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The Corporate Finance Email Chronicles: Spring 2015


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...

Email content

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 centrality 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 page for the class:
This page has everything connected to the class, including webcast links, lecture notes and project links.

The syllabus has been updated and you will be getting a hard copy of it on the first day of class but the 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 am a minimal user of NYU Classes (I hate closed systems) but am planning to use a young upstart site that allows content, social media and commentary to co-exist called Yellowdig. The site is listed below:
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:

Like all things Apple, the set up iis 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.

I know that you are feeling overwhelmed by now, but for those of you with devices and slower broadband, I also have a YouTube Playlist for the class:
Please check it out.

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 fourth edition. It is exorbitantly over priced but you can buy, rent or download 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 and me-too 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 have two objectives. I would like to make it the best class you have ever taken, period. I know that this is going to be tough to pull off but I will really try. I hope to see you on February 2nd in class.


As the long winter break winds down, I hope you are ready to get started on classes. I also hope you got my really long email last weekend. If you did not, you can find it here:
This one, hopefully, will not be as long and has only a few 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. Online classes: I sent out an invitation for you to join the class on Yellowdig (https://www.yellowdig.com/board/Corporate+Finance+Spring+2015 ) Many of you have accepted the invitation and I thank you. You can choose to also follow the class on iTunes U or on YouTube (see last email for details).

3. Pre-class prep: Are you kidding me? What kind of twisted mind comes up with a pre-class prep for the very first class. Just relax, have fun this weekend and try to be in class. If you cannot make it, never fear! The webcast for the class will be up a little while after the class, but it just won't be the same as being there in person.

For those of you who have not got around to checking, class is scheduled from 10.30-11.50 in Paulson Auditorium on February 2. See you there!


I am sorry for hitting with you a third email before class has even started, but it never hurts to be prepared. Just to prevent any shock that you might feel when you walk into the class on Monday, here is what you can expect to see:
A soulless auditorium: Paulson Auditorium fits a lot of people, is functional (for the most part), but it is not a warm and fuzzy place. I don’t particularly like the room either, but it is what it is.
A big class: I know that given what you pay for an MBA, you never expected to be back in a big class, but this one is big. At last count, it was 340 and still rising.
If you are a first-year MBA, you will have lots of company: About 320 of the 340 people in the class are first year, full-time MBAs, which is about 80% of the total full-time class. So, you should know lots of people in the class, even if you have never socialized with people outside your block.
If you are taking Foundations simultaneously, you’ve got lots of company too: About a third of the class is taking foundations at the same time as corporate finance. It does add to your work in the first few weeks, but trust me. You will get through it, and I will help.
If you are a EMBA/Langone/2nd year MBA student, I won’t let you get orphaned: There are a few Langone, EMBA and 2nd year MBA students in the class. Some of you have already emailed me, telling me that you know no one in the class and are afraid that you will not be able to find a group. I understand that many of you have different time constraints than the full-time first-year MBAs. However, there may be enough of you to create your own group(s). To help, I have set up a shard Google spreadsheet (I have called it The Orphan List, but don’t take that personally), where you can enter your details and then contact other people on the list.

See you on Monday! 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, 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. Yellowdig stragglers: If you have not registered on Yellowdig and would like to and have not got an invitation, please let me know. You can get to the site by typing in:

10. Announcements: If you plan to make announcements in this class (and it may be way too early for this), there is a shared Google spreadsheet for sign-ups, since there will be only one announcement at the start of every class.

11. Post class test & solution: Each class, I will be sending out a post class test and solution for each class. This is just meant to reinforce what we did in class that day and there are no grades or prizes involved. I am attaching the ones for today's class.

Attachments: Post-class test and solution


I am glad to see the sun out today, though I wish it were 40 degrees warmer (fahrenheit, not celsius). Anyway, three quick notes for today. The first is that the corporate finance puzzle #1 is up and running. In class yesterday, we talked about the perils of ignoring first principles in finance generally and about mismatching currencies specifically. In this week's puzzle, I look at the turmoil created by the Swiss Central Bank's decision to unpeg the Swiss Franc. I highlight six stories of entities/groups affected by the decision. They range the spectrum from homeowners in Poland to hedge fund honchos. After you read about their plight and empathize with them, please do think about what they share in common, why they are in trouble and how (if at all) they could have avoided their problems.
I have opened up the discussion board on Yellowdig. Feel free to post your thoughts or related articles/links/webcasts.

Second, it took me a while but all of the streams of yesterday’s class are up and running. I know that most of you were in class yesterday but check out the links anyway. You never know when you might need them.
Webcast page for the class for Stream, downloadable video and downloadable audio: https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcastcfspr15.htm
iTunes U: https://itunes.apple.com/us/course/id959944936
Yellowdig: https://www.yellowdig.com/board/Corporate+Finance+Spring+2015
YouTube: http://youtu.be/hc9JuBlfor4

Third, I hope that you are well on your way to finding a group. In case you are not attached yet, the orphan list that I put up last Friday seems to have quite a few people on it. Please add your name to the list or better still, contact other people on the list. And as you find groups, please take your names of the list:

One final reminder. Please get lecture note packet 1 before class tomorrow and bring it to class. We will be starting on the packet.


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.

1. Other People's Money: 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 is one of my favorites for illustrating the straw men that people like to set up and knock down. 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 the dysfunctional actions taken by Disney during the 1990s. If you want to review these on your own, try this book 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)

3. Company Choice: 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...

4. 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
ISS (Institutional Shareholder Services) also measures corporate governance for many US companies with a corporate governance score. You can find out more by going to their site:
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 & I will send you another email later today about accessing it). I will be putting a webcast online on Friday 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 US-based company.. 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…

Aswath Damodaran

P.S: Post class test and solution for today’s class attached

Attachments: Post-class test and solution

2/5/15 It is never too early to start nagging you about the project. So, let me get started with a checklist (which is short for this week but will get longer each week. Here is the list of things that would be nice to get behind you:
Find a group: If you have trouble finding one, try the orphan spreadsheet for the class. (https://docs.google.com/a/stern.nyu.edu/spreadsheets/d/1m1Ij9t0JEFEoxAyKHyFJ6QxRgFHOaN-972frKG7NLeI/edit?usp=sharing )
Pick a company/theme: This will require some coordination across the group but pick a company and find a theme that works for the group.
Find the most recent annual report for your company.
If your company has quarterly reports or filings pull them up as well.
Get a listing of the board of directors for your company & start your preliminary assessment.
In doing all of this, you will need data and Stern subscribes to one of the two industry standards: S&P Capital IQ (the other is Factset). It is truly a remarkable dataset with hundreds of items on tens of thousands of public companies listed globally, including corporate governance measures. However, to use Capital IQ, you have to enroll and this is an email I got earlier this week about enrolling. Please, please register now. You will not regret it and it will not only save you lots of time in the future but will give you another weapon you can use in analysis.
2/6/15 As you get ready to enjoy your weekend, a few notes for today:
1. Lecture note packets: The bookstore has lecture note packet 1 back in stock, if you are interested in buying it. The download for free on to your iPad or print if off some sucker's printer options are always available. You can get the packet by clicking on the link below:
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/webcastcfspr15.htm ), the Yellowdig page for the class, on iTunes U or on the Youtube channel for the class. Take your pick.
3. Orphans: I am getting straggling emails from some of you about your sad plight as orphans. The orphan page can be found here for both listing and adoption:
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. It looks at ways to assess the corporate governance at your company, using HP from 2013 as an example. I use HP's annual report, its filings with the SEC and other public information to make my assessment of the company. You can find it 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. Weekly puzzle posting: I posted the first weekly puzzle of the week (the after effects of the surge in the Swiss Franc). If you did or do get a chance to look at it, and have your answers to the questions that I posed, you can go to the discussion board on Yellowdig and post your views (with links, if you so desire). You have to be registered on Yelllowdig to do this. Most of you are, but if you are not, go to https://www.yellowdig.com.
Until next time!

The first newsletter is attached. It is filled with gripping details of Kim Kardashian’s balance sheet (assets and liabilities detailed), an expose of what exactly is bedeviling the New York Knicks this season and it also contains the true reasons why Russell Wilson threw that pass in the waning minutes of the Super Bowl. (Not really, but a little hype does not hurt). Think of it as the National Enquirer on steroids. Seriously, do whatever you need to do this weekend first, then what you want to do and if you have time left over, take a look at the newsletter. It should not take more than a couple of minutes to browse through.

Attachment: Newsletter #1


This week, we will continue with our discussion of corporate governance, focusing first on where power in a company rests (stockholders, managers, labor, the government) and the consequences for corporate finance. We will then move on to lenders/bondholders and how left unprotected, they can be exploited, and on to financial markets, examining both the predilection of firms to delay/manage bad news and investor reactions to it. Having laid bare the limitations of the assumptions that underlie traditional corporate finance, we will examine alternatives to stock price maximization.

On a different note, the TAs have lined up tutorial sessions starting on February 17th. These are optional and for anyone who feels that they can use extra help. Since the room for the TA sessions fits only 65, I have a Google shared spreadsheet created for the TA sessions and you can see the first two sessions. Please sign up if you are interested. If you lose interest after you sign up, please take your name off the list.

One final reminder. The lecture note packets are back in stock at the bookstore. So, please bring lecture note packet 1 with you to class tomorrow (either in the bookstore version, your downloaded version or a printout). See you in class tomorrow!


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 and bondholders get ripped off. 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. I have also attached the post class test and solution for today's class.

Attachments: Post-class test and solution

2/10/15 Ever been to the Shake Shack in Madison Square Park? I remember seeing it when it first opened, being tempted to try it out and giving up on it because of the long lines. Anyway, Shake Shack went public to rapturous response a few weeks ago, with the stock doubling on the opening day. As traders and portfolio managers fell over each other trying to buy the stock and the founder, restauranteur Danny Meyer, was feted, there were a few discordant notes, especially about the way corporate governance is structured at the company. The company not only has high-voting and low-voting shares that are tilted to give Mr. Meyer full control of the company, with well below 50% of the overall holding, but it also has some strange clauses that come close to self dealing. Of course, Shake Shack is not the first company to play this game but it is the latest in a series of companies that have copied the Google model of governance. I would suggest that you start with this Bloomberg article specifically on the corporate governance issue:
Follow up with this document from Shake Shack about their corporate governance practices:
If you really have the time and the inclination, start reading through the prospectus and see if you can catch all the little tricks being used to preserve control in the hands of existing managment:
Finally, take a look at the questions that I have on the issue both from the perspective of the founders/insiders and investors:
And if you can get a conversation going on Yellowdig, all the more power to you!

As we take baby steps towards measuring risk, I want to review where we stand. The objective function matters, and there are no perfect objectives. That is the message of the last two classes. Once you have absorbed that, I am willing to accept the fact that you still don't quite buy into the "maximize value" objective. That is fine and I would like you to keep thinking about a better alternative with three caveats. First, you cannot cop out and give me multiple objectives - I too would like to maximize stockholder wealth, maximize customer satisfaction, maximize social welfare and employee benefits at the same time but it is just not doable. Second, your objective function has to be measurable. In other words, if you define your objective as maximizing the social good, how would you measure social good? 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, here is an interesting read: 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.htm
Dow Jones Sustainability Index: http://www.sustainability-index.com/
And this is just the tip of the iceberg. Environmental organizations, labor unions and other groups all have their own corporate rankings. In other words, whatever your key social issue is, there is a way to stay true (as a consumer and investor).
If you have picked a company, there are two orders of business you have for 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 mentioned a paper that related stock prices to corporate governance scores in class today. You can find the link to the paper below:
In closing, though, I know that the sheer size of the class and the setting make it intimidating for participation. I understand but I hope that (a) you will feel comfortable enough to make your views heard, even if they are violently at odds with mine and (b) that you talk to me in person or by email about specific issues that we are covering in class that you may not understand or have a different perspective.

I am also attaching the post-class test & solution for this session.

Attachments: Post-class test and solution


As for the project & class, 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?
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. Since we have no class on Monday, you should have plenty of time.

One final note. If you are trying to watch the webcast of yesterday’s class, you are probably getting a blank screen. I am working on a fix and hopefully should have it up and running soon. 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. Big Acquisition Stories: Since we talked about the sorry history of acquisitions in class on Wednesday, I thought I would brighten your mood with a deal that the market seems to like (Expedia buying Orbitz)
Expedia buys Orbitz: http://www.reuters.com/article/2015/02/12/us-orbitz-worldwide-m-a-expedia-idUSKBN0LG1OA20150212
To connect corporate governance to national interest to acquisition, especially when the company in question is Club Med, but this story has all three in spades:
How the Club Med acquisition happened: http://www.wsj.com/articles/how-the-club-med-bidding-war-was-waged-1423692196

2. 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://youtu.be/x_H_4KTeOkc
Presentation link: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/holders.ppt
Finally, one hopeful sign for investors is the presence of activist investors (like Carl Icahn) in your midst, not because they always do the right thing but because they put managers on notice. To help you determine whether you have an activist investor in your listing, I have a link (dated, but it is the best I could do) that lists the activist investors in the US (with phone numbers, if you ever want to call them):

3. Google Shared Spreadsheet: I have posted these links online on the webcast page, Yellowdig and on iTunes U. Finally, the TAs will be starting their weekly sessions next week. In case you are interested in attending these sessions, the Google shared spreadsheet to sign up is open.


Another week passes and the newsletter chronicles its passing. Last week, we completed our discussion of the firm's objective function by looking at the flaws in the market and how market price maximization can go wrong. However, we also noted that the alternatives to it also can go wrong and it becomes a question of choosing between flawed objectives. Next week, we will start our discussion of risk by looking at risk and return models in finance and how they look at/measure risk. I know that this is a long weekend and I hope that you can get your groups in place and companies picked, perhaps even get the corporate governance section done. In fact, if you do get a chance to get into school, please find a Bloomberg terminal and print off the pages that we will be using for the next week: HDS, BETA and DES (4-5 pages). If you are unsure about how to read this output, I have prepared a packet on how to use your Bloomberg printouts for the rest of this class:
Please take a look at it, if you need a reference.

Attachments: Newsletter #2


A quick note, previewing the week to come. Since we have no class tomorrow, it will be a short week. On Wednesday, we will look at risk and return models in finance. If you took Foundations last semester, or waived out of it, you may have seen these models already. If you are taking it right now, you may be seeing it in class now or very soon. Never fear! My focus in this class is very different. I will not be going through the statistical proofs and the mind-numbing portfolio theory. I am interested in something simpler: how do these models help me come up with hurdle rates in corporate finance?

We have been dancing around the question of activist investors and whether they are good or bad for markets. The Economist has a cover article on the topic this week that you may find useful:

You may also find this blog post I put up a couple of years ago interesting (or not):

2/17/15 I hope that you had a great weekend, but it is over (as if you did not know). I did give you a break yesterday with no emails but that respite is over. In this week's puzzle, I focus on risk and how we set ourself up for scams by forgetting that opportunity comes with danger. There are three news articles that I have linked up in this puzzle: the first one is to a Wikipedia description of Ponzi schemes (I have no intellectual pretensions and use Wikipedia all the time). The second is the obituary of Robert Citron,the treasurer of Orange County at the time of the pension disaster in the 1990s. The third (and this is the focus of the puzzle) is a news story about the arrest of an MIT Professor and his HBS-educated son for a hedge fund scam. While it is not the biggest scam of all time, I think it crystallizes why these investment schemes are born, why they work and why they inevitably fail:
Ponzi Scheme: The Original: http://en.wikipedia.org/wiki/Ponzi_scheme
Robert Citron, RIP: http://www.nytimes.com/2013/01/18/business/robert-citron-culprit-in-california-fraud-dies-at-87.html?_r=0
MIT Professor/son arrested: http://www.bloomberg.com/news/articles/2014-08-12/ex-mit-professor-son-to-plead-guilty-in-hedge-fund-scam
If you get a chance, here is what I would like you to think about. Put yourself in the shoes of the victims in these scams and think about why you may have been tempted to join in. Then, put yourself in the shoes of the scammer and determine how you would structure these scams to draw in gullible and greedy investors. A con game requires that the con man and the victim both cooperate and it is worth looking at why it happens. The puzzle can be found at this link:
You can use Yellowdig to post your thoughts (and I have started a discussion topic around risk). Until next time (from Dartmouth College at Hanover, NH, where it is even colder than New York)!

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...

A couple of reading suggestions, if you get a chance. One relates to the puzzle that I mailed out for this week on risk and in particular, to Bernie Madoff. If you are fascinated by Madoff, the following article is relevant/readable and I strongly recommend it: http://nakedshorts.typepad.com/files/madoff.pdf
On a different note, here is another article on activist investing that you may (or may not) find interesting"
Hope you enjoy both readings.

Attachments: Post-class test and 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: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
While the spreadsheet uses (and links) to the sovereign ratings and CDS spreads from March 2013, I have attached the updated Moody's sovereign ratings (from today) and CDS spreads from January 2015.

Second, in case you want to get started preparing for quiz 1 (Don't freak out. It is not until March 9), you can find all past quizzes that I have given in this class below (with solutions);
Link to past quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1.pdf
Link to solutions to past quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz1sol.xls
I have to caution you that the quiz will look foreign to most of you right now, since we will be covering the bulk of the number crunching material in the next two weeks.

Attachments: Moody's Ratings (January 2015), Sovereign CDS Spreads (January 2015)


I hope you get to enjoy what looks like the first good weekend in a long, long time! If you get bored and run out of stuff to do, here are a couple of reading suggestions. I have also attached the always-awesome, amazing-read newsletter (not and not) of the week!

Attachment: Newsletter #3

2/22/15 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 tonight or early tomorrow morning.
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
A final point. I have put lecture note packet 2 online, if you want to get a jump on downloading it, though we will not use it until after the break.

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. You can find the Merrill survey on its research link (but you may be asked for a password). You can get the other surveys at the links below:
CFO survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2422008
Analyst survey: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2450452

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 130 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 2015 update:
Play with the spreadsheet. Try changing the index level, for instance, and see what it does to the premium.

4. Company revenue exposure: As a final step, see if you can find the geographic revenue distribution for your company. You can then use my January 2015 ERP update to get the ERP for your company

Beta reminder: Pease 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.

The post class test and solution for today are attached.

Attachments: Post-class test and solution

2/24/15 This week’s puzzle is a really simple one but it is very useful to go from the abstract to real on the notion of firm specific and market risk. You can start with the puzzle description here:
In effect, here is what I do. I take today’s Wall Street Journal and break down the stories under What’s News into firm specific and market risk as well as good/bad/neutral news. If you can do the same with the journal for the rest of this week, you will be surprised at how quickly it becomes second nature. Try it. It’s not that bad.

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. 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.

Attachment: Post-class test and solution


I hope that you have had a chance to print off the Bloomberg beta page for your company. Once you have it, do check the adjusted beta and confirm for yourself that it is in fact equal to
Adjusted Beta = Raw Beta (.67) + 1.00 (.33)
I mentioned in class that I initially was curious about where these weights were coming from but I think I have found the original source. It was a paper written more than 30 years ago (which I have attached to this email) that looked at how betas for companies change over time and concluded based upon a small sample and data from 1926-1940 (I am not kidding!) that they converged towards one, with roughly the magnitudes used by Bloomberg. Why has it not been updated with larger samples and better data? Well, that is what happens when "here when I got here" becomes the response to questions about numbers we use all the time. I have also forwarded this email to the beta calculation guy at Bloomberg. I hope that they have let him out of that basement room, where he was locked up.

The bottom line is this. Do I believe that the betas of companies tend to move towards one over time, if they survive? Yes, partly because they get larger over time and partly because they get more diversified. When we get to valuation, in this class and the elective (if you choose to extend your torture at my hands), you will see that I move betas towards one in almost every valuation that I do. But I don't do it right away and I reserve the discretion to do it faster for some firms than for others. Bloomberg clearly does not trust you to know which direction one is… You and I do...


It is Friday and time for the weekly in practice webcast. In the webcast, I take a look at Disney's 2-year weekly regression (from February 2011- February 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 YouTube or on iTunes U.

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


The weekly newsletter is attached and as you can see, we are moving along at a reasonable clip. If you have not been keeping up, this is a good weekend to catch up since the first quiz is a week from Monday.

Attachment: Weekly Newsletter #4

3/1/15 I hope that you had a good weekend. In tomorrow’s class, we will continue with our discussion of betas by looking at the determinants of betas and then a way to get around the limitations of a single regression beta. We will continue that discussion on Wednesday and use the approach to estimate a cost of equity for private firms. While we may start on debt and its cost on Wednesday, the first quiz, which is a week from tomorrow, will end with the beta discussion.

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. (The equation for the levered beta was supposed to be on page 146, but went missing. I have attached it to this email. Please print it off)

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.

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

Attachments: Post-class test and solution


Last week, Warren Buffett came out with his much anticipated letter to Berkshire Hathawaystockholders. What made it even more special was that it was his 50th annual letter and he used it to summarize how he built the company up and his investment philosophy. The letter can be found at this link:
In the letter, Mr. Buffett lays out the returns earned by BH stockholders over the last 50 years and contrasts it with the S&P 500. I have put the returns into an excel spreadsheet that is attached and is also at this link:
While that there are numerous corporate finance lessons in the newsletter that are worth debating, I would like you to focus just on the returns and answer specific questions about risk and performance. You can find the questions here:
I hope that you have a chance to try your hand at disentangling the Oracle’s track record. Until next time!


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 five 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 slides that we covered today.
2. Try the post-class test and solution. I think it will really help bring together some of the mechanical issues involved in estimating betas.
3. Read this short Q&A on bottom up betas which highlights the estimation process and some of its pitfalls:
Finally, watch your emails tomorrow, since I will be sending the seating chart for quiz 1 as well as the presentation that I plan to use in the review session on Friday. That session is scheduled from 12-1 in KMEC 2-60. I know that many of you will not be able to make it. (In fact, I have to hope that you don't all show up since there are 330 people in this class and that room fits only 160). The class will be recorded and webcasts will be accessible by Friday evening.

Finally, 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 issue 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.

Attachments: Post-class test and solution


On days like these, I think of moving to San Diego and I am sure that you are tired of winter as well. But the wheels keep grinding and your quiz is still on Monday. Good news is that the break is a few days later and you may be able to get to someplace warmer. For the review session, scheduled from 12-1 in KMEC 2-60 tomorrow (Friday, March 6), I have attached the slides that I will be using. Please download or make copies of these slides:
As I mentioned in class, the session will be webcast and ready for viewing by later tomorrow.

The quiz is on Monday from 10.30-11 and to alleviate the crowding in Paulson, I have also reserved KMEC 1-70 for that time. The seating for the quiz is as follows:
If your last name starts with Go to
A - G KMEC 1-70
H - Z Paulson
If you will be missing the quiz, either because you have another engagement that is too important to break or because you plan to be sick on Monday (just kidding.. that is just my cynical side showing), please email me before the quiz and put “Missing CF Quiz 1” in the subject head.

I won’t even mention the project, since I am a realist.


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 link below:
I will post versions to Yellowdig and iTunes U, when the downloadable versions are ready. Please download he presentation to use along with the review:
I hope it helps. It may help even more if you go through some of the past quizzes and then watch it.

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: https://www.stern.nyu.edu/~adamodar/podcasts/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!


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 weekly/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. How do you decide whether to use a historical or an implied equity risk premium?
In a market like the US, with a long and uninterrupted history, the choice depends on whether you believe that things will revert back to the way they were (in which case you may decide to go with the historical premium) or that the world is a dynamic, ever-shifting place, in which case you should go with the implied premium. In most other markets, where you don't have a long history, it is not really a choice, since the historical premium is too noisy (big standard error) to even be in contention. Thus, I use a short cut. If it is a AAA rated country like Germany or Australia or Singapore, I use the US equity risk premium, arguing that mature markets need to share a common premium. If it is not a AAA rated country, see the answer to (4).

3. 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.

4. How do you adjust for the additional country risk in companies that have operations in emerging markets?
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). When assessing the equity risk premium for a company, look past where the company is incorporated at where it does business. The equity risk premium that you use should be a weighted average of the equity risk premiums of the countries in which the company operates.

5. Why do you use revenues (rather than EBIT or EBITDA) as the basis for your weighting?
Note that what you would really like to know is the value of a company's different businesses/geographies, but since you don't have value, you look for proxies. While you may have a choice of different measures (revenues, EBITDA, EBIT etc), I prefer revenues for three reasons. First, it is always a positive number, which is good since I want weights that are greater than zero. Second, it is less susceptible to accounting allocation judgments than numbers lower down on the accounting statement. Third, I can convert it into a value by using an EV/Sales multiple, which I can get from the sector.

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

Alternatively, you can use the net debt to equity ratio and cut it down to one step
Net Debt to Equity = (Debt - Cash)/ Market value of equity
Unlevered beta for the business = Levered Beta for median company /(1+ (1-tax rate) (Net Debt to Equity))

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 (since cash has a beta of zero)
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 all 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.

Attachment: Newsletter #5


A few very quick points and I will leave you to your own devices:

1. 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!

2. 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. Seating reminder: In case you have forgotten your room assignment for tomorrow:
3f your last name starts with Go to
A- G KMEC 1-70
H -Z Paulson Auditorium

Finally, please do remember that there is class after the quiz and that we will also have class on Wednesday. I hope the complete the discussion of hurdle rates tomorrow by first defining debt, then laying out the first principles for computing the cost of debt and then coming up with weights for the cost of capital. On Wednesday, we will look at the first steps in measuring investments returns, before everyone leaves for spring break.

Attachment: Beta Addendum


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. We started class today by looking at what makes debt different from equity, and using that definition to decide what to include in debt, when computing cost of capital. 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. We followed up by arguing that the cost of debt is the rate at which you can borrow money, long term, today and then looked at ways of coming up with that number from the easy scenarios (where a company has a bond rating) to the more difficult ones (where you have only non-traded debt and bank loans and no rating). I have attached the post class test & solution. You will notice a few questions relate back to something we talked about in the prior class, total betas, since I did not get a chance to include those in my last post class test.

One final note. If you have checked your Google calendar, you will notice that there is a group case due on April 1 in class (at 10.30 am). I know that this is way in advance of that date, but that case is also now available to download. I am attaching the case to this email but I will send you another one specifically about the case and what you might be able to get started on in the near term. Back to grading quizzes...

Attachments: Post-class test and solution, Case


Your quizzes are ready to pick up. To get them, please come up to the 9th floor of KMEC. When you get off the elevators, walk towards the main doors to the finance department but before you go in, look to your right. You should see the quizzes in three neat piles on top of the table, sorted alphabetically and face down. Please leave these piles in the same order that you found them, after you have found your quiz.

I have attached the solutions with the grading templates to both quizzes (if you had the risk free rate in 2a in Zlotys, you had Quiz a and in Forints, you had Quiz b). I have also attached the distribution for the first quiz. As I mentioned in class, please don’t overreact to your score on the first quiz. There is plenty more to come. And if you have any issues with the quiz grading, please drop by and let me know your concerns. If you feel strongly that your multiple choice answer was right (and I have found it to be wrong), I am willing to listen to your rationale, though I may not accept it. Do not approach the TAs since they are blameless in this process. I grade the quizzes and any mistakes are mine.

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

3/10/15 I hope you have had a chance to pick up your quiz. I do know that some of you have questions about the grading, and if you do, please do come by. I don’t bite. On a different note, if you are still in the mood for corporate finance, this week’s puzzle is built around bond ratings (since we just finished talking about it in class). The place to start, if you are unfamiliar with the process, is with this very old document from Moody’s which still describes the process well:
Follow it up by reading the news story on Petrobras being downgraded:
Next, take a look at the financials of Petrobras to get a measure of why they are in this much trouble:
Once you have the lay of the land, try answering the questions in this document:
See you in class tomorrow!

I know that some of you were in Spring break mode already, but today's class represented a transition from hurdle rates to measuring returns. We started by completing the last pieces of the cost of capital puzzle: coming up with market values for equity (easy for a publicly traded company) and debt (more difficult). We then began our discussion of returns by emphasizing that the bottom line in corporate finance is cash flows, not earnings, that we care about when those cash flows occur and that we try to bring in all side costs and benefits into those cash flows. Defining investments broadly to include everything from acquisitions to big infrastructure investments to changing inventory policy, we set the table for investment analysis by setting up the Rio Disney investment. We will return to flesh out the details in the next session (after the break). The post class test and solution are attached.

I also emailed you the case on Monday. Just in case you did not get it (or skipped over that email), you can get the case by going to the link below:

Attachments: Post-class test and solution

3/12/15 No nagging about the project today. Just enjoy your spring break and come back rested and ready. I will not send you an email (and that is a promise) until late next week. So, if you have serious withdrawal issues, check the email chronicles. Be safe and be good!

I know that spring break is not officially over but my hiatus from sending your emails is over and I do have a couple of notes on the case and the project, First, on the case. I know that most of you have not had a chance to read the case, let alone analyze it, but if you did read it, I hope that you will get started on it soon. (If your reaction is what case?, you may want to click on this link:
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 can 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). I thought that a webcast on estimating the pre-tax cost of debt and the value of debt would come in useful. The webcast is from last year but I 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 at the time of the webcast was as of January 29, 2012. Since a new 10K was due a few weeks after the webcast, I used the 10Q from the most recent quarter (as of the time of the webcast) to update information. (Most of you will get lucky and your most recent 10K or annual report will be ready to use, but just in case it is not...)
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/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 at the link below.
Home Depot 10Q: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/Debt&Cost/HDdebtcomputation.xls

While it has the Home Depot's numbers, you can use it for any company. I hope it is useful. I have also attached the newsletter for the week, in case you have completely forgotten where we were in class.

Attachments: Newsletter #6

3/22/15 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 iCar 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).

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 class today by extending the return on capital concept to entire companies and argued that notwithstanding its accounting limitations, comparing the return on capital to the cost of capital provides us with a basis for measuring whether a company’s existing investments are good (or not).
We then returned to the Rio Disney analysis and 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


We talked about sunk costs in class yesterday and how difficult it is to ignore them, when making decisions. You can start your exploration of the sunk cost fallacy with this well-done, non-technical discourse on it:
You can then follow up by reading a tortured Yankee fan's (my) blog post on the Yankee's A Rod problem and the broader lessons for organizations that have made bad decisions in the past and feel the need to stick with them.

Finally, I know that you are probably busy working on your case (spare me my illusions) but in case you have some time, I would like to pose a hypothetical, just to see how you deal with sunk costs. Before you read the hypothetical, please recognize that I am sure that the facts in this particular puzzle do not apply to you, but act like they do, at least for purposes of this exercise:
I hope you get a chance to give it a shot. It will take only a few minutes of your time (though it may take a few years off your life).


In today's session, 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. We then turned our attention to analyzing a project in equity terms, using a Vale iron ore mine in Canada and in the process faced the question of whether we should hedge risk either at the output or input levels. If you found the risk hedging question we talked about in class this morning interesting or worth thinking about, here is a paper (actually a chapter in a book on risk that I have) that you may find useful:
In the last part of the class, we looked at an acquisition of Harman Audio by Tata Motors and used it to illustrate the first principles that should govern the valuation of target companies in acquisitions.

Attachments: Post-class test and solution


I 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 electric cars and Apple’s future, 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 equity risk premiums, for instance.)
d. There are tax rules that you violate at your own risk. For instance, investing in physical facilities 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 these cases, 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 yesterday 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 it in PC mode to get it to work...


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 in March 2013. 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: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ROIC.mp4
Walmart: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pdf (10K for 2012) and https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10Klast year.pdf (10K for 2011)
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…


I know that you have a lot of work to do on the case. So, I won't make this long. The newsletter is attached.

Attachments: Newsletter


In the week to come, we will continue and complete our discussion of investment returns, starting tomorrow with a comparison of NPV versus IRR and then moving on to look at side costs and side benefits. A big chunk of Wednesday's class will be dedicated to discussing the case (If you ask, "What case?", you are asking for retribution...) By the end of Wednesday's class, we will be close to done with packet 1. Packet 2 is ready to be either downloaded online or can be bought at the bookstore. To download it, go to the webcast page for the class and check towards the top of the page:

Anyway, speaking about the case, here are some closing instructions:
1. As you write your case analysis, keep it brief. There is no need for story telling, strategic discussions or second guessing yourself. Crunch through the numbers, pick your investment decision rule and make your decision.
2. Once you are done with the case analysis, put together a report. In the report, make sure you include a table that shows your numbers by year (operating earnings, cash flows) and a computation of your discount rate or rates.
3. On the cover page, please include the following:
Names of the group members in alphabetical order
Cost of capital for Apple iCar
Accounting Return on Project
NPV for iCar (10-year life)
NPV for iCar (Longer life)
Decision: Accept or Reject
4. Convert your case report into a pdf file and email me the file, ccing everyone in your group. In the subject of the email, please enter “The Coolest Car Ever"
5. If you can take the key numbers that you get, put them in the Excel spreadsheet which is attached and email them to me by Tuesday night (or earlier if you have them), I will be everlastingly grateful. I would like to show you (as a class) the distribution of findings across groups.


We started today's class by looking 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.
We then compared projects with different lives and considered how best to incorporate side costs and side benefits into investment analysis. In the meantime, you have all of the tools you need to address the Apple iCar project. Please send your group project report as a pdf file with “The Coolest Car Ever" as the subject before class on Wednesday. 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. Also, please fill out the attached spreadsheet with your numbers and send them back to me when you have them (or as early as you can).

Attachments: Post-class test and solution

3/31/15 I know that you are busy with the case and probably have neither the time nor the patience for weekly puzzles and I don’t blame you. However, if you are up for it, I do have a challenge related to something we talked about in class yesterday: side benefits, synergies and franchise values. The franchise in question is Frozen and the puzzle revolves around it. Please read the description of the puzzle here:
If you just have a little time, think about how you would build in these side benefits at the time that you consider a new animated movie project at Disney. If you have more time, take a look at my Star Wars franchise valuation and see if you can extend it to Frozen. It is fun to do and may stand you in good stead if you are entering the entertainment business.
This valuation was done when Disney bought Lucas Arts a few years and is dated, but the structure should still work.

The bulk of today's class was spent on the Apple iCar 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 auto companies that drives the cost of capital for the car business, 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 battery factor expansion that would have happened anyway in year 8.
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 numbers online:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/iCarPresentation.pdf
Excel spreadsheet with analysis: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/AppleiCarsoln.xls
Please download them. Not only will they be useful to do a comparison of why your numbers may be different from mine but also to get ready for the next quiz. I will also post the grading template for the case, once I am ready to start returning the cases. The post class test and solution for today are also attached.

Attachment: Post-class test and solution

4/1/15 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 (4, costing 1/2 a point) and allocated G&A (5, costing 1/2 a point) in your analysis. On the front page of your case, you will see something like this in your grade for the class (Overall grade; 9/10; Issues: 4,5) 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.
Finally, on how to read the scores, the case is out of 10 and the scoring is done accordingly. I hate to give letter grades on small pieces of the class, but I know that will be hounded by some until I do. So, here is a rough breakdown:
9.5-10: A
9: A-
8.5: B+
7.5-8: B
6.5-7: B-
5.5-6: C

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 70+ cases, I am a little sick of Apple’s iCar... 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 auto firms. Also, if you consolidated your cash flows from auto and iDevice sales, it is perfectly appropriate (and in fact correct) to take a weighted average of the auto and device betas. The catch, though, is that the weights change over time. It is avoid that re-weighting problem that I used my approach of discounting each of the cash flows using its own cost of capital.

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 2.5% (the riskfree rate + default spread). On the debt ratio, on leases, there were variations in what you assumed would happen with the lump sum in year 6. I spread it over 5 years but I am fine with groups that used 3 or 10 years instead. It has only a small impact on the value. Finally, I did notice a disquieting practice where some groups were adjusting the auto beta for the cash held by Apple. Apple’s large cash holdings cannot be used to push

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 8 for computing the battery factory investment. Many of you either ignored the savings in year 8 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. (I did not penalize you for that because it has small effect.)
c. G&A: If you subtract out the allocated G&A to get to operating income, the difference between the allocated and the incremental G&A has to be added back to earnings. 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.

Finally, and this is a pet peeve of mine. So, just humor me. Please do not use the word "net income" when you really mean after-tax operating income. Not only is it not right but it will create problems for you in valuation and corporate finance. Also, try to restrain your inner accountant when it comes to capital budgeting. As a general rule, projects don't have balance sheets, retained earnings or cash balances. Also, if a project loses money, don't create deferred tax assets or loss carryforwards but use the losses to offset against earnings right now and move on.

Now that the case is behind us, time to get ready for a busy week coming up. On Monday, we will 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.


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.pdf
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/typicalproject.mp4
The links are also online on the webcast page for the class.

The second quiz, though, is coming up. If you feel ready to get started, here are the details:
1. When is it: 10.30-11 on Wednesday, April 8
2. What will it cover: Everything since quiz 1 (Lecture note packet 1: 159-End) but not what we will be starting on Monday. In the book, it is the second part of chapter 4 (cost of debt & capital), chapter 5 and chapter 6.
3. Past quizzes: The past quizzes are already online:
Past quiz 2s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz2.pdf
Solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz2sol.xls
4. Review session: There will be a review session on Tuesday, April 7, from 12-1 in KMEC 2-60. The review session will be recorded and the webcast should be up by later in the afternoon.
5. Quiz seating: The seating for the quiz will be as follows:
If your last name begins with Go to
H- N KMEC 1-70
A-G, O-Z Paulson
6. Quiz absence: If you are going to miss the quiz, please let me know before 10.30 am on Wednesday, April 8.
Good luck and happy quizzing.


I hope you get a chance to get out there and enjoy the spring weather. In case you get bored and want something to read, I have attached the newsletter for the week. Just a reminder that we will start packet 2 on Monday. So, please either buy it, download it to your device or print it before then. I have also been asked whether you can use Excel (on the computer or your device) for the quiz and the answer is no. The quiz will not require elaborate calculations and a calculator should suffice.

Attachment: Newsletter

4/5/15 In the week to come we will turn to the financing principle and start the discussion of the trade off between debt and equity. While tomorrow’s material will not be on the quiz on Wednesday, I hope to see you there, with packet 2 in hand.

In today's class, we started our discussion of the financing question by drawing the line between debt and equity: fixed versus residual claims, no control versus control, and then used a life cycle view of a company to talk about how much it should borrow. We then started on the discussion of debt versus equity by looking at the pluses of debt (tax benefits, added discipline) and its minuses (expected bankruptcy costs, agency cost and loss of financial flexibility). Even with the general discussion, we were able to look at why firms in some countries borrow more than others, why having more stable earnings can make a difference in how much you can borrow and why having intangible assets can affect your borrowing capacity. After the quiz on Wednesday, we will continue with this discussion. The post class test relates mostly to session 15 (last session on synergy and side benefits), but it is worth doing just to get that part under your belt. I am also attaching the slides for tomorrow’s review session. (All of the copiers in the finance department are down. I won’t be able to make copies. I am sorry!

Attachments: Post-class test and solution


The review session video is not quite ready to download yet, but you can watch the stream of the session by going to:
I will upload the downloadable version as soon as it is ready. The presentation for the review session is attached. Finally, here is the seating arrangement for tomorrow’s quiz:
If your last name begins with Go to
H- N KMEC 1-70
A-G, O-Z Paulson
See you tomorrow!

Attachment: Presentation

4/7/15 I know! I know! I am piling on, but just in case you feel the urge to look at corporate finance after your quiz, the puzzle for the week is up and it centers around distress at oil companies, triggered by large debt burdens, taken on in better times. The puzzle is available at this link:
Included with the puzzle is a spreadsheet containing all publicly traded oil companies with the total debt they owe and the numbers you can use to scale that debt, including market & book equity, EBITDA and bond ratings, if available. I have attached that spreadsheet. Hope you enjoy solving the puzzle.

I know that you probably had a tough time keeping focus after the quiz, but enough about the quiz. In today's class, we looked at the cost of capital approach as a way of optimizing your financing mix. Put briefly, you look for the debt ratio that minimizes your cost of capital. That does require that we estimate the cost of equity and debt at different debt ratios and we started the process using Disney as an example.

Attachment: Post-class test and solution


The quizzes are done and are in the usual spot (ninth floor of Finance department, KMEC, should be right ahead of you when you come out of the elevator, on your right). Please just take your quiz and leave the pile in alphabetical order. I have attached the solution and the distribution. As always, if there is a problem, please bring it to my attention and I will fix it. (The TAs have nothing to do with the grading. So, please do not harass them.) I will be out for a meeting from 12.30 -1.30 but should be back soon after.

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:
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.
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).
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.
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.
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://www.stern.nyu.edu/~adamodar/podcasts/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 as well as for Global companies. Hope you find them useful!

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


I will keep this really short, since I am sure that you are sick of me. Last week, we began our discussion of capital structure by laying out the trade off between debt and equity for all businesses. That trade off, with tax benefit and added discipline as pluses and expected bankruptcy and agency costs as minuses, sets up the framework that we will build on in the coming week to find the right mix of debt and equity for any business. The newsletter is attached. Until next time!

Attachment: Newsletter #9

4/12/15 This week, we continue with our discussion of finding the right financing mix. Tomorrow, we will complete our discussion of using the cost of capital approach to find the optimal debt ratio for Disney, Tata Motors, Baidu and Vale. On Wednesday, we will talk about finding the right financing mix for financial service firms and talk about the adjusted present value approach. By the end of the week, you should be able to compute the optimal debt ratio for your firm (in the big project). By the way, if you have not picked up your quiz yet, they are still outside the front door to the Finance department. Until next time!

In today's class, we continued our discussion of 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. The optimal debt ratio is the point at which your cost of capital is minimized. Using this approach, we estimated optimal debt ratios for Disney (40%), Tata Motors (20%), Vale (30% with actual earnings, 50% with normalized earnings), Baidu (10%) and Bookscape (30%). Disney was underlevered, Tata Motors was over levered and Bookscape was at its optimal. We closed the class by looking at an extension of the cost of capital approach, which allowed us to bring in expected bankrutpcy costs into the discussion.

Now, to the project, which I know has been on the back burner for a while. I know that some of you are way behind on the project, and as I mentioned in class today, I will offer you a way to catch up. If you get a chance, please try the optimal capital structure spreadsheet (attached) for your firm and bring your output to class on Wednesday. It will help if you have a bottom up beta (based on the businesses that your company operates in) and an ERP (given the countries it gets its revenues from) but if you don’t, use a regression beta and the ERP of the country in which your company operates (for the moment). Until next time!

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

4/14/15 In class yesterday, we talked about how a firm can borrow money to buy back shares and, in the process, make its shareholders better off, primarily due to the tilt in the tax code due to debt. However, it is a trade off and only firms that have debt capacity (are under levered) will gain from leveraged recapitalizations. If you are struggling with that concept, this week’s puzzle will come in handy. I focus on Walgreens, a company that has been targeted by activist investors as a good candidate for a leveraged recap. You can read the background here, with both the investor and company viewpoints on the wisdom of a recapitalization:
However, both sides have weak links in their arguments. To make your own judgment, try doing the assessment on your own. Everything you need is at the link below:
If you have some time, try it out. It will help you (I think) on multiple fronts. Until next time!

We started today's class, using the optimal capital structure spreadsheet to compute the optimal debt ratios for Walgreens. We then looked at extending the approach to financial service companies, where the focus shifts to regulatory capital and equity and the determinants of optimal debt ratios. We noted that higher tax rates, higher cash flow capacity (EBITDA/EV) and lower risk all translate into higher optimal debt ratios and explain differences in optimals across companies. Across time, the optimal debt ratios for all firms will become higher if the bond market demands less of a premium for risk (default spreads) than the equity market (with equity risk premiums). In the final part of the class, we looked at coming with optimal debt ratios by looking at the rest of the sector and the rest of the market. Next session, we will move on to the other half of the financing principle: whether and when to move to the optimal and designing the perfect debt. The post class test and solution are attached. Until next time!

Attachments: Post-class test and solution, Walgreens: Historical Data and Walgreens: Optimal Capital Structure


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://www.stern.nyu.edu/~adamodar/podcasts/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
I have attached the Dell capital structure spreadsheet. You will notice that this spreadsheet which is from two years ago has a few minor tweaks that make it different from this year's version, but it is fundamentally similar.

I know that I have been sending you serial emails on the project over the whole semester and that some of you are way behind. Since it may be overwhelming to go back and review every email that I have sent out over time, I thought it would make sense to pull all the resources that I have referenced for the project into one page, which you can use as a launching pad for starting (or continuing) your work on the project.
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:

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, to put muscle behind 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).


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. Better still, if you can plug the numbers in for your own company and get the optimal, I would be ecstatic. Until next time!

Attachment: Issue 10 (April 18)


As we approach the closing weeks for the class, we will build on the optimal debt ratio that we estimated last week and look at the next step: whether to move to the optimal and if so, how quickly and what the right type of debt for a firm should look like. 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.

Also, in case it got lost in the email I sent on Friday, I have created a hub for all of the materials related to the project. Visit it, when you get a chance.

Finally, I do know that a few of you who are second year MBAs have a senior trip that overlaps with the final exam and had asked about an early final. I was able to get a room and a time for this early final. It will be in KMEC 2-90 from 9.30-11.30. If you are not going on the senior trip, please do not take advantage of this option.


In today's session,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). We then followed up by examining the process of finding the right debt for your firm, with a single overriding principle: that the cash flows on your debt should be matched up, as best as you can, to the cash flows on your assets. The perfect security will combine the tax benefits of debt with the flexibility of equity.

At this stage in the class, we are close to done with capital structure (chapters 7,8 &9) and with all of the material that you will need for quiz 3 (which is not until a week from Wednesday). Thus, you can not only finish this section for your project but start preparing for the quiz at the same time. Quiz 3 and the solution to it are also up online, under exams & quizzes on the website for the class:
Past Quiz 3s: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz3.pdf
Past Quiz 3s solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/prqz3sol.xls

I have also attached today's post class test & solution.

Attachments: Post-class test and solution


This week's puzzle lays the foundation for 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">Surplus notes: What are they?
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.

Attachments: The 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.

In the second half of the class, we started on our discussion of dividend policy. We began by looking at some facts about dividends: they are sticky, follow earnings, are affected by tax laws, vary across countries and are increasingly being supplanted by buybacks at least in the United States. We will continue the discussion of how much companies should return to investors in the next session. The post class test & solution for today is attached.

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 to include 2013 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 of debt for each period. You can also enterprise value (which is market value of equity + net debt), if you are so inclined. I know that you should be including the present value of lease commitments each period, but that would require doing it each year for the last ten.

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.

Attachments: Duration Spreadsheet

4/24/15 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). Here are the details on the webcast:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/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. Until next time!

Bad news: Another weekly newsletter for you. Good news: It is the second to last one, which is my not-so-subtle way of telling you that the end of the semester is fast approaching. Until next time!

Attachment: Issue 11 (April 25)


The last quiz will be this week on Wednesday and as I have mentioned before, it will be on capital structure, covering chapters 7-9 in the book and the first half of the second lecture note packet (until you get to dividend policy). The review session for the quiz will be Tuesday from 12-1 in KMEC 2-60 and the webcast will be available shortly thereafter. I am attaching the slides that I will be using for that session. Finally, here is the seating for the last quiz:
If your last name starts with Go to
A-N, W-Z Paulson Auditorium
O- V KMEC 1-70
I apologize profusely to those at the end of the alphabet (W-Z) for not getting you into KMEC 1-70 but the room cannot fit more than 100 and at 330 people, I could not fit everyone in there for the quizzes. I will get you in there for the final exam.

Attachments: Review presentation


We spent all of the session setting up the trade off on dividends, starting with the argument that Miller/Modigliani made that dividends don't matter (in a world where investors are taxed at the same rate on dividends & capital gains & stock issuance is costless) to the dividends are bad school (built on the almost century long higher tax on dividends) to the dividends are good school. We closed by looking at two bad reasons for paying dividends (that they are more certain, that you had a good year) and three potentially good reasons (to signal to market, to make your clientele happy and to take advantage of debt holders). In the last part of the class, we introduced the notion of FCFE or potential dividends.

However, most of you are are probably focused on the third quiz and a few quick notes:
1. Seating arrangement: The seating for Wednesday's quiz is as follows:
If your last name starts with Go to
A-N, W-Z Paulson Auditorium
O- V KMEC 1-70

2. Review session: The review session will be in KMEC 2-60 from 12-1 tomorrow. The review presentation was attached to yesterday’s email. So, please print it off when you get a chance, since I will not be able to make copies for tomorrow.

3. Content: The quiz will cover capital structure; Lecture note packet 2: 1-141; Chapters 7-9 in the book

Attachments: Post-class test and solution


In case you were not able to make it to the review session, the streaming video is up and the downloadable version should be up soon. You can get the streaming video at this link.
If you were at the review session or watched it, I did leave you with one task: estimating the buyback price at which the remaining shareholders get nothing. I don’t know whether you tried this, but here is what you need to do:
Change in value = $60 million
The entire change in value has to go to the shareholders who sell their shares back. Assume that the buyback price is $X. Here is the equation that you would need to solve for:
(100/X)*(X-25) = 60
The first term in the equation is the number of shares bought back with the $100 million in new debt (given in the problem) and the second term is the increase in value that goes with each share bought back. The answer I get for X is $62.50. As a test, plug it back into the valuation and value the remaining shares outstanding, just as I did on the other buyback prices in the review and see if the remaining shares are now worth only $25 each.

There also seems to be some confusion about how the third quiz works, especially if you have done well on the first two quizzes. Since there seems to be some confusion about what will happen if you miss quiz 3 or to your worst quiz, in general, I thought I should clarify the grading process.
1. If you take all three quizzes, your worst quiz will have its score replaced with the average score you get on all of the other exams in the class (two quizzes and the final). Thus, if you get 8, 6 and 4 on your three quizzes and a 26/30 on the final, your worst quiz is of course the 4 and the average score you got on your other exams was 80% (8+6+26)/50, giving you a score of 8 on your worst quiz.
2. If you did not take all three quizzes, the 10% on the quiz you missed was moved to the remaining exams:
Thus, if you missed quiz 1, your weights on the remaining quizzes would be 12% for quiz 2, 12% for quiz 3 and 36% for the final
If you missed quiz 2, your quiz 1 remains at 10%, but your quiz 3 will be 12.5% and your final will be 37.5%
If you miss quiz 3, your quizzes 1 and 2 remain at 10% apiece but your final is worth 40%
The open question seems to be whether you should choose to miss quiz 3, if you did really well on quizzes 1 and 2. The answer is no, since it will not change your scores on those quizzes and your final will now be worth 40%. So, you will be creating more pressure on yourself for the final exam. In other words, you can never be better off by missing a quiz but you run the risk of being worse off.

Finally, the weekly puzzle for the week is up and it is about the GM buyback. The links are below:
News story: http://www.wsj.com/articles/gm-commits-to-immediate-5-billion-share-buyback-1425900636
HBR Article on GM Buyback: https://hbr.org/2015/03/gms-stock-buyback-is-bad-for-america-and-the-company
My blog post on GM Buyback: http://aswathdamodaran.blogspot.com/2015/03/the-gm-buyback-beyond-hysteria.html
Questions for weekly puzzle: https://www.stern.nyu.edu/~adamodar/New_Home_Page/cfpuzzles/cfspr15puzzle12.htm
I know that there is no chance that you will try the weekly puzzle before tomorrow, but please try it, if you get some time after the quiz, since it may help you on the dividend section of your project.
I hope that you have confused you enough in this email.


The quizzes are not done yet but I am working on them. Today, in class, we moved on to look at how much a company can afford to pay out as dividend. This measure, that I titled FCFE, is the cash left over after taxes, reinvestment needs and net debt payments. When a company pays out less than its FCFE, it is accumulating cash, and we laid the foundations for analyzing dividend policy by asking the key question: do you trust managers with your cash? During the session, we applies this framework to the Disney, Vale and BP.. Post class test and solution attached

Attachments: Post-class test and solution


Your quiz is done and is ready to be picked up outside the front door to the finance department. As always, they are in alphabetical order. Please leave them in the same order. I am attaching the solutions to the quizzes and the distribution for the quiz. You will be getting a much longer email later today (with the remaining to-dos on the project) and you can view that either as a promise or a threat.

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


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 and have imposed a page limit of 25 pages on the report. Please keep your report to that limit. 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 11 days from today. It is due by 5 pm on May 11

5/1/15 As we work through the analysis of dividend policy, you have to look at the trade off on traditional dividends (and whether your company is a good candidate for paying dividends or increasing them). The first webcast looks at the question, using Intel as an example:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/dividendtradeoff.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/dividends/dividendtradeoff.pdf
You have to follow up by assessing potential dividends and whether your company is returning more, less or just about the same amount as that potential dividends. The second webcast looks at the question, again using Intel:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/dividendassessment.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/dividends/dividendassessment.pdf
Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/dividends/IntelDividends.xls
Annual Report: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/dividends/IntelAnnualReport.pdf
Historical data: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/dividends/IntelBloomberg.pdf
I hope you get a chance to take a look at both webcasts.

The last newsletter for the semester is attached. That is the good news (if you hate this newsletters or just ignore them). The bad news is that we have two weekends left in the class and that effectively makes the final project a priority. I emailed you a to-do list on Thursday and links to two In-Practice webcasts on dividends yesterday. Unfortunately, I screwed up on one of them (the dividend assessment one) since my screen capture is of the wrong display (and a blank screen). I redid the webcast today from home and while you can hear my dogs whining and the phone ringing in the background, it works reasonably well. The link should take you to the new version now.
The dividend/FCFE spreadsheet is a little tricky because it requires you to switch signs on a couple of inputs (if you get them from the statement of cash flows). If you are all caught up with dividends, you should try the valuation spreadsheet:
It is not a difficult spreadsheet to work with. So, give it a shot!

Attachment: Issue 12 (May 2)

5/3/15 In tomorrow's class, we will finish the dividend discussion by Tata Motors and summing up the process estimating potential dividends (FCFE) and following through with whether as investors in these companies, we would push them to return more, less or leave dividend policy unchanged. We will then start on valuation, laying the foundation (which should be familiar from investment analysis) tomorrow, and continue talking about value on Wednesday, tying together investment, financing and dividend policy to it.

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 also looked 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.

In the second half of the class, we laid the foundations for valuing companies by talking about the importance of narrative and connecting them to numbers. If you are interested, here is the talk that I gave to the CFA annual conference on the topic last year:
It is really long, but you can watch a little bit of it, if you are so inclined. We ended the class by talking about the distinction between valuing equity and valuing an entire business. Finally, the post class test and solution are attached.

Attachments: Post-class test and solution


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 in May 2013. 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
As I mentioned in class, spreadsheets may be all about the numbers but valuations reflect narratives. To get a sense of what my Apple narrative looked like at about the time of this valuation, please take a look at this blog post
Blog post on Apple valuation in May 2013: http://aswathdamodaran.blogspot.com/2013/04/apple-calm-after-storm.html
Once you have gone through the webcast, please try entering the numbers for your company into the spreadsheet (which I have attached) and if you can, bring the output to class tomorrow. This spreadsheet does have a few more bells and whistles added to it, since the original webcast but the structure is fundamentally the same, though the numbers have all been updated.

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 overreaches. I know that you are capable of protecting yourself, and if you feel comfortable, please go ahead and turn off the defaults. Until next time!


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.
I hope you get done with your number crunching 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... Post class test and solution are attached.

Attachments: Post-class test and solution


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 160 & 161, 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 excess return 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. My value is very different from the price. What's wrong?
First, very different is in the eye of the beholder. i have valued companies and obtained values that are less than one fifth of the price and five times more than the price. The reason is sometimes in my inputs but it can also be a massively under or over priced stock. So. check your numbers and if you feel comfortable with them, let it go.

16. When will this torture end?
Four days from today (5 pm on May 11)... but the memories will last forever…


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,
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. Once you are done with your valuation, you will check it against the market price. If it is different, you will get the urge to go back and tweak your inputs to get your value to be closer to the price. Try to fight that impulse, though it is tough to do.

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 “The Fat Lady is waiting".
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…

5/9/15 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 a couple of lacrosse 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: 6
Updates to come: 300+
If your response is what summary, I am attaching the summary sheet, just in case.

The summaries continue to roll in.
Summaries received: 168
Still to come: 160

A quick head's up about tomorrow. I will continue to pull the numbers from any summaries I receive through 7 am tomorrow. So, please keep them coming. I am planning on getting the presentation ready, using your summaries as the basis, on my train ride into work tomorrow. While it is unlikely that I will be able to make copies before class, I will email you the presentation. On a different note, I know that you are probably exhausted after pulling this together, but please do try to come to class tomorrow. Not only will it provide an overview of the class and a preview of the final exam, but I will try to make it memorable. There will be fireworks, pearls of wisdom and small hints about the final exam (which will not be webcast).


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 6.40 am), I have attached the presentation to this email as well as the summary numbers for every company in the class. 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 Thursday from 12-1 in KMEC 1-70 (Note the change in room) and it will be webcast, if you cannot make it. The final exam is on Friday from 10-12 and I will send the seating chart out tomorrow. The early final, by invitation or permission only, is on Thursday from 9.30-11.30 in KMEC 2-90.

One final reminder. The CFEs have to be completed for you to be able to access your grades and you have between May 12 and May 14 to get this done. Please, please do it tomorrow and get it out of the way. To show you how seriously I take the suggestions in these evaluations, I still remember my very first semester teaching at UC Berkeley in the Fall of 1984. It was an undergraduate corporate finance class and I was terrified that I would screw up. When I got the evaluations back, I reviewed them carefully for suggestions and I still remember my favorite suggestion. It was one line and it said "Wear more earth tones!!" It is the one suggestion that I have never taken to heart..

Student Instructions for Completing Online CFEs

Login to https://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password.
Select the CFE that you wish to complete.

Attachments: Closing presentation, Project summaries


I am just starting work on your projects and they should start going out sequentially as I get each one graded. While you wait on tenterhooks for that grade, a few other housekeeping details:
1. CFE
The CFEs are now ready to go. The window stays open only until Thursday (about 72 hours)
Student Instructions for Completing Online CFEs

Login to https://www.stern.nyu.edu/cfe. Use the same login and password that you use for accessing email. If you have not activated your Stern account yet, please visit http://start.stern.nyu.edu to activate your Stern account and password.
Select the CFE that you wish to complete.

2. Final exam seating
The final exam is scheduled for 10-12 on Friday and the seating arrangement is as follows:
If your last name begins with Go to
A - J KMEC 2-60 (Note the change in room)
K - Z Paulson
If you get additional time to take the exam, please come to my office at 9.00 am so that I can get you started in a room in the finance department.

3. Final exam review session
The review session is scheduled for 12-1 on Thursday in KMEC 1-70 (again, note room change). I have attached the review presentation to this email. Incidentally, all past final exams and solutions are already online, in case you want to start working through them:
Past finals: https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/cffinals.pdf
Past finals (solutions): https://www.stern.nyu.edu/~adamodar/pdfiles/cfexams/cffinals.xls

Attachments: Review Presentation


The webcasts for the review session are up and running. If you were not able to make it to the session, they are available:
Streaming: http://nyustern.mediasite.com/Mediasite/Play/69e93eaf5636486997f25ba66745284a1d
Downloadable: https://nyustern.mediasite.com/Mediasite/FileServer/2fa71667-5d89-4131-b70d-d2cac9fa99c1/Presentation/69e93eaf5636486997f25ba66745284a1d/videopodcast.mp4

Attachment: Review Presentation

5/14/15 I forgot about this completely but was reminded by Jaafar (thank you). I had asked you to work out the solution for the price of the remaining shares if the buyback by Campbell was at $38. The answer is $36.61and I have attached how I got there. You can play with the buyback price to see how it affects the remaining shares. It is a very good exercise.
On a different note, just in case you need a reminder, the exam is from 10-12 tomorrow. (Please, please don’t show up at 10.30.) And here is the seating
If your last name begins with Go to
A - J KMEC 2-60 (Note the change in room)
K - V Paulson
W - Z Either room
Until next time!

I am sorry it took me longer than I wanted it to, to get the finals done, but I was at my son’s graduation from Saturday through last night. The exams are ready to pick up in the usual spot and I have attached the solutions. I have also attached a distribution but with no grades attached, since the final grades should be out very soon.

Attachments: Final solution (a or b).


he grades are officially in and you should be able to check them online soon (I actually have to turn them over to the records and registration people because the Stern computer system will not accept class grades from me, since it thinks that the class is too big. Go figure, since it had no trouble collecting your tuition for enrolling you in the same class!) . In the interests of transparency, I have attached a spreadsheet where you can enter your scores on the quizzes, the final exam, the case and the final project and see your final grade computation. On a more general note, I want to thank you for the incredible amount of work you put into this class. You made it easier for me to teach and I really appreciate it. I know that I buried you under emails (this is the 122nd of the class), assignments, projects and weekly puzzles and I also know that most of you were unable to keep up. However, the material for the class will stay online and on iTunes U for the foreseeable future. If you want to review parts of the class, please do go back and review the lecture, look through the notes and even try that week's puzzle. If you really, really want to master corporate finance, don't waste too much time reading books & papers or listening to lectures. Pick another company (preferably as different as you can get from your project company) and take it through the project analysis. Each time you repeat this process, it will not only get easier and more intuitive, but you will always learn something new. I still do!

I ope that you have a wonderful summer planned out and that those plans come through. If you choose to continue to be tortured, I hope to see you in valuation in the fall. Unfortunately, due to an undergrad Corporate Finance class that I will be teaching in the spring, there will be no spring version of the class). If you decide that you have had enough, I don't blame you and I hope that you are taking something away from this class which will be useful in whatever you choose to do. That's about it for my last email. Until next time or perhaps for the last time!

Attachments: Check your grade on the class