms just like yours.

2. Cost of debt and debt ratio: If there was one number that most groups agreed on, it was that the cost of debt for Apple was 4% (the riskfree rate + default spread).
On the debt ratio, the only item is leases, there were variations in what you assumed would happen with the lump sum in year 6. I spread it over 3 years but I am fine with groups that used 4 or even 5 years to spread it out. It has only a small impact on the value.

3. Cash flows in the finite life case: I won't rehash the arguments about why we need to look at the difference between investing in year 3 and year 9 for computing the distribution system cost. Many of you either ignored the savings in year 9 or attempted to allocate a portion of the investment in year 3, a practice that is fine for accounting returns but not for cash flows. But here were some other items that did throw off your operating cash flows:
a. Interest expenses: The cash flows that you discount with the cost of capital should always be pre-debt cash flows. That is why it does not make sense to subtract out interest expenses before you compute taxes and income. If you do that, you will double count the tax benefits of interest expenses, once in your cash flows (by saving taxes) and once in your discount rate, through the use of an after-tax cost of debt.
b. Working capital: The working capital was fairly clearly delineated but there were three issues that did show up. One is that a few groups used the total working capital every year, instead of the change, which is devastating to your cash flows. The other is that the working capital itself was sometimes defined incorrectly, with accounts payable being added to accounts receivable and inventory. Third, the fact that working capital investments have to be made at the start of each year means that the change in working capital will lead revenues by a year; many of you had the change in the same year or even lagging revenues
c. G&A: The non-incremental portion of G&A has to be added back to earnings, because it should not have been subtracted out. While many groups did do this, a few added back the entire amount, instead of the amount (1- tax rate). The reason you have to do this, is because if the expense is non-incremental, the tax benefit you get from it is also non-incremental. Adding back the after-tax amount eliminates both.
d. Capital maintenance: While I am glad that some of you were thinking about capital maintenance, putting in a large capital maintenance in the finite life case is unfair to that scenario. Why would you keep investing larger and larger amounts of money into a business as you approach the liquidation date? However, I allowed for some flexibility on this issue.
e. Salvage value: The salvage value should include both the working capital salvaged as well as the billion in fixed non-depreciable assets.

4. Cash flows in the infinite life case: The key in this scenario is that you need more capital maintenance, starting right now. (Here is a simple test: If your after tax cash flows from years 1-10 are identical for the 10-year life and longer life scenarios, you have a problem...) Though some groups did realize this, they often started the capital maintenance in year 11, by which point in time you are maintaining depleted assets. Those groups that did not include capital maintenance at all argued that they felt uncomfortable making estimates without information. But ignoring something is the equivalent of estimating a value of zero, which is an estimate in itself. Also, you cannot keep depreciation in your cash flows (in perpetuity) and not have capital maintenance that matches the depreciation, since you will run out of assets to depreciate, sooner rather than later. The basis for capital maintenance estimates should always be depreciation and your book capital; tying capital maintenance to revenues or earnings can be dangerous. The other big input is the growth rate in perpetuity. The easiest and safest growth rate is the inflation rate. Using a growth rate much higher than inflation implicitly assumes real growth in perpetuity, which requires capital expansion (with associated costs). And using any growth rate that exceeds the riskfree rate is absolutely deadly if you do not invest in new capacity.

Now that the case is behind us, time to get ready for a busy week coming up. Tomorrow, we will finish our discussion of investment returns by talking about side costs and side benefits of many types and follow up by looking at very generally at options to delay, expand and abandon that can lead firms to take investments that do not pass financial muster. We will probably start on financing choices tomorrow and continue with the trade off between debt and equity after the quiz on Wednesday. So, please do bring packet 2 to class with you.


In today's class, we closed the books on investment analysis (literally, since we finished packet 1). We began by looking at creating an online retail store for Bookscape and rejected the idea, because the NPV was negative. We did use the cost of capital for being in the online business, when making the assessment, since it is a different line of business. We then looked at the cost of excess capacity, arguing that there is usually a cost to using excess capacity for a new project, because you run out of capacity sooner. You can either build/buy capacity earlier rather than later (and the cost is the PV of the difference) or you can cut back sales (and the cost is the PV of lost profits).
We then looked at two examples of synergy. In the first, we looked at Bookscape adding a cafe to its bookstore, where the synergy takes the form of higher book sales and the resulting cash flows. In the other, we looked at the Sensient acquisition by Tata Chemicals, and the synergy there was in opening up the Indian market for Sensient's products. There were three mechanical elements that affected the value of synergy in this case. The first was that we did the analysis entirely in rupees and therefore had to adjust the US $ cost of capital to make it a rupee cost of capita ( by talking into account the inflation differential). The second was that the synergies came entirely from Sensient's products, leading us to use its beta in the cost of equity computation. The third wa that you had to wait three years to see the synergies, which we captured by discounting the value of synergy back three years.
In the final part of investment analysis, we looked at past projects, first in a postmortem, measuring the actual cash flows against expectations. We then used the information from the past to refine our estimates of future cash flows, which we then used to determine what the optimal path was going forward: abandonment, if the expected cash flows were negative, liquidation, if the salvage value > ongoing value, divestiture, if we can divest the business for more than the ongoing value or continuation.
We closed the class by framing what is coming in the next part of the class: the financing decision. We contrasted the properties of debt versus equity and talked about how the choice can vary across a company's life cycle. I have attached the post class test & solution for today. A reminder again that the review session tomorrow will be from 12-1 in KMEC 1-70.

Attachments: Post-class test and solution


If you were unable to make it to the review session, I have the webcasts up and running in all the usual places (on the webcast page for the class, on Lore and on iTunes U). Unfortunately, I ran about 4-5 minutes over and the webcast ends on slide 23. Rather than leave you in the dark, and suspicious about what pearls of wisdom I may have let loose in the last 5 minutes, I recreated those last 5 minutes in the friendly confines of my office. Here are the links to the webcasts and the presentation:
The powerpoint slides: https://www.stern.nyu.edu/~adamodar/pptfiles/acf3E/reviewQuiz2.ppt
The webcast in class:
Rich Media Playback: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/a4c060c6-98e5-42ff-876d-4564ec18c684
Vodcast Playback: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/a4c060c6-98e5-42ff-876d-4564ec18c684/media.m4v
Podcast Playback: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/a4c060c6-98e5-42ff-876d-4564ec18c684/media.mp3
The add on webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/reviewQuiz2addon.mp4

Attachments: Review presentation

4/9/13 I know that you are absolutely no mood to do something on this tonight, but perhaps later this week... JC Penney announced that their current CEO, Ron Johnson, who was brought into Penney by Bill Ackman, the activist investor, to turn the company around would be stepping down and would be replaced by Mike Ullman, the old CEO he replace.
One reason is that the turnaround has not worked so far, as can be seen in the financials of JC Penney (attached).
The question, though, is whether anything will work to turn this company around. It is human nature to believe that with the right people and policies, any company can be turned around but that is hubris. Sometimes, the forces of the market and competition line up so strongly that a company cannot be turned around. Is JC Penney one of those companies? Would you be willing to step in and be CEO? Assuming that the end game is to wind the company down, how would you run the company? All interesting questions that we will see played out over the next few months or years.
Think about it, when you get a chance. But get through the quiz first. Until next time!

I know that you probably had a tough time keeping focus after the quiz, but enough about the quiz. In today's class, we explored the trade off that animates the financing decision. Looking at the debt versus equity choice, the biggest benefit of borrowing is a tax benefit, increasing with the marginal tax rate. Consequently, you would expect companies that face high marginal tax rates to borrow more than those that face lower or no taxes (REITs, cruise line companies). The second benefit is a more subtle one: debt can make managers at some companies (mature, cash generating and widely held) more disciplined in their project choice.
On the other side of the equation, debt creates three costs. The first is an expected bankruptcy cost, a function of the probability of bankruptcy (increasing with the riskiness of the business/cash flows) and the costs of bankruptcy (including both direct, deadweight costs of going bankrupt and indirect costs associated with being perceived as being in trouble). The second is an agency cost, arising from the very different interests and stockholders and lenders, and manifested in either higher interest rates to borrowers or covenants. The third is the cost of lost flexibility, when you use debt capacity today that you could have used in the future.
This trade off will be quantified in the sessions to come, but start thinking about it in qualitative terms for the moment. I am attaching the post class test and solution.

Attachments: Post-class test and solution


The good news: the quizzes are done and can be picked up. The bad news: I hope there is none. You can pick the quizzes up just outside the front door to the finance department. They are in neat, alphabetical piles (A-G, H-O, P- Z). Please just take your quiz and don't browse. I have also made copies of the solutions (to both quizzes) and a distribution for the grades. I have attached copies to this email and put the links up on line (One way or the other, you should be able to get to them).
On the quiz itself, there was no single problem that gave everyone trouble but there were common trouble spots on each one. On problem 1, it was converting the US $ cost of capital into a rupee cost of capital. On problem 2, it was getting the change in working capital right and salvaging it. On the third, it was converting present values into annuities, since the projects had different lives...

It is also a good point in the class to pause and reflect. We are now two quizzes and a case into the class. If you have done well so far, remember that they collectively account for only 30% of your grade... so, more work to do. If you have done badly so far, remember that they collectively account for only 30% of your grade... please don't abandon hope.. you can salvage the class. The key though is to manage the remaining five weeks of the class well, starting with the big project... To get you restarted on that venture (which I know has been on the back burner for a while, I will send you an email later today).

Finally, I know that the quizzes, at 30 minutes apiece, have seemed like speed derbies to some of you. I know that it is easy to panic over that short a period and that is does not seem fair. However, it is my belief that one of the key skills in finance is to be able to react quickly to numbers and get a sense of what the answer is even before you get started. I call it Shark Tank Finance (Have you seen the show? If you have not, you are missing a great experience in valuation and finance...http://abc.go.com/watch/shark-tank/225872 ) and it is also an acquired skill. I know it is not fair, since those who have been around numbers all their lives have acquired the skill already....but if you can hang in there, you too can be up at the table bantering with Mark Cuban about how much a business is worth...

Attachments: Solution (a or b)as well as the distribution of grades


I know that you just got back your quiz and you are in no mood for corporate finance but this is a great weekend to get caught up with your big project. We are in the capital structure section and the first thing you can do (if you remember what company you are analyzing) is to take it through the qualitative analysis, i.e., the trade off items on capital structure:
a. Tax benefits: Check out your company's marginal tax rates, relative to those of others in your group. If you have the only Irish company in your group, you have the lowest marginal tax rate in your group and other things remaining equal, should have the least debt.
b. Added discipline: Go back and check the HDS page (with the top 17 stockholders in your company). If you don't see anyone from your management team in that list and no activist investors (Carl Icahn or Bill Ackman), your company could benefit from having more debt (to discipline management).
c. Bankruptcy cost: To assess your company's expected bankruptcy cost, look at two variables. The first is whether they are in a stable or risky business. If you are in a risky business, you have a much higher risk of bankruptcy than if you are in a nice safe business. The second is indirect bankruptcy cost. As I noted in class, these are the negative consequences of being viewed as being in financial trouble: customers stop buying, suppliers demand cash and customers leave. If those costs can be high at your company, you should borrow less money.
d. Agency costs: The more trouble lenders have in monitoring and keeping track of the money that they lend, the more borrowers will have to pay to borrow. Thus, if your company has intangible assets and difficult-to-monitor investments (R&D, for example), it should borrow less money.
e. Financial flexibility: If the investment needs in your company tend to be stable and predictable (a regulated utility, for instance), you should not value flexibility very much. If you grow through acquisitions and/or are in an unstable business, you will value it more and borrow less.
At the end of the qualitative assessment, you are just trying to decide whether you would expect your company to borrow no money, only some money or a lot of money.

Today's in practice webcast takes you through the process of assessing this trade off, with suggestions on variables/proxies you can use to measure each of the above factors. If you are interested, here are the links:
Webcast: https://dl.dropboxusercontent.com/u/24597893/CFSpr13/Webcasts/tradeoffdebt.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/tradeoffdebt/debttradeoff.ppt
Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/tradeoffdebt/tradeoffHP.xls
I am also attaching two spreadsheets: one contains the marginal tax rates by country and the other has the average effective tax rates by sector for US companies.

Attachments: Marginal tax rates by country, Effective tax rates by sector (US)


Time for the weekly event or non-event of the newsletter. If you are so inclined, please do take a look. Just as an update, we will continue with the discussion of capital structure in the next week and come up with ways of finding the "optimal" mix for a firm. Until next time!

Attachment: Newsletter #9


In the next week, we will go beyond the trade off on debt and use the cost of capital as a tool for coming up with the optimal. In tomorrow's class, we will begin by looking at one of corporate finance's best known (and most misused) theorems: the Miller Modigliani theorem. After looking at the financing hierarchy that firms seem to follow, we will try the cost of capital approach on Disney to come up with the optimal debt ratio for the company. We will then use the optimal to follow up and examine why it makes sense to move to the optimal and considerations that may hold a firm back. In Wednesday's class, we will continue looking for tools to assess the optimal mix for a company and use them on Disney, Aracruz and Tata Chemicals.
If you really want to get a jump on the week, you can also compute the optimal capital structure for your firm, ahead of tomorrow's class. Gather up your financial statements and then do the following.
1. Go online to
Download the excel spreadsheet called capstru.xls and save it. 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, answer "No" to the question on indirect bankruptcy costs (B23) and Yes to the last two question (B32 and B33).
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... but it is easier to download a fresh version of the spreadsheet than to fix the error.
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....)
It should take about 20 minutes to do (and I am not being facetious...).

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 the "little red hen principle" is in, here is a link:

Until next time!

Attachment: Optimal capital structure spreadsheet


In today's class, we started with the trade off on debt and used it to derive the Miller Modigliani theorem that debt is irrelevant to value, if you live in a world with no taxes, default risk and agency costs. We then looked the financing hierarchy that firms seem to follow: retained earnings is the most preferred financing source, followed by debt, new stock issues and preferred stock. Observing what type of financing a firm uses will give you a window into its financial health.
We then started on the cost of capital approach to deriving an optimal financing mix: the optimal one is the debt ratio that minimizes the cost of capital. To estimate the cost of capital at different debt ratios, we estimated the levered beta/ cost of equity at each debt ratio first and then the interest coverage ratio/synthetic rating/cost of debt at each debt ratio, taking care to ensure that if the interest expenses exceeded the operating income, tax benefits would be lost.
Again, if you get a chance, please try the optimal capital structure spreadsheet (attached again) for your firm and bring your output to class on Wednesday. Until next time!

Attachments: Post-class test and solution, Optimal capital structure spreadsheet


Three quick notes. First, I have updated the email chronicles to reflect all emails through yesterday. I am sorry, but I slacked off for a couple of weeks in the middle.

Second, I know that I have been emailing you bits and pieces of the project each week (reminders, spreadsheets, data and webcasts). I thought it might help if I pulled them all on to one resource page.
I hope you find it useful.

Third, the weekly puzzle for this week revolves again around Dell. A few weeks ago, I used Dell to talk about corporate governance questions. This week, I want to return and examine whether Dell is a good candidate for all of the additional debt that all three groups that are trying to take over Dell are planning to take on. Carl Icahn is talking about borrowing $9 billion and paying a dividend of that amount. This is a dividend recapitalization and I have attached another article about the surge in dividend recaps in Europe.
I have also attached the financials for Dell and my estimate of the optimal debt ratio for Dell.
My estimate is that Dell has an optimal debt to capital ratio of 50%. It is currently at just over 27% but with the new debt in each of the three proposals, it will be at about 60% debt.

Finally, if you do get a chance to estimate the optimal debt ratio for your firm, please do (and bring it to class with you)! Until next time!


In today's class, we extended the discussion of optimal capital structure by looking at three follow up questions after finding the optimal debt ratio: Why should you move to the optimal? What if something goes wrong? What if we don't want to buy back stock or pay dividends? On the first question, we looked at the change in value from moving to the optimal and computed a break even price for the stock buyback; paying the break even price gives every investor the same share of the increase in value. On the second question, we asked both what if questions (about the operating income) and put a bond rating constraint (a minimum acceptable rating) on the firm. On the third, we argued that the optimal would not change much if the new investments that the firm was planning to make were in the businesses it is in already but could change if the investments were in new businesses.
We then followed up by looking at the optimal debt ratio for Tata Chemicals (to illustrate the cross subsidization that happens in family group companies), Aracruz (to argue for the use of normalized earnings for cyclical & commodity companies) and Bookscape (t to talk about the modifications that we have to make in computing the optimal for private businesses). We also talked about the "optimal financing" choices for financial service firms, by redefining capital as just equity capital and focusing on regulatory capital ratios.
In the final part of the class, we looked at four determinants of optimal debt ratios, the marginal tax rate (higher -> higher optimal), current cash flows as a percent of value (higher - Higher optimal), risk (higher -> lower optimal) and the relative risk premiums in equity and bond markets. Please do work on not only getting the optimal debt ratios for your firms but also on looking at why you are getting the optimal that you are. In the meantime, here are the post class test and solution for today's class (I don't have the webcast links yet.. Will post them when I get them).

Attachments: Post-class test and solution

4/18/13 Since we spent the bulk of the week talking about the optimal capital structure spreadsheet, you already know that you should be working towards that section in your project. I would like to use this email to clarify the end game for the project, not so much to scare you but to provide you with some guide posts along the way:
1. Resource page: I put the link up to the corporate finance resource page, where I will collect the data, spreadsheets and webcasts that go with each section of the project in one place to save you some trouble:
I will be putting a webcast on the optimal capital structure spreadsheet online tomorrow.
2. Main project page: I had mentioned the main page for the project at the very start of the class, but I am sure that it got lost in the mix. So, just to remind you, there is an entry page for the project which describes the project tasks and provides other links for the project:
It also has sample projects from prior years that you can browse through.
3. Project formatting: I guess some of you must be starting on writing the project report or some sections thereof. While there is no specific formatting template that I will push you towards, I do have some general advice on formatting and what I would like to see in the reports:
Note, in particular, my plea for brevity. I have put a page limit of 25 pages on your entire written report (You can add appendices to this, but use discretion).
4/19/13 I know that I have been nagging you to get the optimal debt ratio for your firm done. To bring the nagging to a crescendo, I have done the webcast on using the cost of capital spreadsheet, using Dell as my example. You can find the webcast and the related information below:
Webcast: https://dl.dropboxusercontent.com/u/24597893/CFSpr13/Webcasts/optdebt.mp4
Dell 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/optdebt/dell10K2013.pdf
Dell optimal capital structure spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/optdebt/dell10K2013.pdf
As I was going through the spreadsheet, I did notice a few things that can give rise to confusion (especially the wording about long term debt). I have fixed the confusing parts (for the most part) and added some tweaks that will allow you to do diagnostics more easily on your firm. So, if you have been procrastinating and have not used the spreadsheet yet, I have attached the new, improved, better version. If you have already entered the numbers into the spreadsheet, in spite of my confusing directions, you can always check the new version to see if you get a different answer. Until next time!
Attachment: Optimal capital structure spreadsheet

I hope you are enjoying this great weekend! I will keep this short. The newsletter for the week is attached. If you do get a chance, watch the webcast on using the optimal capital structure spreadsheet that I put up on the webcast page yesterday.

Attachment: Newsletter #10

4/21/13 As we approach the closing weeks for the class, we will continue with our discussion of optimal capital structure tomorrow by looking at two more approaches to coming up with the optimal: the adjusted present value approach and the "relative" approach. We will then look at the follow-up to the optimal capital structure analysis, i.e., what the next steps are if a firm is under or over levered. We will them move on to the basics of designing the perfect debt for a firm, both in intuitive terms and by using a quantitative approach. So, if you have the optimal debt ratio for your firm worked out, bring it to class with you tomorrow. We have work to do.. Until next time!

In today's session, we looked at two other ways of deriving the optimal debt ratio for a firm. In the adjusted present value approach, we looked at the impact of debt on value by starting with the unlevered firm value, adding the tax benefits of debt and subtracting out expected bankruptcy costs. The optimal debt level is the one that maximizes the firm value. While the estimation of expected bankruptcy cost is the weak link in this model, you are welcome to try it out on your company, using the spreadsheet linked to this email.
We also looked at comparing a company's debt ratio to the sector average debt ratio. You can find sector average debt ratios for companies broken down globally by going to:
Scroll down the page to the debt ratio trade off variables by industry and you can download the dataset for the region of the world that you are most interested in.
If you stay on the same page and scroll down a little further, you will see the link to the market regression for debt ratios updated to 2013.
You can plug the numbers in for your company into this regression to get a predicted debt ratio.
In the final part of the class, we looked at applying closure to the optimal debt ratio analysis by looking at how quickly you should move to the optimal and what actions to take (recap versus taking projects), drawing largely on numbers that we have estimated already for the company (Jensen's alpha, ROC - Cost of capital).
I have also attached today's post class test & solution. Until next time!

Attachments: Post-class test and solution


This week's puzzle lays the foundation for what we will talk about tomorrow: the perfect financing vehicle. Specifically, the perfect financing for a firm will combine the best of equity (the flexibility it offers you to pay dividends only when you can afford them) with the best of debt (the tax advantages of borrowing). While this may seem like the impossible dream, companies and their investment bankers constantly try to create securities that can play different roles with different entities: behave like debt with the tax authorities while behaving like equity with you. In this week's puzzle, I look at one example: surplus notes. Surplus notes are issued primarily by insurance companies to raise funds. They have "fixed' interest payments, but these payments are made only if the insurance company has surplus capital (or extra earnings). Otherwise, they can be suspended without the company being pushed into default. The IRS treats it as debt and gives them a tax deduction for the interest payments, but the regulatory authorities treat it as equity and add it to their regulatory capital base. The ratings agencies used to split the difference and treat it as part debt, part equity. The accountants and equity research analysts treat it as debt. In effect, you have a complete mis mash, working to the insurance company's advantage.
What are surplus notes? http://en.wikipedia.org/wiki/Surplus_note
The IRS view of surplus notes: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/taxview.pdf
The legal view of surplus notes: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/courtview.pdf
The ratings agency view of surplus notes: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/ratingsviewnew.pdf
The regulator's view of surplus notes: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/regulatorview.pdf
The accountant's view of surplus notes: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/weeklypuzzles/surplusnotes/GAAPview.pdf
After you have read all of these different views of the same security, try addressing some of the questions in the attached document.

Attachment: Questions


In today's class, we looked at the design principles for debt. In particular, we noted the allure of matching up debt cash flows to asset cash flows: it reduces default risk and increases debt capacity. We then looked at the process of designing the perfect debt for your company, starting with the assets you have, checking to see if you still get your tax deduction, keeping different interest groups happy and sugarcoating the bond enough to make it palatable to bond holders.
We then went through three basic approaches to debt design: an intuitive assessment of a company's products and pricing power, an analysis of expected cash flows on a single project and a macro economic regression of firm value/operating income against interest rates, GDP, inflation and exchange rates.
Keeping in mind the objective of matching debt to assets, think about the typical investments that your firm makes and try to design the right debt for the project. If your firm has multiple businesses, design the right kind of debt for each business. In making these judgments, you should try to think about
- whether you would use short term or long term debt
- what currency your debt should be in
- whether the debt should be fixed or floating rate debt
- whether you should use straight or convertible debt
- what special features you would add to your debt to insulate the company from default
Your objective is to get the tax advantages without exposing yourself to default risk. If you want to carry this forward and do a quantitative analysis of your debt, I will send you a spreadsheet tomorrow that will help in the macro economic regressions. The post class test & solution for today is attached. Until next time!

Attachments: Post-class test and solution


If you have done the intuitive analysis of what debt is right for your firm, you can try to do a quantitative analysis of your debt. I have attached the spreadsheet that has the macroeconomic data on interest rates, inflation, GDP growth and the weighted dollar from 1986 to the present (I updated it this morning to include 2012 data. The best place to find the macro economic data, if you want to do it yourself, is to go to the Federal Reserve site in St. Louis:
Give it a shot and download the FRED app on your iPad and iPhone. You can dazzle (or bore) your acquaintances with financial trivia.

You can enter the data for your firm and the spreadsheet will compute the regression coefficients against each. You can use annual data (if your firm has been around 5 years or more). If it has been listed a shorter period, you may need to use quarterly data on your firm. The data you will need on your firm are:
- Operating income each period (this is the EBIT)
- Firm value each period (Market value of equity + Total Debt); you can use book value of debt because it will be difficult to estimate market value for each period.

The easiest way to get this data is to use the FA function in Bloomberg and choose the income statement items for operating income and the enterprise value breakdown. You can print off either annual or quarterly data.

I have to warn you in advance that these regressions are exceedingly noisy and the spreadsheet also includes bottom-up estimates by industry. There is one catch. When I constructed this spreadsheet, I was able to get the data broken down by SIC codes. SIC codes are four digit numbers, which correspond to different industries. The spreadsheet lists the industries that go with the SIC code, but it is a grind finding your business or businesses. I am sorry but I will try to create a bridge that makes it easier, but I have not figured it out yet.

My suggestion on this spreadsheet. I think it should come in low on your priority list. In fact, focus on the intuitive analysis primarily and use this spreadsheet only if you have to the time and the inclination. My webcast for tomorrow will go through how best to use the spreadsheet. Until next time!

Attachments: Debt design spreadsheet

4/26/13 I know that you are busy but I have put the webcast up on debt design, using Walmart as my example, online (on the webcast page as well as on the project resource page). In the process, I did modify the macrodur.xls spreadsheet I sent you and created a version that is a little simpler to use for the bottom up estimates:
Here are the details on the webcast:
Webcast: https://dl.dropboxusercontent.com/u/24597893/CFSpr13/Webcasts/debtdesign.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/debtdesign/debtdesign.ppt
WMT financial summary: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/debtdesign/WMTFAsummary.pdf
WMT macrodur.xls spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/debtdesign/WMTmacrodur.xls
I hope you get a chance to watch the webcast and design the perfect debt for your firm.

I hope that you are enjoying this absolutely stunning spring day (and if I am rubbing salt in wounds, I apologize). The newsletter for the week is attached. Please read it when you get a chance.
Just a reminder, if you need one, that the third quiz is on Wednesday. The review session will be on Tuesday from 12-1 and all of the past quizzes are online, if you are inclined to try them out:
Past quiz 3s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz3.pdf
Past quiz 3 solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz3sol.xls

Attachment: Newsletter #11


If you have tried to access the in practice webcasts (not the class webcasts), you probably have noticed that the webcasts don't load. Here is why. The links are posted on Dropbox, because server space at Stern in limited. However, Dropbox has a bandwidth constraint, where if your public files downloads exceed 200 GB a day, your account gets suspended for three days. Turns out that the limit was hit yesterday and no more downloads will be allowed for three days. I am looking for an alternate file sharing site but they all have constraints.

In the meantime, though, you can still access the webcasts on Lore or on iTunes U
You should already be logged into the class and the webcasts are accessible. The same is true for iTunes U.

Remember that this does not affect any of the class webcasts, since they are housed on the Stern server. That server has had some isssues, off and on, but the webcasts should be accessible. I am sorry and I am working on fixing the problem.


In today's class, we started on our discussion of the last corporate finance principle: the dividend principle. Having established the fact that dividend policy is often the end result of investing and financing choices, we laid out four basic facts about dividend policy. First, dividends are sticky, i.e., companies are reluctant to change dividends. Second, dividends are affected by tax laws. Third, dividends lag earnings. Fourth, companies are increasingly turning away from dividends to stock buybacks in the search for flexibility.
We then looked the three schools of thought on dividend policy. The first, the Miller-Modigliani school, argues that to the extent that companies can issue stock to replace dividends paid and there are no tax consequences, it should not matter what a company pays in dividends. In effect, investors will just see a remix of the same return, with the dividend and price appreciation parts changing. The second is that dividends are bad, and this school had resonance especially in the days when dividends were taxed at a much higher tax rate than capital gains. The thirds is that dividends are good, because your stockholders like them (clientele effect), they are positive signals or because they transfer wealth from lenders.
In an entirely different context, the quiz will be day after tomorrow and will cover just capital structure (Pages 1-137 in your lecture notes). The review session is tomorrow from 12-1 in KMEC 1-70. The seating arrangement for the quiz is as follows:
If your last name begins with Go to
A - D Paulson
E - L KMEC 2-60
M- P KMEC 2-70
Q - Z Paulson

Attachment: Post-class test and solution


No. I am not channelling my inner Hamlet, but this may be a question that is bugging you. II know you are busy but there are three questions that seem to have come up from reviewing the past quizzes that I want to address:
1. In computing the change in firm value from changing the cost of capital, should you multiply the savings by (1+g)?
I know that the last thing you want to deal with right now is a deep philosophical question but this is one that you will confront again and again as you go through finance. To provide some context, the present value of a growing perpetuity is
PV = Expected cash flow next year/ (r -g)
The key is that the numerator should be the expected cash flow next year. Thus, if you are told that a firm expects to generate $ 100 million in cash flows next year, the present value is
PV = 100/ (r -g)... No need for (1+g) since you already have next year's number
If you are given the cash flow in the current or most recent year, though, you have to grow this number out
PV = 100 (1+g)/(r-g)
In the context of cost of capital changes and computing firm value, it is a little hazy as to what you are estimating when you multiply firm value by the change in the cost of capital.
a. If you are multiplying today's firm value (market value of equity + debt) by the change in the cost of capital, you are getting the savings over the next year. Consequently, you don't need to multiply by (1+g). This is what I assumed in computing the increase in firm value for Disney and there is no (1+g) in the equaitonl
b. If you are multiplying the firm value from the end of the last financial year (which may be 4,6 or even 9 months ago), you are getting a saving from the last year and you should multiply by (1+g)
Needless to say, this is confusing. So, to make things simple, it nothing is stated about the point in time that firm value is computed at, you should ignore the (1+g). I plead guilty to not being entirely consistent on the past quizzes and I am sorry. W I would accept either answer but please specify what you are assuming.

2. What does rational mean?
In many of the problems, I ask you to assume that investors are rational. Basically, what I am asking you to assume that the the investors who sell their shares back get the same share of the increase in firm value as those who do not. Thus, you can divide the change in the firm value by the total number of shares outstanding. We will talk about this more during the review session.

3. How do you adjust ROC for leases?
The PV of leases should be added to the book value of debt, when computing capital invested. The operating income can be adjusted in one of two ways:
Adjusted Operating income = Operating Income + current year's lease - depreciation on leased asset
Operating income = Operating Income + pre-tax cost of debt * PV of leases
They will not give you the same answer but they accomplish the same objective (and you will get full credit either way).


I am attaching the review session presentation to this email. Please download it, if you are coming to the class (or if you need it for the webcast). See you in about 50 minutes. Until next time!

Attachment: Presentation


The review session presentation and links are posted online. They are also listed below:
Rich Media Playback: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/06f05a29-27e4-4e29-8edf-56f88155233d

Vodcast Playback: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/06f05a29-27e4-4e29-8edf-56f88155233d/media.m4v

Podcast Playback: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/06f05a29-27e4-4e29-8edf-56f88155233d/media.mp3

The presentation is attached. I hope you get a chance to watch it.

Attachment: Presentation


I know that you are busy studying for the quiz, but if you can take a few minutes on the puzzle for this week, it may help you on the quiz and will certainly enrich our discussion of capital structure and dividend policy. As you probably know, Apple reported its earnings last week, but the big news was on the financial side: the company announced that it would return about $100 billion in cash to its stockholders in the next two years, with the tilt towards buybacks (feeding nicely into the dividend policy discussion we are having in class right now). The bigger surprise was that Apple opened the door to borrowing conventional debt for the first time in its history. Here is the news story:
The company is planning to borrow $ 17 billion, in a mix of securities (fixed and floating rate, with different maturities). Grist for the mill, right? In keeping with the topics for the quiz, you may want to take a look at the optimal debt ratio that I computed for Apple using the updated earnings report and also look at the debt design and see if it makes sense. I also put this post on Apple on my blog earlier today that brings together much of what we have been talking about in class:
Hope you get a chance to browse through this stuff.

Attachments: An assessment of Apple's optimal capital structure, Questions


Nope. Quizzes are not done yet. Working on them. With the third and final quiz behind you, we are in the home stretch. In today's session, we continued with our discussion of dividend policy by looking at three big factors driving dividend policy. The first was that you acquire an investor base that likes your dividend policy (and a policy of nor paying dividends is a dividend policy). This dividend clientele can sometimes create problems, if your characteristics as a firm changes. The second is the signaling story, i.e., that changes in dividends send signals to the market. While an increase in dividends is usually a positive signal, it can sometimes be a negative signal (for high growth company). Finally, the payment of dividends can transfer wealth from bondholders to stockholders. We ended the class by setting up the process for looking at whether a company is paying out too much or too little in dividends, which we titled the cash trust nexus.
I have attached the post class test and solution to this email.

Attachments: Post-class test and solution


The quizzes are done and are ready to be picked up, in the usual spot. The usual rules apply. Please don't browse and leave the quizzes in the same alphabetical order that you found them. If you have a problem with the grading, bring your quiz in (and don't bug the TAs, since they have nothing to do with the grading). I have attached the solutions/grading template for both quizzes and the distribution. Until next time!

Attachments: Solution (a or b) and distribution of scores


As we work through the analysis of dividend policy, we are setting up for an assessment of dividend policy on Monday where we look at how much a company has returned to its stockholders versus how much it could have. The latter, we will term the free cash flow to equity. Rather than wait until that session is over, you can start estimating both numbers for you company over time. The key is to analyze this over 3-5 years or longer, rather than one year. In the spreadsheet that is attached, I do the mechanics, which are really straightforward to compute the numbers for your company. You can get the webcast by going here:
I have attached Disney's most recent 10K (which I use in the webcast) and the spreadsheet.
If you are the attentive type, you will probably notice that the webcast is now housed on Stern's server, rather than Dropbox. In fact, I have moved all of the previous in practice webcasts which used to be on Dropbox (there might be a few that you still find) to the Stern server, and fixed the links in the webcast page for the class and the corporate finance resource page.
Webcast page: https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr13.htm
Project resource page: https://www.stern.nyu.edu/~adamodar/New_Home_Page/cfprojectresources.html
I will not be in tomorrow, since I have to give a talk in Atlanta. If you have an issue with the quiz grading, I am sorry but it will have to wait until Monday. See you then! Until next time!


  1. Spreadsheet
  2. Disney Annual Report (2012)

I hope you have had a chance to pick up your quiz. As you look at the calendar, there is some bad news and some good news. The bad news is that you have three class sessions and two weekends left in the class. I know that you may be in a bit of a panic, but here is what needs to get done on the project. (I am going to start off from the end of section 5, since I have nagged you sufficiently about the steps through that one).

1. Optimal capital structure: You need to compute the optimal debt ratio for your company
1.1: Estimate the cost of capital at different debt ratios.
Use capstru.xls, if you need to.
1.2: If you want to augment the analysis by using the APV approach (apv.xls), do so. Clearly, these approaches will add value only if you have a sense of how operating income will change as the ratings change for your company or the bankruptcy cost as a percent of firm value.
1.3: Assess how your firm's debt ratio compares to the sector. You can just compare the debt ratio for your firm to the average for the sector. If you feel up to it, you can try running a regression of debt ratios of firms in your sector against the fundamentals that drive debt ratio (Look at the entertainment sector regression I ran for Disney in the notes).

2. Debt design: As you work your way through or towards the debt design part, here are a few sundry thoughts to take away for the analysis:
2.1. The heart of debt design should be the intuitive analysis, where you look at what a typical project/investment is for your firm (perhaps in each business it is in) and design the most flexible debt you can, given the risk exposure.
2.2. The quantitative tools (the regression of firm value/ operating income versus macro variables) may or may not yield useful data. The bottom-up approach (using sector averages) offer more promise. If you have a non-US company, a US company with little history or get strange results, stick with just the intuitive approach. Use the spreadsheet at this link to do both:

2.3: Compare the actual debt to your perfect debt (either from the intuitive approach or from the quantitative approach) and make a judgment on what your company should do.

3. Dividend analysis: We will be developing a framework for analyzing whether your company pays out too much or too little in dividends. You can read ahead to chapter 11, if you want, and use the attached spreadsheet to examine your company. The session on Monday will be a lot easier, if you do one or the other.
3.1: Examine whether your company has returned cash to its stockholders over the last few years (5-10 or whatever time your firm has been in existence) and if yes, in what form (dividends or stock buybacks). The information should be in your statement of cash flows.
3.2: Assess whether your firm is holding back cash or returning in excess by running your numbers through the attached spreadsheet.
You can watch the webcast I posted on Thursday, if you run into questions.
3.3: Make a judgment on whether your company should return more or less cash to its stockholders.

The next section has not been covered yet in class, but you can get a jump on it now, if you want.

4. Valuation: This is a corporate finance class, with valuation at the tail end. We will look at the basics of valuation next week and you will be valuing your company. Since we will not have done much on valuation, I will cut you some slack on the valuation. It provides a capstone to your project but I promise not to look to deeply into it. Knowing how nervous some of you are about doing a valuation, I have a process to ease the valuation: Download the fcffsimpleginzu.xls spreadsheet on my website. It is a one-spreadsheet-does-all and does everything but your laundry.

You will notice that the spreadsheet has some default assumptions built in (to prevent you from creating inconsistent assumptions). I do let you change the defaults and feel free to do so, if you feel comfortable with the valuation process. If not, my suggestion is that you leave the inputs alone.

You will notice that I ask you for a cost of capital in the input page. Since you already should have this number (see the output in the optimal capital structure on section 1), you can enter it. If you want to start from scratch, there is a cost of capital worksheet embedded in the valuation spreadsheet. There is a diagnostic section that points to some inputs that may be getting you into trouble. I also ask you for information on options outstanding to employees/managers. That information is usually available for US companies in the 10K. If you cannot find it, your company may not have an option issue. Move on.

5. Project write-up and formatting: If you are thinking of the write-up for the project and formatting choices, you can look at some past group reports on my site (under the website for the class and project). I prefer brevity. As a general rule, steer away from explaining mechanics - how you unlevered or levered betas -and spend more time analyzing your output (why should your company have a high beta? And what do you make of their really high or low return on capital?). I will send an email just on this part of the process soon.

Ah, where is the good news? You will be done with the project exactly 9 days from today. Finally, in case you have not had enough from me, I am attaching the latest newsletter (Good news. It is the last one!). Until next time!

Attachment: Newsletter #12


As your project winds down (or up), I am sure that there are loose ends from earlier sections that may bother you. In the interests of brevity, I have listed a few of the questions that seem to be showing up repeatedly in emails:

1a. I just discovered that my company lists revenues from "other businesses". How should I treat these in bottom-up beta computations?
If your company tells you what the other businesses are, you can try to incorporate their betas into your bottom up beta. If all you have is a nebulous 'other businesses', I would ignore it in beta computations.

1b. I just discovered that my US company has revenues from other countries (including emerging markets) and in other currencies. How does this affect my cost of equity/debt/capital?
First, if you have chosen to do your analysis in a currency (say US dollars), your riskfree rate will be the riskfree rate in that currency (US treasury bond rate), even if the company has revenues in multiple currencies. Second, your cost of debt will still be that of a domestic company. Coca Cola will not have to pay an Indian country default spread when it borrows money in rupees. If it had to, it would just borrow in the US and use currency derivatives to manage risk. Third, and this is the only place it may make a difference, it may change the equity risk premium you use. Instead of using the mature market premium, you may decide to incorporate the additional risk of some of the countries that you operate in. Note that this is likely only if you know your revenue exposure in some detail and you get significant revenues from emerging market countries (with less than AAA ratings).

1c. What should I be doing with the cash balance that my company has when computing the unlevered beta?
Adjusting betas for cash creates more headaches and confusion than perhaps any other aspect of discount rates. Back up, though. To get the unlevered betas of the businesses that your company is in, you should always start with the average regression beta for the companies in the sector, unlever the betas using the average gross D/E ratio and then adjust for the average cash balance at these companies. (That will yield the unlevered betas corrected for cash for each of the businesses that your company is in).
Now, comes the tricky part. You can compute an unlevered beta for just the operating businesses that your company is in, by taking the weighted average of the unlevered betas of the businesses. You can also compute an unlevered beta for the entire company, with cash treated as an asset/business with a beta of zero. The latter will always be lower than the former. My suggestion is that you compute both.
If you are now computing a cost of equity as an input into the cost of capital, you want to use the unlevered beta of just the operating assets of the business as your starting point for levered beta and cost of equity. That is because the cost of capital is a discount rate that we apply to operating cash flows (and to value the operating assets). In fact, we add the current cash balance to this value, because cash has been kept separated from operating assets. (If you use the lower unlevered beta that you get with cash incorporated into the calculations to get to a cost of capital, you will end up at least partially double counting cash, once by lowering the beta and the cost of capital, and again when you add cash at the end).
When would you use the beta for the company (with the cash beta of zero incorporated into your calculation)? Rarely. Here is one scenario. Let's assume that you are looking at a discounting the dividends of a company or an overall cash flow that is estimated from net income. These cash flows reflect cash flows from all of the company's assets (not just its operating assets) and it is appropriate to use the lower company beta with the cash effect built in.
(If you find this too abstract, go back to lecture note packet 1 and check out pages 164 &165, where I estimated Disney's beta and cost of capital)

2. If I have no or little conventional debt and significant operating lease commitments with no rating, how do I compute a synthetic rating?
If you use just conventional interest expenses and operating income to compute the interest coverage ratio and the synthetic rating, you will overrate companies with lots of leases. You should try to adjust both the operating income and interest expenses for leases. Before you panic, let me hasten to add that all of the spreadsheets that incorporate leases (ratings.xls, capstru.xls and the valuation spreadsheet) do this for you already. If you did build your own spreadsheet, check and make sure that you are incorporating leases.

3. I have a negative book value of equity. How do I compute ROE and ROC?
First the book equity you should use for ROE and ROC should be the total shareholders equity, which can be a negative number. With a negative book value of equity, you cannot compute ROE. You should still be able to compute return on capital, since adding the book value of debt to negative book equity should still lead to a positive book capital. If book capital is negative, though, you cannot estimate return on capital either.

4. My ROE > Cost of equity and my ROC < Cost of capital (or vice versa). How is this possible and how do I explain it?
There are two reasons why the two measures may yield different conclusions:
1. The net income includes income/losses from non-operating assets including cross holdings in other companies. If you have cross holdings that are making you a lot of money, you can end up with a high ROE, even though ROC looks anemic. If you have cross holdings that are losing you money, the reverse can happen. Net income is also affected by other charges (restructuring, impairment etc.) and other income... I trust the ROC measure more when it comes to answering the question of whether the company takes good investments.
2. The ROE reflects the actual interest expense on debt. To the extent that you are borrowing money at rates lower than what you should be paying (given your default risk and pre-tax cost of debt), you are exploiting lenders and making equity investors better off. Thus, you can take bad projects with "cheap" debt and emerge successful as an equity investor. (Think of the LBOs done earlier this year.)

5. My Jensen's alpha is positive (negative) and my EVA is negative (positive). How do I reconcile these findings?
Market prices are based on expectations of how well or badly you will do in the future. To the extent that you beat or fail to meet these expectations, stock prices will rise or fall. Thus, if you are a company that is expected to earn a 30% ROC and you earn a 25% ROC, you will see your stock price go down (negative Jensen's alpha) even though you have a healthy positive EVA. Conversely, if you are a company that is expected to make only a 2% ROC and you make a 3% ROC, you will see your stock price go up (positive Jensen's alpha) while your EVA will be negative.

6. How do I come up with the cash flows and characteristics of a typical project?
I really do not expect you to come up with cash flows. Just describe in very general, intuitive terms what a typical project will look like for your company. For Boeing, for instance, you would describe a typical project in the aerospace business as being very long term, with a long initial period of negative cash flows (when you do R&D and set up manufacturing facilities) followed by an extended period of positive cash flows in multiple currencies.

7. The cost of capital is higher at my optimal debt ratio than at my current debt ratio. Why does that happen and what do I do?
Try the "FAQ" worksheet in the capital structure spreadsheet.

8. If my firm is already at its optimal debt ratio, do I still need to go through the debt design part?
Yes. You still have to determine whether the debt the company already has on it's books is of the right type. The only scenario where you can skip this is if both your actual and optimal debt ratios are zero percent.

9. I cannot do the macro regression (because my company has been listed only a short period or is non-US company). What do I do about debt design?
Skip the macro regression. You can still use the bottom up estimates for the sector in which your firm operates. To do this, you need an SIC code which your non-US company will not have. Look up a US competitor to your company and look up its SIC code. You can also still do the intuitive debt design. (I would do the same if you are getting absurd or meaningless results from your macro regression...)

10. My macro regression is giving me strange look output. What should I do?
Take a deep breath. The macro regression is run with 10 or 11 observations and you can get "weird" output because of outliers. That is why you should look at the bottom up estimates and bring in your views on what a typical project for a company looks like.

11. My company pays no dividends. Should I bother with dividend analysis section?
Yes. Paying no dividends is a dividend policy. You will have to estimate the FCFE to check to see if this policy makes sense. (If the FCFE <0, it does...)

12. I have a non-US company. How do I get market returns and riskfree rates for the dividend analysis section?
On this one, I am afraid that the fault is mine for not giving you a way to pull up the data on other markets. To compensate, I will be okay with you using the US data for non-US companies.

13. I am getting strange looking FCFE for my company... What's going on?
Check the signs of the numbers you are inputting into the spreadsheet. If you are entering cap ex as a negative number, for instance, I will flip the sign around and add cap ex instead of subtracting it out...

14. We have a problem group member. Are we allowed to take punitive measures?
Yes, as long as you do not violate the Geneva Conventions. If you are new to this type of business, you can review this scene from The Marathon Man for ideas (http://www.youtube.com/watch?v=dG5Qk-jB0D4). I must warn you that this may violate the Stern Honor Code.

15. When will this torture end?
A week from tomorrow (5 pm on May 13)... but the memories will last forever...


In today's class, we put the closing touched on dividend policy analysis by going through the possess of estimating FCFE, the cash flow left over after capital expenditures, working capital needs and debt payments. My suggestion is that you estimate the aggregate FCFE over 5 years (or as many years as you have data) and compare it to the cash returned. If the cash returned = FCFE, you have a rare company that pays out what it can afford in dividends. If cash returned <FCFE, your company is building up cash and you should follow through and look at how much you trust the management of the company with your cash (use the EVA and Jensen's alpha that you have estimated for your company).
If cash returned > FCFE, check to see whether the company is digging a hole for itself and whether you can find a way for them to exit as painlessly as possible. Remember that if you found your company to be under levered, you want them to pay out more than their FCFE at least in the near term.
We ended the session by looking at how most companies set dividends, which is by looking at what everyone else in the sector is doing. I have attached the sector averages for dividend policy (in two files). If you want to see my dividend market regressions, click on the link below:
Note the low R-squareds before you use the regression.
Finally, the post class test and solution are attached. Until next time!

Attachments: Post-class test and solution

5/7/13 I know that today is usually the day for the corporate finance puzzle, but this week, I think we have to reset our priorities. Since the project is due in less than a week and you may still have not done the valuation part, I decided to move up the in practice webcast three days and post the links today. The spreadsheet that I used to illustrate the process is the fcffsimpleginzu.xls that I had sent in an email last week and the company I have used is Apple. Here are the links:
Link to the webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valuation.mp4
Valuation of Apple in May 2013: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/valuation/applevaln2013.xls
Apple 10K (September 2012): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/valuation/apple10K.pdf
Apple 10Q (March 2013): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/valuation/apple10Q.pdf
Once you have gone through the webcast, please try entering the numbers for your company into the spreadsheet (which I have attached) and bring the output to class tomorrow. While there are other more elaborate and involved valuation spreadsheets, this one has three advantages. First, it requires relatively few inputs to value a company. Second, it is versatile and will value companies across the life cycle, from young, money losing start ups to companies in decline. Third, I have tried to set default options in the spreadsheet that protect you from your own inputs. I know that you are capable of protecting yourself, and if you feel comfortable, please go ahead and turn off the defaults.

I know that some of you are on to the valuation spreadsheet. A couple of things to note about the spreadsheet. If you have no options outstanding, just enter 0 for the number of options and leave the rest of the inputs for the options untouched. If you put blanks in the cells or zeros, you are likely to see errors pop up in the option spreadsheet. If you do enter the options and you are still getting DIV/0 errors, don't freak out. This is one of the unpleasant byproducts of the iterative function: the spreadsheet becomes a little unstable. It is easy to fix. I can do it for you but you can do it yourself as well. Here is what you should do:
1. Go into the options worksheet.
2. Go to cell C15 (Adjusted S). Enter any number you want in that cell (I just use 5)
3. Then go to the menu and UNDO what you just did.
4. Like magic, everything will work...

I hope you get done with the numbers in the next day or two. Once you have the numbers done, could you please fill out the attached spreadsheet with your numbers and send them to me. In the last class, I hope to summarize all of your findings and present them to you - the ten most under levered companies in the class, the ten most over valued companies in the class... It is fun, but I can do it only I have your numbers. While it make the logistics easier, if you sent me the numbers for everyone in the group in one go, I will take what I can get. Thus, if four out of five members have their numbers ready, but the fifth is lagging, I will take the four companies that you have the data for. Since it will take me a little time to pull these numbers into a summary sheet and analyze them, please do get them to me by Sunday evening at the latest and earlier would be better... Thank you again!

Attachment: Summary sheet


In today's class, we looked at valuation as the place where all of the pieces of corporate finance come together - the end game for your investment, financing and dividend decisions. After drawing a contrast between valuation and pricing, we looked at the four drivers of value: cash flows, growth rates, discount rates and when your company will be a stable growth company. We then looked at how these numbers can be different depending on whether you take an equity or firm perspective to valuation and what causes these numbers to change. In particular, we argued that while no one can lay claim on the "right" value, we still need to be internally consistent with our assumptions. High growth generally will be accompanied by high reinvestment and high risk, and as companies mature, their growth and reinvestment characteristics should change. Ultimately, though, the best way to learn valuation is by playing with the numbers and seeing how value changes. Post class test and solution attached. Until next time!

Attachment: Post-class test and solution

5/9/13 As you embark on the valuation phase of the project, here are a couple of things to keep in mind:
1. Stick with the simpler version of the ginzu spreadsheet that I have created just for this class; (There is a more complicated version of this spreadsheet... let's save that for the valuation class.. if you want to continue this torture)
2. Recognize that you always have to make assumptions about the future to value companies. In other words, you will not find these numbers in 10Ks, annual reports or SEC filings. That is the bad news. The good news is that I don't have a crystal ball either. So, as long as your estimates are internally consistent, you are okay.
3. I have built the spreadsheet to protect you by setting in default settings at the safest levels. I do give you the options to release these defaults but do so only if you understand the consequences
4. I made a big deal about your ROE/ROIC in class yesterday which has led to some angst for some of you who are getting outlandishly high or even negative values for ROE and ROIC. First, recognize that when you are completely dependent upon accounting numbers, as you are with both ROE & ROIC, you can get strange numbers because book value and accounting earnings can be skewed. For instance, if we follow the conventional practice of netting out cash and goodwill from the book values of debt and equity to get to invested capital, you can end up with negative invested capital. In my original return spreadsheet, I had locked you into these defaults, but I recognize that some of you may want to change those defaults. So, I have modified the spreadsheet to allow you to leave some or all of the goodwill in the invested capital. In making these judgments, here are some things to think about.
a. On goodwill, in the standard approach where we don't include it in invested capital, we assume that companies behave sensibly when they acquire other companies and that the goodwill paid is for future growth assets. We do know that companies don't always follow this script and that they overpay. My rule of thumb on goodwill is that I cut less slack for companies that have done bad acquisitions in the past and for older acquisitions. Thus, if you are looking at HP, given their history of terrible deals, my suggestion is that you leave 100% of the goodwill in the invested capital.
b. On cash, it is a tougher call. If you feel that the cash is needed for operations and is wasting (i.e., not invested in fair return financial securities), you should leave that portion of the cash in invested capital as well.
Until next time!

I know that this is shaping up as the weekend from hell for some of you and I share some (or all) of the blame. Anyway, it is too late for me to be offering you "substantive" help on the project, at least on a collective basis, but here is a list of "to dos" for you and me over the weekend:
For you:
1. Finish the number crunching for the project.
2. Fill in the attached summary sheet with the numbers and get them in to me in an email. In the subject heading, please list "CF Summary".
3. Work on writing up the project report. Don't get fixated on format or on small details. Think big picture. In fact, think of yourself as someone who has been asked to look at your company and address what it does well and badly on each dimension - investment analysis, capital structure and dividend policy. If your company is doing everything well, don't feel the urge to change it.
4. On Monday morning, around 10 am, check your email. You should find a presentation (see my tasks below) for the class attached to the email.
5. Come to class on Monday. I know that some of you have not been in class the last couple of weeks and I understand that there are finals and projects due in other classes. However, Monday's class is special. If this were a play, it would be when the fat lady sings. While I may be neither fat nor a lady nor can I hold a tune, I will do my best impersonation.
6. Turn in your project report by email by 5 pm, as an attachment (pdf preferably, though I can take MS Word). In the subject, please list "The torture ends".

For me:
1. Send nagging emails every few hours, asking for your summaries and providing updates.
2. Pull your summaries together in a master spreadsheet.
3. On Sunday night, do assorted magic on the summaries
4. Put into a final presentation (see above) and send to you by Monday morning at 10 am
5. Show up in class and do the "fat lady song"
6. Wait for your final project reports
7. Start grading...

Attachment: CF summary sheet

5/11/13 I will keep you updated through the weekend on the number of summaries that I have receive and the number yet to come. It is not intended to panic you or evoke guilt but to just keep you in the loop. And if you do have last minute questions or just need some handholding and therapy (It is going to be okay! This too shall pass! You are a good person, just having a bad moment!... Just practicing my lines..), you can email me and I will try to respond as soon as I can. I have four soccer games to get to over the weekend but I should be able to check email. My iPhone typing skills are abysmal. So, please forgive me if my replies seem abrupt or nonsensical (that spell check on the iPhone is deadly)!
Updates received so far: 16
Updates to come: 340
Until next time!

Almost there. Keep them coming. I won't start on putting the presentation until 7.30 am tomorrow. So, anything that comes in overnight, I can fit in.
Updates so far: 155
Updates to come: 195
I know that you are way past exhaustion, but thank you!


I think I am set for class and I hope to see all of you in class (even those of you who have switched to the online mode). Thank you very much for your summaries. I had about 95% of the firms by this morning and I think I will have enough copies of the presentation in class. In case, you prefer to see in on your iPad or other device, I am also attaching it.

Attachment: Closing presentation


Again, thank you for sending me your summaries and helping me put together the presentation for today's class. If you were not able to make it to class (and I don't blame you for sleeping in, especially if you were the person sending your summary in at 4 am), I have attached the presentation to this email. In class today, we looked at the big picture of the class, using the project findings to illuminate each part from corporate governance to risk to investment analysis to capital structure, dividend policy and valuation. I have posted the summary numbers for the entire class online and attached it to this email as well. The review session for the final exam will be on Wednesday from 12-1 in KMEC 2-60 and it will be webcast, if you cannot make it. The final exam is on Friday from 9-11 and I will send the seating chart out tomorrow. Until next time!

Attachments: Project summaries


I am attaching the presentation for tomorrow's review session to this email. I will try to make copies for everyone who will be at tomorrow's session. However, if you will not be there and will be watching the webcast, please use this presentation.
Last (and perhaps most important), please do your CFEs as soon as you can. The CFE window opens today and should stay open through Friday.

Attachment: Presentation


I hope to see you at the review session tomorrow from 12-1 in KMEC 2-60. Finally, here is the seating arrangement for the final exam. Note that we have 1-70, 2-60 and Paulson:
If your last name ends with Go to
A - G KMEC 2-60
H - P Paulson
Q - Z KMEC 1-70


If you were not able to make it to the review session, the webcast is now up and running.
Webcast: http://echo360.stern.nyu.edu:8080/ess/echo/presentation/f4e1871e-310f-4944-a2dd-ce975ce7e1f5/media.m4v
Presentation: https://www.stern.nyu.edu/~adamodar/pptfiles/acf3E/finalreview.ppt
If the Stern server is running slow, I will post it on iTunes U and Lore.

You can also get the past finals & solutions:
Past finals: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/cffinals.pdf
Solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/cffinals.xls
The solution spreadsheet is broken into worksheets, with each worksheet representing a different final. I hope it makes it easier to find a solution to a particular exam.
One final note. In my email yesterday on the seating, I screwed up on the the last name designation (I specified "ends with" rather that "begins with"). Just to make sure that there is no confusion:
If your last name begins with Go to
A - G KMEC 2-60
H - P Paulson
Q - Z KMEC 1-70

5/16/13 I know that you are busy working through past finals, but I could not let this story slip past:
Looks like operating leases will become debt sooner or later (and we won't have to capitalize leases and make the adjustment anymore). Think of how much work this would have saved you on the project.

The finals are done and ready to pick up at the usual spot. I know that the final was challenging though not as challenging as some of you made it (When there are three ways of doing a problem, some of you had the knack to pick absolutely the most complicated way). Anyway, the exams are in alphabetical order (for the moment) and face down. I have attached the solution and the grading template, as well as the distribution for the exam. Please do not read too much into the distribution since the final grades will be out early next week.

I am also on my way to the airport to catch a long flight to Singapore. I will not be back until a week from Tuesday. If you have a problem with the grading, it will have to wait until I get back unless you can scan the page in question and email it to me. Don't worry, though! Even if your final grade has been submitted, I can put in for a grade change.

Attachments: Solution (a or b) & distribution.


I just turned the grades in and they should be online. I know that each and every one of you spent an incredible amount of time in this class and I really, really appreciate it. I also know that some of you will be disappointed in your grades and I feel as badly as you do about not being able to help you master the mechanics. If you have questions about how you ended up with the grade that you did, I am a believer in transparency and in keeping with that, I have attached a spreadsheet, which you can use to see your grade computation. I hope that a bad grade does not sour you on finance and that you will take tools away from this class that you can use elsewhere.

One of the best things about teaching is that you get closure at the end of every semester and it is time to wrap up and move on. When we started in January, I said that I would try to make this a class that would stay with you for the rest of your life. I may not have succeeded but I really did try! I hope that you find ways to use what we have talked about in this class in whatever you choose to do in your future. Just as an aside.. If you really want to master Corporate Finance, the best way to do it is by getting your hands dirty... I know that this will sound masochistic, but pick another company and do the entire corporate finance analysis on it. You will find two things. First, it will take a lot less time the second time around. Second, you will learn something new with every company you examine.

You will notice that this email does not end with the three words that every other email that I sent this semester ended with: "until next time". For better or worse, this is my last email to you in this class. However, you do have my email address for life. No matter what you decide to do or where you go to work, I am only an email away. If you have questions, doubts or just thoughts you want to share, I will be always glad to be the recipient. While I will not promise an instantaneous turn-around, i will get back to you. If you do choose to take my valuation class, you can look forward to a whole new set of emails and I look forward to seeing you in the Fall or the Spring. As a final thought , have a wonderful summer. God speed!

Attachment: Grade Checker