title small bio t4 t9
t1 t5 t10
t3 t6 t11
t2 t8  




The Email Chronicles (Valuation - Fall 2013)

The emails for this class will be collected in this file. Have fun with them!

Date Email sent out

To begin with Stern has revamped the stern links interface. So, nothing seems to be working at the moment! So, this email may end up in purgatory for all I know. Anyway, I am going to hope it gets through.

I restrained myself from sending you emails all summer but the respite is over... the torture begins again (http://www.youtube.com/watch?v=7edeOEuXdMU) I am sure that you are finding that break is passing by way too fast, but the semester is almost upon us and I want to welcome you to the Valuation class. One of the best things about teaching this class is that valuation is always timely (and always fun...) Just as examples: Is Facebook still a bargain, after its price has zoomed over the last year? Is Icahn right about Apple? If you have not visited my blog, I put my thoughts down on these issues (though I am still working on the Kardashian valuation) over the summer:

1. Preclass work: I know that some of you are worried about the class but relax! If you can add, subtract, divide and multiply, you are pretty much home free... If you want to get a jump on the class, you can go to the class web site

2. Syllabus & Calendar: The syllabus for the class is available and there is a google calendar for the class that you can get to by clicking on
For those of you already setting up your calendars, it lists when the quizzes will be held and when projects come due. The final exam is scheduled for December 13 from 1-3. So, you can make your plane reservations to go home right after!

3. Lecture notes: The first set of lecture notes for the class should be available in the bookstore by the start of next week. If you want to save some money, they can also be printed off online (if you want to save some paper, you can print two slides per page and double sided). To get to the lecture notes, you can try
Please download and print only the first packet on discounted cashflow valuation. If you have trouble printing the pdf file, try the powerpoint file instead If you want to save paper, you can download the pdf file on you iPad, Android or Kindle and follow along...

4. Books for the class: The best book for the class is the Investment Valuation book - the third edition. (If you already have the second edition, don't waste your money. It should work...) You can get it at Amazon or wait and get it at the book store... If you are the law-abiding type, you can buy "Damodaran on Valuation" - make sure that you are getting the second edition. Or, as a third choice, you can try The Dark Side of Valuation, again the second edition, if you are interested in hard to value companies.. Or if you are budget and time constrained, try "The Little Book of Valuation".

5. Valuation apps: One final note. I worked with Anant Sundaram (at Dartmouth) isn developing a valuation app for the iPad or iPhone that you can download on the iTunes store:
It comes with a money back guarantee... Sorry, no Android version yet... As for Blackberry, fuggedaboutit... Dead technology walking!!!!!!!! I am looking forward to seeing you in a few days.. I think we are going to have a lot of fun (at least, I am...

6. Online reach: As you probably know (if you were in my corporate finance class), I have tried over the last few years to provide multiple ways to access the class. So, you will shortly be getting a second email from me (if this one gets through) inviting you to to join the Lore grouping for this class and offering you a way to also add this class on to your Apple devices on iTunes U. I know that this may be over kill, since you will be physically in the class, but I think you will find it useful.

I am looking forward to seeing you on Sept 4 - Wednesday at 10.30 at KMEC 2-60 to be precise.. I think we are going to have a lot of fun. Until next time!


As we move towards opening day (as I like to call it), there are a couple of housekeeping to-dos:

1. Accept your invite to the Lore online class : You should have received an invitation earlier today to join Lore, a service I use to keep the class materials organized. Please accept the invitation. If you did not receive an invitation, it is possible that Stern has the wrong email address for you. You can still join the class, by going to http://www.lore.com, click on join the course and then enter RV9Q3U as your code.

2. iTunes U course: I will be putting the class on iTunes U. If you have an Apple device (iPhone, iPad), joining the class is easy. You should first go the App store and download iTunes U for the iPad/iPhone. It is free. After you have downloaded the app, you can do it in one of two ways.
a. Click on this link (from your Apple device, not your computer): https://itunesu.itunes.apple.com/audit/COJN7B8T55
b. Open iTunes U on your Apple device. Click on Catalog and go to the bottom of the page. It should have an ENROLL button. Click on it and enter this code: J7R-DK5-BM3
The class will show up on your iTunes U app and you will get a notification (which you can turn off, if you want) every time I post something to the class.
If you are unlucky enough to have an Android device (phone or tablet), you can still access iTunes U but it will take a little more work. You have to first download the the Tunesviewer app (http://tunesviewer.sourceforge.net). You can then access the iTunes U course. I think it is worth the trouble. The lectures and lecture notes look/sound better on a tablet than they do on the computer.


I hope that you are back in school and that you are at least gradually making the transition to the different rhythms of class. Just in case you have not been reading your emails for the last few weeks, a few things to get up to speed:
1. Previous emails: This is the third email for the class (and class has not even started). If you have no idea what the first two emails were about, you can find out by clicking below:
Please read the second emails for details about getting online connections to the class.

2. Lecture notes: The lecture notes for the class are available. You can get the first packet by going to
If you have trouble with the pdf file, you can try the powerpoint file. It is also available at the bookstore (really). You will not need the packet until next week.

3. Capital IQ access: As a Stern student, one of the few privileges you get is access to Capital IQ, an incredibly comprehensive dataset that includes rich information on market, accounting and corporate governance data on about 41,000+ publicly traded companies. At some point in the class, you will need access to Capital IQ. So, at the risk of jumping the gun, here is the email that I got this morning from IT:
If you are planning to have your MBA students use Capital IQ this semester, please be advised that the enrollment period for the fall semester is from September 3rd to September 30th. For an account this semester, they can enroll by filling out the CapitalIQ survey on their Career Account www.stern.nyu.edu/careeraccount . We are letting you know so that you can pass the message along to the MBA students in your classes if appropriate. Please note that if students will need Capital IQ for projects later on in the semester, they will need to request access during this official enrollment period at the beginning of the semester. In addition, there will be an optional Capital IQ training session for students on Wednesday, September 11th at 5pm and a webinar on September 19th at 12pm. Attendance at the sessions is not required in order to request an account, but will provide basic training. Students can RSVP through their Career Accounts.
Please do this as soon as you can (how about right now?).

4. Class tomorrow: I will see you in the revamped, new KMEC 2-60. While I think that the school spent way too much money (they always do), they did a pretty good job with this room. I think we will have fun with the room. I will also bring physical copies of the syllabus, project description and the lecture notes for the first two sessions. I know that some of you will be missing the class, and if you are, you can download the pdf versions of these three documents by going to:
The webcasts of the sessions will show up about an hour after class tomorrow. So, you can catch up! Until next time!


First, a quick note about today's class. During the session, I made clear that this was a class about valuation in all of its many forms – different approaches (intrinsic, relative & contingent claim), different forums (for acquisitions, value enhancement, investing) and across different types of businesses (private & public, small and large, developed & emerging market). After spending some time laying out the script for the class (quizzes, exams, weekly tortures), I started on the first packet (intro to valuation) by giving you my reasons for doing valuation (to fight looming lemingitis) and starting on the discussion of widely held misconceptions about valuations.

With that out of the way, have you classified yourself yet? Are you a proud lemming, a "Yogi bear" lemming or a lemming with a life-vest? While you are pondering that life-changing question, I do have some points to make:
1. Please do find a group to nurture your valuation creativity, and a company to value soon. If you are ostracized, please let me know...

2. Once you pick a company, collect information on the company. I would start off on the company's own website and download the annual report for the most recent year (probably 2012) and then visit the SEC website (http://www.sec.gov) (for US listings) and download 10Q filings...

3. The web cast for the first class are up in all three forums (website, iTunes U and Lore). You can access it by going to:

4. Post class test: To review what we did in class today, I prepared a very simple post-class test. I have attached it, with the solution. Give it your best shot.

If you did not get the syllabus, project description and the valuation intro in class this morning, they are all available to print off from this site.

Just to restate what I said in class this morning, you can pick any publicly traded company anywhere in the world to value. The non-US company that you value can have ADRs (but does not have to have ADRs) listed in the US but you still have to value it in the local currency and local market. You can even analyze a private company, if you can take responsibility for collecting the information.

Aswath Damodaran

Attachments: Post-class test and solution.

9/4/13 Hi!
As promised in class today, the first valuation of the week is available for you to try your hand at. You can start with my blog post (which just went on) on how I approached the valuation and my narrative (I am big on telling the story behind the numbers):
Blog post: http://bit.ly/1dIceph
Once you have worked through the blog post, please download the latest financials for Tesla.
Annual report: https://www.stern.nyu.edu/~adamodar/pc/blog/tesla10K.pdf
Quarterly report: https://www.stern.nyu.edu/~adamodar/pc/blog/tesla10Q.pdf
You can download the data on individual automobile companies:
Industry data: https://www.stern.nyu.edu/~adamodar/pc/blog/autos2013list.xls
Next, you can download my spreadsheet (with my valuation):
Valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/teslavaluation.xls
Once you have made your tweaks or major changes to my valuation, please visit the Google shared spreadsheet and post your numbers. Please don't delete columns or add them to the Google shared spreadsheet.
Google shared spreadsheet: https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadHh3OVBFa0ljLV96Vm83VmZwcUF5TXc&usp=sharing
I know that some of you feel ill equipped to do valuation this early in the class, but trust me on this one. YOU CAN DO IT!
Until next time!
9/5/13 Hi!
I hope that you were able to take a look at the Tesla valuation and made it your own. (Please. I won't take it personally if you disagree with me). Anyway, a couple of quick notes:
1. Audio on first webcast: The school spent a lot of money revamping KMEC 2-60 and for the most part, I like the new look. There is, however, a cost when you rip out and reconstruct rooms. Not everything works the way it is supposed and the recording system in the room did not work very well for the first webcast (the audio has a lot of noise and does not work in stereo). I am sorry! I have talked to the AV people and they are trying to get it fixed before next week. I will keep you posted.
2. Project update: This week's task is simple. Get a group together and pick a company. Don't over analyze it. Every company is interesting and if you do change your mind, you can always switch companies.
Not much more to report for the moment. Have a great weekend!
9/6/13 Hi!
I know! I know! Friday is supposed to be your day of rest, but I decided to break that rule. (If you make the rules, you can change them). I know that many of you still pondering your company choices and group dynamics, but if and when you pick a company, the first step is to get the raw material you need for your valuation. These include data on the company (annual reports, regulatory filings like the 10K/10Q), sector wide data (numbers for other companies in your sector) and macro economic data. I know that many of you already know exactly how to do this. However, if you feel uncertain, you can try this webcast out.
Incidentally, I do talk about using Capital IQ to get sector wide information in this webcast. If you have not registered for Capital IQ yet, I am reproducing the message I got from the tech people a few days ago: (I know that you got the same message a few days ago... but just in case you did not...)
If you are planning to have your MBA students use Capital IQ this semester, please be advised that the enrollment period for the fall semester is from September 3rd to September 30th. For an account this semester, they can enroll by filling out the CapitalIQ survey on their Career Account www.stern.nyu.edu/careeraccount . We are letting you know so that you can pass the message along to the MBA students in your classes if appropriate. Please note that if students will need Capital IQ for projects later on in the semester, they will need to request access during this official enrollment period at the beginning of the semester. In addition, there will be an optional Capital IQ training session for students on Wednesday, September 11th at 5pm and a webinar on September 19th at 12pm. Attendance at the sessions is not required in order to request an account, but will provide basic training. Students can RSVP through their Career Accounts. Until next time!

I did give you a day off yesterday. I thought about a newsletter for the week but decided that with no news to speak off, it would have to be a blank one. So, skipped it. But time to get back to the grind.
First, I hope you have had a chance to try your hand on the Tesla valuation. As I noted in my earlier email (from Wednesday night), give it a shot even if you feel completely uncertain about valuation. All of the information you need is on the first blog post I made on Tesla:
I must have pissed off some Tesla bulls, because I was on the receiving end of hundreds of emails and tweets accusing me of everything from being a "paid mercenary" for the shorts to the always effective "just an academic". While I have a thick skin, I decided to throw the Tesla bulls a bone in a follow up email:
If you get a chance to read it. As I note at the end of the post, "if you are a Tesla bull and are threatened by a blog post (by an academic, after all), you must not be very secure in your bullishness." Maybe, I should not have used those words, because they seem to have set off an entirely different group of Tesla bulls.

Next, moving right along, we will start tomorrow's class with what I call the Bermuda triangle of valuation (i.e., the place where good valuations get sucked up) and talk about the trifecta: bias, uncertainty and complexity. I will then move on to describe in very broad terms the basis and arguments for and against intrinsic valuation (DCF), relative valuation (multiples/pricing) and contingent claim valuation (real options). In fact, to get the conversation started tomorrow, we will begin with a set of valuation scenarios where I would like you to think about both the direction the bias and how it manifests itself in your valuation choices. Please review it very quickly (about five minutes will do) before class tomorrow.

On Wednesday, we will start on the discussion of the first input in valuation: the risk free rate. That should be easy, right? I wish. Until next time!

Attachment: Valuation bias: A test


Today's class started with a test on whether you can detect the direction bias will take, based on who or why a valuation is done. The solutions are posted online. We then moved on to talk about the three basic approaches to valuation: discounted cash flow valuation, where you estimate the intrinsic value of an asset, relative valuation, where you value an asset based on the pricing of similar assets and option pricing valuation, where you apply option pricing to value businesses. With each approach, we talked about the types of assets that are best priced with that approach and what you need to bring as an analyst/investor to the table. For instance, in our discussion of DCF valuation and how to make it work for you, I suggested that there were two requirements: a long time horizon and the capacity to act as the catalyst for market correction. Since I mentioned Carl Icahn and Bill Ackman as hostile acquirers (catalysts), you may want to look at Herbalife, the company that Ackman has targeted as being over valued. See if you can get a list going of how he is trying to be the catalyst for the correction... and think about the dark side of this process.

Speaking about input fatigue, I am attaching the link to a New York Times piece on decision fatigue. It is a fun and interesting read. Please take a look at it, when you get a chance:

Finally, as will be the case with every session of this class, there is a post-class test (with a solution). I have also attached the answers to the bias test that we started the class with. By the time, I got to scenario 7, I am sure that you lost track of what we were finding.

Attachments: Post-class test and solution.

9/10/13 Hi!
As most of you are probably aware, Apple's big announcement is scheduled for later today. Since Apple is one of my obsessions, I thought I would send you my valuation of Apple. As you review my inputs, remember that I love the company and its products and that love may be skewing my numbers. If you are a Microsoft fan (what's wrong with you?) or an Android buff (Yikes!), you may find my numbers hopelessly optimistic. So, change them.
The place to start is with the blog post that I have on the valuation. As you read the post, you will notice that I reference back to previous blog posts. The reason I do so is that I cannot hide the history that I have for the company. It would be asking way too much for you to read all of the prior posts, but the more of them that you read, the better:
Blog post: http://bit.ly/1aZaNlg
Having read the blog post, you can download Apple's most recent 10K, which given that its fiscal year ends in September, is very old (It is from 2012) and its most recent 10Q (from July) which has the first 9 months of the most recent fiscal year.
Apple's 10K: https://www.stern.nyu.edu/~adamodar/pc/blog/apple10K2012.pdf
Apple's 10Q: https://www.stern.nyu.edu/~adamodar/pc/blog/apple10QJuly13.pdf
My valuation is included in the spreadsheet at the link below:
My valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/AppleSept13.xls
If you get a chance, go in and make this valuation your own (change my inputs). If you feel so inclined, the shared Google spreadsheet awaits:
Shared spreadsheet: https://docs.google.com/spreadsheet/ccc?key=0Alt0SdORYnWadGVfSGpCT254Yy16cG9BaVpFcXV0LXc&usp=sharing
See you in class tomorrow! Until next time!

Today's class started with a look at a major investment banking valuation of a target company in an acquisition and why having a big name on a valuation does not always mean that a valuation follows first principles. After setting the table for the key inputs that drive value - cash flows, growth, risk, we looked at the process for estimating the cost of equity in a valuation. The key concept is that of a "marginal" investor, who is diversified and looking at risk through that investor's eyes. We spent the rest of the session talking about what should be (but no longer is) the simplest input into the process: the risk free rate.
I hope that the discussion of riskfree rates a left you fairly clear about what to do next. In case, you are still confused, this is the next step in the process:
1. Pick a company (in case you have not already).
2. Determine a currency that you will value the company in. Once you have decided on the currency, find a riskfree rate in that currency. If your company is a US or European company, you just got lucky. Either take the easy way out and use the US T.Bond rate as the dollar riskfree rate and the German 10-year bond rate as the Euro riskfree rate, or adjust them for the default risk you see in each sovereign.
If you are valuing a company in an emerging market in the local currency (be brave), your job is a little more complicated.
2a. Get the longest term government bond rate you can get in the local currency. Here is the link that I have found most useful in this endeavor:
2b. Get the local currency rating for the country by going to the moody's web site: http://www.moodys.com (Look under sovereign ratings).
2c. Estimate the default spread given the rating by downloading the country default spread spreadsheet that I have attached to this email. If you prefer to get CDS spreads, use the current CDS spreads that I have as an attachment (I will post both under the webcast page). You can also get them from a Bloomberg terminal by typing in SOVR.
2d. Riskless Rate = Government bond rate - Default Spread given rating

I have a paper on riskfree rates that elaborates on the discussion in class today. It is really not a painful read, if you can spare the time. You can get to it by going to:

Finally, I did a post on my blog specifically on the question of the risk free rate being low and the implications for valuaton:

I am off to Santiago, Chile, tonight to do a valuation seminar and am looking forward to my first trip to the country. In the meantime, though, to keep you occupied, I have also attached the post-class test for today's session and the solution to the test.

Attachments: Post-class test and solution., Sovereign CDS spreads (9/13), Moody's sovereign ratings (9/13)


Today's class started with a discussion of equity versus firm valuation and the requirement of consistency. I argued that, if you do your valuations right, the value of equity that you get by valuing equity directly should be equal to the value of equity you obtain by valuing the business and subtracting out debt. I also mentioned that it is really hard to do but well worth trying. To bring home the concept, I put together the first weekly challenge. Recognize that this is completely optional and that you will not be graded on whether you get the right answer. However, if you do get a chance to work through the weekly challenge, please go to lore.com (if you are not registered yet, let me know and I will send you an invitation) and submit your answer. I will give you my solution late on Sunday. I hope you get a chance to give it a try! (It is kind of fun, in a sick sort of way!!!!)

Attachment: Weekly challenge #1


I hope that you have a chance to pick a company to value and that your group is complete (or close to it). If you have picked a company and collected the basic data (see last week's webcast), you probably more data in front of you then you want. In particular, those of you who have picked US companies have a 10K to read, in all of its bulk. Today's valuation tools webcast is about reading a 10K, with the intent of valuing a company. You can get the webcast by going to:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Reading10Knew.mp4
The webcast is accompanied by some supporting material, which you can get below:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/Reading10KPG.pdf
P&G 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/ProcterGamble10K.pdf
P&G valuation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/PG/P&Gvaluationfixed.xls

If you get done with this, the next step is to get a riskfree rate in whichever currency you are working in. I have a webcast (that you may or may not remember from Corporate Finance) on how to do this:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/riskfree.mp4
The webcast is accompanies by supporting material:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/riskfree.ppt
Moody's ratings (from Feb 2013): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/Moodys.pdf
CDS spreads (from Feb 2013): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/riskfree/CDSfeb13.pdf

The links are also available on the webcast page for the class and will be on iTunes U and Lore soon.

I should be back from Santiago tomorrow morning. Until next time!


I hope that you have a fun weekend ahead of you. What better way to get it started than reading the first newsletter for this class? It is attached.
On a different note, don't forget to give the first weekly challenge (also attached)( a try and post your solution on Lore.
Other than that, I enjoyed Santiago but I am glad to be back home. Until next time!

Attachment: Newsletter #1


I hope your weekend was fun! If you did have a chance to try the weekly challenge, I have attached the solution. Even if you did not, you can still take a look at both the challenge and solution.
On a different note, this week, we will talk about equity risk premiums, betas and cost of equity. With equity risk premiums, we will first start with a contrast between historical and implied premiums and the implications of using each. We will also look at the question of country risk and whether you should have different equity risk premiums for different countries, and if so, how best to estimate these premiums. With betas, I will not stick to dogma and draw lines in the sand for the CAPM but focus instead on measuring the relative risk in an investment. See you in class tomorrow! Until next time!

Attachment: Weekly challenge #1 solution


We are little more than halfway through the discussion of equity risk premiums but the contours of the discussion should be clear.
a. Historical equity risk premiums are not only backward looking but are noisy (have high standard errors). You can the historical return data for the US on my website by going to
Scroll down and look towards the top of the table of downloadable data items.

b. Country risk premium: The last few months should be a reminder of why country risk is not diversifiable. As you see markets are volatile around the world, I think you have a rationale for a country risk premium. You can get default spreads using one of the three approaches that I described last week (in my session on risk free rates). If you are interested in assessing and measuring country risk, to get from default spreads to equity risk premiums, you need two more numbers. The first is the standard deviation for the equity market in the country that you are trying to estimate the premium for. Try the Bloomberg terminal. Find the equity index for the country in question (Bovespa for Brazil, Merval for Argentina etc.) and type in HVT. This should give you the annualized standard deviation in the index - change the default to weekly and use the 100-week standard deviation. Do the same for the country bond in question. The two standard deviations should yield the relative volatility. If you have trouble finding either number, just multiply the default spread by 1.5 to get a rough measure of the country risk premium. If you are interested, I have attached my July 2013 country risk premium updates.

As for other sites that look at country risk, here is one that you may want to look at. It is the site maintained by Professor Campbell Harvey at Duke who does very good work on country risk:

c. Company risk exposure to country risk: My concept of lambdas for countries is a work in progress. I have a paper on the topic that you can read, if you are so inclined:

d. Implied equity risk premiums: I am attaching the excel spreadsheet that will allow you to compute implied equity risk premiums. I am using the numbers that I used at the start of September to come up with an equity risk premium of 5.62%.

Please try to update the implied premium, using today's numbers for the S&P 500 (easy) and the 10-year T.Bond rate (easy). Leave everything else untouched including growth rate in earnings for next five years & updated dividends and buybacks from the spreadsheet (since these were updated a month ago). Follow the instructions to get the updated equity risk premium. We will explore it further in class on Wednesday.

If you were in class today, you already know that the audio did not work and the recording reflects that. Since watching slides go by with no sounds is not useful, I have linked to last semester's session on the same topic on the webcast page. The pages are pretty much the same (except for the country risk premium page being from January 2013). I am sorry but technology does sometimes fail! Until next time!


  1. Country risk premiums: June 2013
  2. Implied Equity Risk Premium: September 2013
9/17/13 This week's valuation is a of a less high profile company than the last two. Last year, LAN, a Chile-based airline, bought TAM, a Brazil-based airline to create Latin America's largest airline, LATAM.
News story on LAN/TAM merger: https://www.stern.nyu.edu/~adamodar/pc/blog/LANTAMmerger.pdf
Since we have spent the last week talking about country risk and currency consistency, I thought it would be an interesting exercise to value LATAM. To keep things simple, I have stayed with the 2012 annual report, though I am a great believer in updating numbers. While LATAM has released quarterly data, the merger effects are creating enough noise that i think it may hurt rather than help to update.
LATAM's annual report: https://www.stern.nyu.edu/~adamodar/pc/blog/LATAMannualreport.pdf
Before you look at my valuation, please start with my narrative of how I see LATAM evolving over the next few years. It will give you some background for why I have estimated numbers the way I have.
My LATAM valuation narrative: https://www.stern.nyu.edu/~adamodar/pc/blog/LATAMnarrative.pdf
Once you have read the narrative, take a look at my valuation:
My LATAM valuation: https://www.stern.nyu.edu/~adamodar/pc/blog/LATAMsept2013.xls
Play with the numbers and see if you can make them move. Once you have your final valuation, as always, please enter your numbers into the shared Google spreadsheet:

By now, you are probably tired of equity risk premiums and I don't blame you. Today's session, though, was all about implied equity risk premiums and what causes them to change over time. Other things remaining equal, lower stock prices, higher cash flows and higher expected growth all push up the ERP, whereas a higher riskfree rate pushes the ERP down. If you get a chance, please play with the equity risk premium spreadsheet to check for yourself.
As for the inputs into the model, there is not much suspense. Here is where you can get them:
a. Level of the index: Almost everywhere
b. Cash flows on the index: For the S&P 500, I go to the source:
Click on the S&P 500 and then on index announcements. The most recent release on the buybacks/dividends on the index should be there somewhere. The only problem is that S&P updates these numbers on December 15, March 15, June 15 and September 15. So, you will have to leave the numbers unchanged during those months where there are no updates.
You have a choice on which cash flows to use in computing your premium: Current (trailing 12 month), average over last 5 years, average over last 10 years.
c. Expected growth rate: The easy route is to do what we did in class and get the data from Yahoo! Finance, where you will find it in any company's Yahoo page (under analyst estimates at the bottom of the page ). The better way to get it is to find a Bloomberg terminal, find the index in question (S&P 500 in this case) and type in EE. You will get expected earnings at least for the next 2 years and you can extrapolate from there.
d. Riskfree rate: Use the ten-year default free rate in the currency in which your expected growth/cash flows are denominated. For the S&P 500, this would be the 10-year US treasury bond rate.
If you want to carry forward and compare the equity risk premium to the bond default spread, here are the places you can go to get those numbers:
a. For the bond default spreads, visit my favorite macro data source (FRED, the Federal Reserve data site in St. Louis)

Click on categories first, then on interest rates and then on corporate bond rates. Finally, click on Moody's. You will see Baa rates going back to 1919 (Isn't that awesome?) You have to subtract out the ten-year bond rate and if you want to get that, you should find that on FRED as well. There is a iPhone and iPad app for FRED that you should download. It is free and you can download directly into Excel...
b. For the cap rates, you should try this site:
I am sure that there are better sources, but most of them require you to pay money. I am cheap..

If after all of this, you still want to read more about equity risk premiums, here is the link to my magnum opus (or something opus), the annual update I do on equity risk premiums:
Download the paper and browse through it. You will see much that is familiar.
As for betas, the key thing to recognize is that it is a means to an end: a way of adjusting for relative risk. So, keep your eyes on the prize and don't let your disdain for modern portfolio theory get in the way of adjusting for risk and estimating value.


Its your lucky week, since I have not one but two weekly challenges for you to try out. I think that they will be worth your time.
In weekly challenge #2, I provide data on a Peruvian government bond (in Peruvian sul) and give you the information to assess the risk free rate in Sul and the equity risk premium for Peru
In weekly challenge #2a, I provide a historical data base on implied equity risk premiums, T.Bond rates and Baa rated default spreads from 1960-2012 and your task is to assess whether there is a relationship between these variables and whether you can use them to estimate the equity risk premium today.
I have not been sending the post-class tests/solutions to you by email but if you visit the webcast page for the class, you will see post class tests/solutions for each class.
Until next time!

Attachments: Weekly challenge # 2 , Implied premium challenge, data

9/20/13 We spent much of the week talking about equity risk premiums and most of Wednesday's class on implied equity risk premiums. This week's webcast covers the logic and measurement questions in computing implied equity risk premiums. If you are interested in the webcast, go to the link below:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ImpliedERP.mp4
The supporting materials are below:
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/ImpliedERP.ppt
Implied ERP spreadsheet (from February 2013): https://www.stern.nyu.edu/~adamodar/pc/implprem/ERPFeb13.xls
S&P on buybacks (from earlier this year): https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500buyback.pdf
S&P 500 Earnings: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/ERP/SP500eps.xls
I hope you find this useful. Until next time!

The weekend is here! Newsletter is attached! Don't forget the weekly challenges!

Attachment: Weekly newsletter #2

9/21/13 I know! I know! I have used up my quota of Saturday emails but I wanted to bring you up to date on the state of audio on the webcasts. If you have been trying to catch up on missed classes with the webcasts, you know that we have had issues with the audio quality and video quality of the webcasts. The first three webcasts suffer from noise and the sound is in mono (rather than stereo). That was partially the result of the fact that the lecture hall was reconstructed over the summer and new (and better) recording devices were installed. Unfortunately, new technology comes with glitches and this one was no exception. In fact, it reached a nadir in session 4, when it failed to capture any audio (mono or stereo). Session 5 is the first session where the system has actually worked and the advantage of the new system (which has mikes all over the room) is that you can hear the questions being asked in class. I am sorry for the poor sound on the first three sessions but I think we have turned the corner. Optimally, I would love to see you all, in person, in class for every session. That said, I do understand that life gets in the way and that you will have to miss a session or two along the way. Hopefully, the webcasts should be better from now on. Please let me know whether there are still issues, since we are trying to tweak the system to deliver optimum results. Until next time!

I hope you had a chance to try at least one and perhaps both weekly challenges. Whether you did or not, it is time for me to post the solutions.
The solution to the Peruvian sul risk free rate challenge is attached first. It is a good test of whether you can estimate risk free rates in an emerging market currency and compute country risk premiums from raw data.

The solution to the implied ERP data is really not a solution but my analysis of the data, using basic statistical tools. The R-squared is not great but that is the problem with data. You cannot make it sing your tune.

On a different note, in the week to come, we will begin with an assessment of measuring relative risk (beta and its cousins) tomorrow and move on to estimating cost of equity and capital. If we move at a reasonable pace, we should be able to begin on cash flows on Wednesday. Needless to say, if you still have not picked a company to value, it is time to make a choice. See you in class tomorrow! Until next time!


Today's class represented the final pieces of the discount rate puzzle. We began with a discussion of bottom up betas, focusing on defining comparable firms and expanding the sample. Since you will often be the odd person out at your future job, pushing for this approach, I put together a list of questions that you may get asked about bottom up betas (why they are better, how to measure them etc.). You can find them by clicking below:
We continued with the cost of debt, starting with a definition of the cost of debt as a long term, current cost of borrowing and laying out a procedure for estimating this cost, even for firms that don't have traded bonds/ bond ratings. We also took a detour into estimating the cost of debt for firms that may receive subsidized debt from the government/ other entities. Next session, we will turn our attention to cash flows and earnings.

Attachment: Post class test and solution

9/24/13 You may have read the news story yesterday about Blackberry and the proposed buyout by Fairfax Financials for $4.7 billion. That, in conjunction with other events this weekend (Mariano Rivera's last days as a Yankee, my birthday) led me to start thinking about aging and how we react to it, both as individuals and companies, and how much damage we do in fighting the inevitable. I know that sounds incredibly depressing but start by reading the blog post that I have:
Since Blackberry is on its way to being a private business and is approaching its end days (You really, really need to get rid of your Blackberry devices, and really soon), I decided to try valuing another company that seems to be staring over the abyss: Microsoft. Earlier this month, the company bought Nokia for $7.2 billion and immediately lost $15 billion plus of its own equity value.
Start with a summary sheet of the company's financials: https://www.stern.nyu.edu/~adamodar/pc/blog/MSFTfinancials.pdf
Then take a look at the valuation I have for Microsoft, assuming no growth and no reinvestment (think of its as shutting down all new product development, R&D and acquisition and living off the Office/Windows cash cows): https://www.stern.nyu.edu/~adamodar/pc/blog/MSFTgrowthbreakdown.xls
Finally, take a look at what I think is the greatest danger that you face as a Microsoft investor, i.e., that the company will try to rediscover its youth and try for growth at any cost:
Once you are done, you can always visit the shared Google spreadsheet and put in your views on Microsoft:
Until next time!

Today's class looked at the getting the base year's earnings right and explored several issues:
1. To get updated numbers, you should be using either trailing 12 month numbers or complete the current year with forecasted numbers. In either case, your objective should be to get the most updated numbers you can for each input rather than be consistent about timing.
2. To clean up earnings, you have to correct accounting two biggest problems: the treatment of operating leases as operating (instead of financial) expenses and the categorization of R&D as operating (instead of capital) expenses. The biggest reason for making these corrections is to get a better sense of how much capital has been invested in the business and how much return this capital is generating.

If you are really interested in nailing down the basics of cash flows (and preparing for the quiz next week), please try the post-class test (with solution) that is attached. I know the last two questions have not been covered explicitly in class, but implicitly, we have talked about how the address them. Do try the weekly challenge for this week. It is a great exercise in tying up loose ends.

Attachments: Post class test and solution


I know it is early to be doing this but since the quiz is next Wednesday, I thought it may be a good time to revisit some ground rules:
1. Quiz time/location: The quiz is in the first 30 minutes of class (not the middle, not the last) of Wednesday's class (October 2). Please be there on time. It will be a little tight in the room, but since I don't have a TA, I cannot have two rooms (unless I can figure out a way to clone myself).
2. Missing the quiz? If you are going to be missing the quiz, first check out whether you have a good enough reason by going here:
You do have to let me know before 10.30 am on Wednesday by email that you will not be taking the quiz.
3. Quiz coverage: The quiz will cover everything we will do through Monday's class. That will probably be the first 140 pages of the first lecture note packet and the Intro to Valuation packet. In terms of chapters in the investment valuation book, the quiz will focus primarily on chapters 7,8,9 and 10. If you can, do try the practice problems at the end of these chapters. The solutions are online here:
4. Past quizzes: All of the past quiz1s I have given are online. I have attached the links below:
Quiz 1s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1.pdf
Solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz1sol.xls
Some of the earlier quizzes go further into the material and look at growth rates. You can ignore those problems.
5. Quiz 1 review: Those of you who were in my corporate finance class may remember that I had reviews before each quiz. It has always been difficult to find the room and the time to do a review in this class. Last semester, I did put together an entirely webcast review for the quiz. I hope you find it useful. You can find it by going to:
The presentation for the review is attached. I hope the webcast helps... I will also post it tomorrow on Lore and iTunes U.

Have a great weekend (if I have not ruined it)!

Attachment: Quiz 1 review presentation

9/27/13 I know you are busy doing other stuff, but as the discussion shifts from discount rates to cash flows, the details start mounting and it is easy to get lost in abstractions. If you are interested in getting past abstractions, I have put together three webcasts for this week:
How to compute trailing 12 month earnings: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4 (Uses Apple from late 2012)
How to convert leases to debt: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Leases.mp4 (Uses Disney in 2012)
How to capitalize R&D: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/R&D.mp4 (Uses Microsoft annual reports from 2012 & 2011)
They are all about 10-15 minutes each... and you can download the spreadsheets and supporting material by going to https://www.stern.nyu.edu/~adamodar/New_Home_Page/webcasteqfall13.htm
I hope you get a chance (at least after the quiz) to watch one or more of these webcasts.

Hope that you are enjoying this absolutely stunning weekend! In the last week, we completed our discussion of betas, cost of equity and cost of capital. In summary, I argued that the risk free rate should reflect your currency of choice (not the country of incorporation of the company being analyzed), beta the business mix of the company and the equity risk premium the geographic exposure of the company. With the cost of debt, it is the rate at which the company can borrow money today, long term, not the rate at which it borrowed money in the past, with a tax benefit reflecting the marginal tax rate. Finally, with debt ratios, it is the market values of debt and equity that should determine those, even if you have different estimates for the value of equity. On Wednesday, we turned to cash flows, first arguing that you need to use the most updated accounting numbers you can and adjusting those earnings for accounting miscategorization of lease and R&D expenses. All of this is reflected in the attached newsletter. In the week to come, we will finish up with cash flows tomorrow and turn to the first parts of growth, a discussion we will continue after the first quiz on Wednesday.
On a different note, the links to the webcasts that I sent you yesterday in the email were messed up, some leading you to dropbox links and some to no place in particular. If you are interested, here are the corrected links:
Webcast on trailing 12 month earnings: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Trailing12month.mp4
Webcast on converting leases: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/Leases.mp4
Webcast on R&D conversion: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/R&D.mp4
Also, don't forget the weekly challenge! Until next time!

Attached: Newsletter #3


As we get ready to finish up with cash flows, I hope that you had a chance to work through the weekly challenge. The tricky part is figuring out how to come up with a rating, since the interest expenses don't reflect leases, and you cannot convert leases to debt until you have a rating. I suggest an approximation where you treat the entire lease expense as interest expense in the coverage ratio, but you will under estimate the rating and over estimate the cost of debt. There is a way to do this iteratively, and while it can be a bit of pain to do manually, it is easy to do on Excel. I have attached the synthetic rating spreadsheet that I used to get the rating and the solution to this week's challenge. If you have no idea what I am talking about, then it is time to take a look at the challenge. Anyway, see you in class tomorrow!

Attachments: Solution & Synthetic rating


In this last session before the first quiz, we wrapped up our analysis of cash flows with five key points:
1. While truly extraordinary items are easy to deal with, accounting ploys to move expenses into the extraordinary column may require some detective work. For those interested in forensic accounting, here are a couple of references: http://www.amazon.com/Financial-Shenanigans-Accounting-Gimmicks-Reports/dp/0071703071/ref=pd_sim_b_8
There are denser books on the topics but those are for forensic accountants. These books work for the rest of us.
2. If you are interested in exploring effective tax rates, I have attached the the updated averages that I have for effective tax rates for US companies, by sector in January 2013.
3, The definition of cap ex in valuation is much broader than the accounting measure of this number. It includes R&D (and like expenses) and acquisitions
4. If you have negative earnings in your company, you have to make an assessment of why your earnings are negative before you can come up with a solution to the problem.
5. To get from FCFF to FCFE, you don't have to start from scratch. Instead, you can just focus on estimating cash flows to debt (interest expenses, principal payments) and from debt debt and net them out against FCFF
We ended the class with an entree into the different ways you can estimate growth: look at past growth (dicey and unsustainable though that might be) and analyst forecasts. We will follow up on Wednesday after the quiz.
The post class test and solution are attached.

Attachments: Post class test and solution

10/1/13 I know that you are busy preparing for the quiz, but after you are done with it, you may get a chance to try the valuation of the week. It starts with a look at Interbrand's top ten brand names in terms of value. You can get it on Interbrand's web site:
Follow up with my blog post on the topic, where I lay out my thinking on what it is that drives and determines brand name value:
Then, download the financials for Coca Cola and a generic competitor (Cott, a generic beverage manufacturing company)
Financials for Coca Cola: https://www.stern.nyu.edu/~adamodar/pc/blog/Cokefinancials2013.pdf
Financials for Cott: https://www.stern.nyu.edu/~adamodar/pc/blog/Cottfinancials2013.pdf
Finally, download the spreadsheet where I have a break down of Coca Cola's brand name value:
This spreadsheet should work for any brand name company. So, take it for a spin. If you feel so inclined, go in and enter your estimates into the Google shared spreadsheet:
If you are fascinated by brand names and cannot stop yourself, here is a final stop. I have a paper on valuing brand names and other intangible assets that you may find interesting.
That's it. Until next time!

I won't ask you how the first quiz went because that may evoke the wrong response. The good news is that it is over. I have to teach this afternoon and all day tomorrow but I will try to slip the grading in there somewhere. When your quizzes are ready to be picked up, I will let you know.

If you were able to hang in there mentally and physically, we did complete our discussion of growth by first looking at analyst estimates of earnings growth, arguing that they contain far less information about long term future growth than you might think. We followed up by looking at the fundamentals that drive growth. Starting with a very simple algebraic proof that growth in earnings has to come either from new investments or improved efficiency, we looked at how best to estimate growth in three measures of earnings: earnings per share, net income and operating income. With each measure of earnings, the estimation of growth boiled down to answering three questions: (1) How much is this company reinvesting to generating for future growth? (2) How well is it reinvesting? (3) How much growth is added or lost by changes in returns on existing investments? We closed the discussion by looking at how to estimate growth for money losing companies or companies where margins are expected to change significantly over time. In that context, we looked at forecasting operating income for a young growth company, with small revenues and operating losses. While we will look at full fledged valuations, where these parameters all come into play, I have attached an excel spreadsheet where you can play with the key drivers of growth and see the effect on the expected growth rate.

The weekly challenge for this week revolves around fundamental growth. Try it, if you get a chance. I have also attached the post class test and solution for today's class. Hope you get a chance to give it a shot!

Attachments: Post class test and solution


Nope. Not quite done with your quizzes yet, but just in case you have been waited with bated breath for the ERP update for October 1, 2013, it is attached. S&P also released its once-every quarter update on buybacks & dividends which I used to update the cash flows.

Attachment: October 2013 ERP


The quizzes are done and can be picked up on the 9th floor in the entrance way to the finance department. If you have never done this before, here is how it works. When you come off the elevator and look straight ahead, you will see the reception. Walk towards the reception and just before you get to the front door, look to your right. You will see the quizzes stacked in neat alphabetical order (at least when I left them) face down. Please pick up just your quiz and the solution that is next to it (with the distribution on the back). The grading guidelines are in the solution. Check over the grading and if you have an issue, come by. I will be teaching all day today and tomorrow for the executive program. So, Monday will probably work better.

Attachments: Solution and distribution of grades

10/4/13 This week, we focused on estimating growth from fundamentals and built growth rates from accounting returns - return on equity and return on invested capital. Accounting returns can be messy and misleading. In this webcast (that some of you may remember from the corporate finance class), I look at the process of estimating accounting returns, using Walmart as my example:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/ROIC.mp4
Walmart 10K (2013): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10K.pdf
Walmart 10K (2012): https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmart10Klastyear.pdf
Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/cfovhds/webcasts/ROIC/walmartreturncalculator.xls
I hope you get a chance to take a look at it. By the way, the Twitter filing is out and I am working on my valuation. Why don't you give it a shot and we can compare notes?

Hope that you have picked up your quiz and are ready to move on. Last week, we talked primarily about growth, closing with the discussion of fundamental growth in a company. I have attached the newsletter for the week.
As I mentioned in my email yesterday, Twitter's S-1 (prospectus for IPO) has been filed. I am almost done with my valuation, have a few tweaks and hope to post it on Monday. If you want to get started, here is the link to the S-1:
Have fun with it over the weekend!

Attachment: Weekly Newsletter #4


I hope that you had a great weekend. If you did get a chance to try the weekly challenge, the solution is attached. If you did not get a chance, it is still attached.
This week, we will finish our discussion of growth tomorrow as well as the last piece of the valuation puzzle, which is the terminal value. In the process, we will develop four simple rules for keeping your terminal value under control. We will also talk about how best to pick the right model to value your company On Wednesday, we will work on loose ends in valuation, including cash, cross holdings and employee options. Needless to say, we are getting closer to the end game on intrinsic valuation. If you have not started your DCF valuation yet, please do.

Attachment: Weekly challenge #4 solution


We started this class with a continuation of the discussion of expected growth. We looked at both the effects of efficiency growth over time and estimating revenue growth/operating margins for a high growth firm. The heart of today's class was the discussion of terminal value. We began by ruling out using multiples to get terminal values, at least in the context of intrinsic value. To keep terminal values in check, you have to follow four basic rules/principles:
1. Constrain your terminal growth rate to be less than or equal to your riskfree rate (which is a proxy for long term growth in the economy)
2. Don't wait too long to put your company into stable growth (and try not to push past 10 years)
3. The key input in your terminal value computation is your return on capital (and excess return assumption). If your return on capital = cost of capital, your terminal growth rate does not add any value.
4. Give your company the characteristics of a stable growth company in terms of excess returns and cost of capital.
As for which model is right for you, use a firm valuation model if you believe that debt ratios will change over time or are not sure and reserve the dividend discount model for desperate times (when you lack the inputs to compute cash flows).
One final point. We are getting closer to the second lecture note packet. It is now available to download online on the webcast page for the class or at the link below. It will be in the bookstore about a week from now.
I have attached the post class test & solution for today's class.

Attachment: Post class test and solution


As promised in class yesterday, here is my valuation of the week. It is for Twitter. Start with the Twitter S1 filing:
It is long and much of it is legal boilerplate but there is valuable information there. You can the move on to my blog post:
That blog post is best read with my valuation for Twitter (which is attached)
Here is what I would like you to do. Accept nothing on face value and question everything. Make your own judgments and don't get distracted. Once you have a value, go to the shared Google spreadsheet:
Have fun with it! (And I really mean that!!!)

Attachment: Valuation of Twitter


Today's class was about the loose ends in valuation, items we often pay little heed to or attach arbitrary premiums/discounts for. We began by looking at cash and whether it should command a premium at some companies (if they have a good track record and have restrictions on raising capital) and a discount at others (if investors don't trust you with the cash). We then looked at cross holdings in other companies and the numerous barriers to valuing them. Third, we looked at other assets and argued that you should never double count assets. In case you are interested in the Playboy mansion, click on the link below (you will not see any playmates, just the real estate...)
We closed by looking at complex companies by first focusing on how to measuring complexity and then how to incorporate that complexity into valuation. I have attached the post class test and solution.

On a different note, please do get a jump on the DCF valuation of your firm. It is due a week from Friday (October 18) though not for grading, but for feedback. You just have to turn in the Excel spreadsheet containing your valuation and you are welcome to use of my mine (I would recommend one of the Ginzu ones) or build one of your own. I have also attached the weekly challenge for this week and it is a good one, if you are at all uncertain about terminal value. Until next time!

Attachments: Post class test and solution, Weekly challenge #4a


Now that you have had the requisite period to mourn, celebrate or not care about quiz 1, you should be turning your attention to the DCF valuation. Anyway, I thought I would lend a helping hand:
1. Model building versus Model borrowing: This is not a modeling class and I am fine with you borrowing and adapting my models. If you decide to build your own model, keep it simple. Please do not use investment banking valuation models that you may have borrowed from a prior, current or summer job. Not only do they add detail, where you need none, but they often have fundamental mistakes built into them.
2. Which model should I use? First, go through the slides from a couple of sessions ago where we developed a roadmap for picking the right model. Once you have decided whether you want to use dividends, FCFE or FCFF, here is my suggestion. For companies where operating margins are not likely to change dramatically, use one of the ginzu models on my website. They are versatile and will do a lot a great deal of your dirty work (capitalizing R&D, converting leases to debt, taking care of management options) for you. For companies where margins are likely to change over time or companies with negative earnings, use the higrowth.xls spreadsheet (even if you do not expect high growth). In particular, stick with the following choices:
a. fcffginzu.xls: if you are doing a FCFF valuation of a firm that has positive operating income and you do not expect dramatic shifts in margins (and return on capital) over time
b. fcffsimpleginzu.xls or higrowth.xls: if you are doing a FCFF valuation for a money losing firm or want to allow your margins to change over time.
c. fcfeginzu.xls: if you are doing a FCFE valuation of a firm that has positive net income and you do not expect dramatic shifts in margins and leverage over time
d. divginzu.xls: for financial service firms
You can find all four of these under spreadsheets on my website.

Let me clarify, though, what I would like to get from you when you turn it in:
1. Each of you can turn in your valuation individually. You do not have to submit as a group.
2. All I want is a base case valuation of your firm. It will be easiest if you submit the excel spreadsheet containing your valuation and include your assumptions page in the same spreadsheet.
3. There is no hard copy required and you can submit your DCF valuation spreadsheet electronically. But please do the following:
In the subject enter: "My perfect DCF Valuation". Do not deviate from the script or my filtering program will dump your email into my general email pile.
In the email text, specify the name of the company that you are valuing (yes, there are people who have submitted valuations of unnamed companies), the price per share that the stock is trading at on the day of your valuation and your estimate of value per share.
4. Your DCF valuation will not be graded. I will review the valuation and send you back your own spreadsheet with my comments embedded in the spreadsheet. Some of the comments will be suggestions (which you are free to ignore) and some will be stronger than suggestions (and these should probablyy not be ignored).
5. If you don't get back your valuation within 48 hours of submitting it, please send me another email to let me know. My filtering program sometimes works in mysterious ways.
6. If you get done before October 18, go ahead and send your valuation in early.
So, don't freak out about this deadline. It is more feedback on your valuation than judgment day


As you work on your DCF valuation (subtle nag here), you will undoubtedly encounter the big number, which is the terminal value. While we went through the four rules for keeping terminal value in check in class this week, and this week's challenge is all about it, I thought that webcast that went past abstractions would help. Consequently, I took a DCF valuation that was turned in a prior version of this class and put the terminal value under a microscope. I then set up a spreadsheet to check the terminal value for key assumptions and you can use this on your terminal value (or any others that you encounter in your life). The webcast itself is about 15 minutes long and not too painful. (Ignore the big DEMO right down the middle.)
The DCF valuation and the terminal value checking spreadsheet are attached. Until next time!

Attachments: Sample DCF valuation, Terminal value analyzer

10/12/13 I am sure that you have a busy weekend ahead of you but I hope that it is still a good one. I have attached the newsletter for the week. We are close to the end of the intrinsic value mechanics section. Next week, we will actually value companies (imagine!)!!!
Attachment: Weekly newsletter #5
10/13/13 If you did get a chance to try out the weekly challenge solution, that is great! If not, I know that this was probably a busy week. Next week, we finish up with the loose ends and move on to actual valuations. Until next time!
Attachment: Weekly challenge #4a solution

Today, we put the two final loose ends to rest. First, while we used a narrow definition of debt, when computing cost of capital, we argued for using a broader definition of debt, when subtracting from firm value to get to equity value. Second, we talked about how best to deal with both currently outstanding employee options and potential options grants in the future. With the former, we argued for using an option pricing model to value the options and netting that value out of equity value, before dividing by the number of shares outstanding. With the latter, we suggested incorporating the expected cost into the operating expenses, thus lowering future earnings and cash flows.
We then started on our first valuation, Con Ed, using a stable growth dividend discount model. To qualify to be valued with this model, we argued that a company had to meet three criteria: have a high payout ratio, have a fundamental growth rate less than that of the economy (or the risk free rate) and a beta close to one. We then valued 3M both before and after the 2008 crisis to show the impact that macro variables can have on intrinsic value. We moved on to value the S&P 500 using a dividend discount model and an augmented dividend discount model, with the latter suggesting that today's index level is defensible. I am attaching the post class test and solution!

Attachments: Post class test and solution

10/15/13 After the high wire act that was the Twitter valuation, I decided to get back to more boring companies this week and picked another one in the news, for all the wrong reasons, JP Morgan Chase. I would suggest that you start with the New York Times article:
The article is about Jamie Dimon, who I don't particularly like, but I find Mr. Kelleher, president of Better Markets, to be even more unlikable. Anyway, it got me thinking about why the stock price has been so resistant to the bad news. You can pull of the financials for JP Morgan by clicking below:
You can then download my valuation of the company:
It is an old fashioned stable growth dividend discount model and it yields a mind-popping $75.77 a share (the stock is trading at $53) with conservative assumptions about future growth. I also look at three other scenarios and even in the most pessimistic scenario, which assumes a drop in net income of $8 billion, I get a value of $49/share. In other words, this stock is priced for a bargain basement sale. No wonder bad news does not stagger it.
If you do get a chance to value the company, please go to the shared Google spreadsheet and enter your numbers:

In today's class, we completed our discussion of young, growth companies by emphasizing that you will be wrong 100% of the time and that it was okay, because the market is usually even more wrong. We then moved on to valuing mature companies, arguing that you need to value many of them twice: once with existing management in place (status quo) and once with new and revamped management. We closed the life cycle part by looking at declining companies (where growth and reinvestment can be negative) and distressed companies (where you have to adjust the value for the likelihood and consequences of default).
With emerging markets, we focused on a few key issues. The first is that country risk needs a scalpel, not a bludgeon. The second is that corporate governance is a problem but that your cash flows already reflect the problem. A related point was the complexity and cross holdings that you see in family group companies can make valuing these companies difficult. We closed with a short discussion of nationalization risk: you should deal with it outside of the DCF valuation by bringing in a probability of nationalization and the consequences.
Overall, we are approaching the end of the DCF section of this class. If you have not printed off packet 2 of the lecture notes, please do so or buy the packet at the bookstore (you will get packets 2 & 3 consolidated). We will be getting to it next week. I have also attached the weekly challenge for this week and the post class test and solution. Until next time!

Attachments: Post class test and solution


In the assessments of young companies, in particular, we looked at the effect of having options outstanding on the value per share. The weekly challenge for this week zeros in on this particular aspect of valuation.

I know that I don't usually post webcasts until Friday, but I thought I would jump the gun this week. As you work on your perfect DCF valuations, employee options that your company has granted and continues to grant may be a source of imperfection. I know that we went through the mechanics in class. First, value the outstanding options, using an option pricing model. Second, subtract the value of the options from the equity value that you estimated in a DCF. Third, divide the remaining value by the number of shares outstanding (the actual number, not the diluted number). The mechanics of doing this can be tricky and that is why this week's weekly challenge is built around options. After you have tried the challenge, you may also want to watch this webcast that I put together on doing this in practice. I used Cisco, a monster option granter, to illustrate the mechanics. You can find the links below:
Webcast: http://dl.dropbox.com/u/24597893/CFSpr13/Webcasts/Employeeoptions.mp4
Cisco 10K: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/cisco10K.pdf
Spreadsheet for options: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/EmployeeOptions/ciscooptions.xls
I hope you get a chance to watch the webcast and that you find it useful. Until next time!

Attachment: Weekly challenge

10/17/13 For those of you who have turned in your DCF valuations, thank you! If you sent them prior to today, you should have them back already. When you do get them back, notice my comments (if any) are embedded in your own valuations. In some cases, if I found nothing to take issue with, you would just have an email to that effect, without any attachments. For those of you who have not turned in your DCF valuation, please remember that this is not for grading but for feedback. At the same time, though, if your valuation is hopelessly incomplete, it is probably pointless to send it to me for feedback since there is not much I can tell you of value.
One reminder. Don't forget to put "My Perfect DCF valuation" in the subject since it makes easier for me to keep track of your submissions and get them back to you right away. In fact, if you have submitted your DCF valuation and not heard back, it is probably because you did not list that subject and it has been drowned in the rest of my email box. Just resend it with the right subject and I should be able to get it back to you.
I am leaving tomorrow morning to go to Parent's Day Weekend at my daughter's college in California. So, if you do send your DCF and don't hear back from me until Monday, it is because I will be on the road. Until next time!

I hope that you get to enjoy this weekend more than the last one, now that you have the DCF valuation out of the way. I am in California, basking in 80 degree weather! I am attaching the newsletter for this week. Next week, we will be finishing off intrinsic valuation and starting on relative valuation, which is packet 2 of the lecture notes. Please download the packet online (either on the webcast page or on the lecture notes page) before next week. The direct link is below:
If you prefer a physical packet put together by the bookstore, the combined packets 2&3 should be available in the bookstore by now.

Attachment: Newsletter # 6


If you did get a chance to work through weekly challenge #5 (employee options), I have attached the solution. In class tomorrow, we will explore the rest of the dark side of valuation and get close to finishing packet 1. Until next time!

Attachments: Solution & Option value


So, we are finally done with DCF valuation, though the principles will be reused in other parts of the class. We started today's session by looking at emerging market companies and looking at the issues of country risk, corporate governance and cross holdings through those lens. We then moved on to financial service companies, which have gone from being easy to value (just discount the dividends) to being a pain in the neck to value. I suggested using the reinvestment in regulatory capital to compute potential dividends and FCFE. We closed with cyclical and commodity companies, where the standard adjustment is to use normalized earnings over a cycle (economic or commodity price) to value companies but adding on simulations built around the commodity price can enrich the analysis. Attached is the post class test and solution for today. And PLEASE REMEMBER TO PRINT OFF OR BUY PACKET 2 BEFORE NEXT CLASS!!!

Attachments: Post class test and solution


There are two forces that you have to thank for today's valuation of the week. The first is that after reviewing 160 DCF valuations of companies, I am tired of valuing companies. The second is David Glaser, who tweeted after the news story below showed up:
The story is about tracking shares that are being offered on a pro athlete's earnings stream by a company called Fantex. The athlete is a NFL running back. Even if you are not an NFL fan, the valuation is generic enough that it could be used to value any professional athlete's income stream.

You can start off with the blog post that I have on the valuation:
To see the details of the offering, you can download the S-1 (the same filing that Twitter had to make) for the tracking shares:
I have attached the valuation to this email. I hope you have a chance to look at it. It is far more fun to do than projecting profit margins and debt ratios.

Attachment: My valuation of Foster Tracking Shares


We started today's session by drawing a line between value and price. The message is that there knowing one or the other alone is dangerous: understanding value without understanding price is a recipe for frustration, whereas understanding price without understanding value can lead to whiplash. Incorporating margin of safety, what if analysis and probabilistic valuation can all make you a better investor, if you are a value investor, and understanding intrinsic value will make you a better trader, if you are a pricer.
We then moved into the start of a four step process for deconstructing multiples, starting with definitional tests, where we check for consistency and uniformity and then to descriptional tests, where we looked at the distribution characteristics of multiples. I am attaching today's post class test and solution.

Attachments: Post class test and solution


In today's class, we talked about consistency in defining multiples, using PE ratios and EV to EBITDA multiples to illustrate. If you want to give it a shot, this week's challenge should help. As always, I will also post it on Lore and put my solution up on Sunday.

Attachment: Weekly Challenge


By now, you should have received back your DCF valuation back. If you have not, please send it again to me. Rather than make myself into an all-knowing oracle (which I am not), t thought I would take you through the process I used to diagnose your DCF valuations.

Input page checks
Step 1: Currency check: What currency is this company being valued in and is the riskfree rate consistent with that currency?
Right now, if you are valuing a company in US dollars, I would expect to see a riskfree rate of about 3.5% here.. though some of you used 30-year bonds rates which would give you a slightly higher value). if you are valuing your company in pesos or rubles, I would expect to see a higher riskfree rate, (Watch out for the tricky ones.. a Mexican company being valued in US dollars or a Russian company in Euros.. Your riskfree rates should revert back to 3.5%, if this is the case)
Step 2: ERP check: Is the equity risk premium being used consistent with where the market is right now and where this company has its operations?
If you are analyzing a company with operations only in developed markets, I would expect to see a number of about 5.5-6% here... That is because the current implied premium in the US is about 5.8% (January 2013) or 5.5% (March 2013). If you are using a premium of 4% or 4.5%, you will over value your company. If your company is exposed to emerging market risk, I would expect to see something added to the mature market premium. While I begin with the presumption that where your company is incorporated is a significant factor in this decision, it should not be the only one in this decision. Coca Cola and Nestle should have some emerging market risk built into them.
Step 3: Units check: Are the inputs in consistent units?
Scan the input page. All inputs should be in the same units - thousands, millions, billions whatever... What you are looking are units with far too many digits to make sense. (Check the number of shares. It is the input that is most often at variance with the rest, usually because you use a different source for it than the financial statements)
Step 4: Normalization check: If earnings are being normalized, what is the normalized value relative to the current value? If reinvestment numbers are off, should they have been normalized as well?
In some cases, we normalize earnings by looking at historical average earnings or industry average margins. While this is perfectly defensible, you want to make sure that the normalization is working properly. Thus, if earnings of $ 3 million are being replaced with earnings of $ 3 billion, you want to make sure that this company has generated earnings like these in the past. You may also want to consider an alternative which is to allow margins to change gradually over time rather than replace current with normalized earnings.
As a follow up, check the reinvestment rate for the firm. If it a weird number (900%, -100% etc.), it may be because something strange happened in the base year (a huge acquisition, a dramatic drop in working capital). A better choice may be to average over time.

Output page checks:
a. High Growth Period.
Start by checking the length of the growth period and the cash flows during the growth period. In particular,
- Compare the FCFF (or FCFE) to the EBIT (1-t) (or Net Income). Especially if you are forecasting cap ex, working capital and depreciation independently, compute an implied reinvestment rate
Implied Reinvestment Rate = 1 - FCFF/ (EBIT (1-t) or 1 - FCFE/ Net Income
Thus, if you have after-tax operating income of 100 and FCFF of 95, your implied reinvestment rate is 5%
- Look at the expected growth rate over the period. Does it jive with your reinvestment rate? (If you see a high growth rate with a low reinvestment rate, the only way you can justify it is by calling on efficiency growth. For that argument to make sense, your current return on capital has to be a low number... See the attached excel spreadsheet that computes efficiency growth.
- If you are forecasting operating income, cap ex, depreciation and working capital as individual line items, back out your imputed return on capital:
Imputed Return on Capital = Expected EBIT (1-t)/ (Base Year Capital Invested + Sum of all reinvestment through year t-1)
If you see this number taking off through the roof or dropping towards zero, your reinvestment assumptions are unreasonable.
b. Terminal value
Start by checking to make sure your growth rate forever does not exceed your riskfree rate. Then follow up by
- Examining your reinvestment rate in your terminal year, using the same formula we used in high growth
- Backing out your implied return on capital (ROC = g/ Reinvestment Rate)
- Checking against your cost of capital in stable growth (you don't want to get more than 5% higher than the cost of capital and you do not want to set it lower than the cost of capital forever)
I have a spreadsheet that can help in this diagnostic.

One common error to watch out for is estimates of terminal value that use the cash flow in the final year, grow it out at the stable growth rate. That locks in your reinvestment rate from your last high growth year forever.
c. Cost of capital
As a general rule, your cost of capital should be consistent with your growth assumptions. Thus, you should expect to see betas move towards the stable range (0.8-1.2) and your debt ratios to rise towards industry average. Thus, your cost of capital in stable growth should be different from the cost of capital in high growth.
d. Final value of equity
Check for danger signs, including
- Cash and cross holdings becoming a huge percentage of value
- Options either being ignored or being a huge number

Market Price
As a final sanity check, look at the current market price. If your value is not even in the ballpark, go back and repeat all of the earlier steps...

Try it out with your own DCF valuation and then offer to do it for a friend... Then, take your toolkit on the road. Pick up a valuation done by an investment bank or equity research analyst and see if you can diagnose any problems in them. You are well on your way to being a valuation guru.
I have also attached a full set of diagnostic questions that you can consider in the context of valuation to this email. Until next time!

Attachments: Change in growth spreadsheet, Valuation post-mortem

10/25/13 The second quiz is approaching and I have put the review session up online (on the webcast page for the class) with the presentation. The links are below:
Presentation: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valquiz2review.pptx
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valquiz2review.mp4
You can also find all past quizzes with the solutions in the following links:
All past quiz 2s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2.pdf
Quiz 2 solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz2sol.xls
You will see relative valuation problems (multiples) popping up in the pre-2008 quizzes. You can ignore them.

I won't take up much of your time, but just in case you want to see where we are in the class and where we are going, I have attached the newsletter for the week. Until next time!

Attachment: Newsletter # 7


I know that there is little chance that you worked through weekly challenge #6, but you may find some time next week to do it. The solution is attached.

Looking at next week, we will start with the quiz tomorrow and then continue with our discussion of multiples. We will look at a simple device for backing out the determinants of multiples and use these determinants to examine how to compare multiples across time and across firms.

Attachment: Solution


I promised you that you would get your quizzes back sooner than you thought. Well, they are ready to be picked up on the 9th floor, right in front of the door to the Finance department, with the solutions/distribution right next to them.

Attachments: Solution and distribution of grades for the class.

10/29/13 In keeping with the shift away from intrinsic valuation in class, I decided to make this week's valuation of the week a relative valuation. I picked the food product business (why? I have no idea!) and pulled up the raw data on food companies from Capital IQ
I used the raw data to estimate multiples and fundamentals for food companies:
I then used that data to see if I could find the cheapest food companies. See this link for the details of my analysis, step by step:
Here is the end product
This analysis can provide a template for a relative valuation of any type. If you don't like food companies, pick a different sector and you can be off to the races.
10/29/13 If you were not in class after the quiz, you may have found yesterday's webcast a bit of a disappointment, since the slides were not recorded as part of the webcast. I am sorry but it seems to be related some kind of technical problem that no one quite seems to explain to me. Anyway, rather than leave that audio-only webcast up, I decided to redo yesterday's lecture in my office today. If you are interested, you can get the make up webcast by clicking below:
The link is also accessible from the webcast page for the class, Lore or iTunes U. Hope you find it to be a good replacement.

In today's class, we extended our analysis of multiples by first looking at PEG ratios and PBV ratios and then examining enterprise value multiples: EV/Invested Capital, EV/EBITDA and EV/Sales. In particular, we noted that the drivers for EV multiples are analogs of the equity multiples: growth in operating income replacing growth in net income, reinvestment rates replacing payout ratios, ROC replacing ROE and cost of capital replacing cost of equity.
There is a simple way to find the companion variable (the key driver) for a multiple. With an equity multiple, you can get this variable by dividing the net income by the denominator of the multiple. With an enterprise value, you divide after-tax operating income by the denominator of the multiple. With the EV/Sales ratio, this yields the after-tax operating margin as the determining variable. We used that measure to evaluate the value of a brand name, by comparing the pricing of Coca Cola with its current operating margin with its value with a generic margin.
Finally, I am attaching the post class test/solution for today as well as the weekly challenge for this week. I will post the latter on Lore, if you want to try it. I will be posting your mystery project tomorrow online and emailing it to you. It will be due on November 13.

Attachments: Post class test and solution


As promised (or threatened), the mystery project is ready for you. It is a group project, due on Wednesday, November 13, at 5 pm. You can find the description at the link below and I am attaching the data to this email.
The assignment is a pretty straightforward one, and the write up should be brief and to the point. Be creative, use statistics as a tool and don't be afraid to be different.... I have attached the project description and the data that you will need (it is also online on the webcast page for the class and under the main menu for the class... will also be posted on Lore and iTunes U).

Attachments: Data for mystery project

11/1/13 One of the most confusing aspects of multiples is dealing with the variants of value out there: firm value, enterprise value and equity value. In this webcast, I look at what the differences are between these different numbers and how our assessments of leases & R&D can change these numbers. Start with this blog post:
Then watch the webcast:
You can download the presentation:
And the spreadsheet that goes through the calculations:
Hope you find it useful!

I know that you are probably tired of valuation and I will keep it short. The newsletter for the week is attached. Have fun this weekend!

Attachment: Newsletter # 8


I hope that your weekend went well. Mine did! I am attaching the solution to the weekly challenge for the week. As always, you are welcome to go back and try it now, before you look at the solution. This week, we will complete our discussion of relative valuation/pricing before we move to look at asset-based valuation approaches, where you value a company by valuing what it owns individually and then adding up the amounts. In the process, we will look at accounting based valuation, liquidation valuation and sum of the parts valuation.

Attachment: Weekly Challenge #8


In today's class, we closed the book on relative valuation by first talking about how to do relative valuation in sectors filled with unstable or young companies by either using proxies to capture what investors in that sector are pricing in or using forward values for revenues/earnings. We then extended relative valuation from looking at companies in a sector to companies across the entire market, using a market regression. We finished by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. I found this site recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
And the site below has valuation spreadsheets as well as a valuation blog..
Finally, here is a fun article on how relative valuation is used in hotel valuation (It can be based on how much a can of soda at the hotel costs... I am not kidding)

Towards the end of the class, we started on the discussion of asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation, and we will continue next session. Finally, the third packet is available to be printed off online. (If you bought the second packet in the book store, it already includes packet 3... So, you are all set). Post class test and solution is attached.

Attachment: Post class test and solution


In today's class, we closed the book on relative valuation by first talking about how to do relative valuation in sectors filled with unstable or young companies by either using proxies to capture what investors in that sector are pricing in or using forward values for revenues/earnings. We then extended relative valuation from looking at companies in a sector to companies across the entire market, using a market regression. We finished by looking at how to pick the "right" multiple for a valuation, with the answers ranging from cynically picking one that best fits your agenda to picking one that reflects what managers in that business care about. It is amazing how widespread relative valuation is. I found this site recently on rules of thumb in valuation. Take a look at it.... especially the multiples mentioned
And the site below has valuation spreadsheets as well as a valuation blog..
Finally, here is a fun article on how relative valuation is used in hotel valuation (It can be based on how much a can of soda at the hotel costs... I am not kidding)

Towards the end of the class, we started on the discussion of asset based valuation: liquidation valuation, accounting valuation and sum of the parts valuation, and we will continue next session. Finally, the third packet is available to be printed off online. (If you bought the second packet in the book store, it already includes packet 3... So, you are all set). Post class test and solution is attached.

11/5/13 In keeping with the theme of relative valuations, this week's valuation of the week looks at US banks. You can start with the raw data that I pulled off for 36 banks from Capital IQ in this dataset:
The criteria I used for these companies: market cap > $1 billion and data available on Tier 1 capital and risk adjusted assets.
I started by looking the descriptive statistics on all of the variables:
Too look at the connections between the variables, I computed bivariate correlations:
I followed up with scatter plots of PBV against each of the variables:
I then ran regressions of PBV against all of the variables that should matter and then a subset of those variables:
I finally used the regression to get predicted PBV:
Hope you get a chance to try it and find your cheapest bank.

At the start of the class, we tied up a loose end on sum of the parts valuation, taking United Technologies through both a relative and a DCF sum-of-the-parts valuation. We then turned to private valuation. Private company valuation is almost an art form, at least in the way in which it is practiced, filled with 'arbitrary" discounts on value. In today's session, we brought private company valuation into the DCF framework, though we did note that the discount rate for a private business valuation can reflect the buyer's diversification status and that the value itself may have to be adjusted for illiquidity and key person losses. The key, though, is that motive matters in private company valuation and the same private company can have different values to different buyers. I have attached the post class test and solution for this week, as well as the weekly challenge. Until next time!

Attachments: Post class test and solution

11/7/13 Hi!
As promised in class, I did a webcast on the steps in data analysis. If you are solid on your statistics, you can skip this webcast, since you already know everything that I am saying. If you need a quick review of the process, I think it will be useful.
Start with the webcast:
Download the slides:
Here is the raw data:
And the descriptive statistics:
Hope it helps!

I hope that you are getting a chance to enjoy the weather today, even if it means lugging your laptop to the park. Anyway, the newsletter for the week is attached. Also, please give the weekly challenge a try (it is a very easy one).

Attachment: Newsletter #8

11/10/13 If you did get a chance to try out weekly challenge 8, the solution is attached. As we get ready to put private company valuation to rest tomorrow by looking at the IPO process, there are interesting stories about earnings before bad stuff in both the New York Times and the Wall Street Journal:
New York Times: http://www.nytimes.com/2013/11/10/business/earnings-but-without-the-bad-stuff.html?ref=business&_r=0
WSJ: http://online.wsj.com/news/articles/SB10001424052702303309504579188352607330632?mod=WSJ_hp_LEFTWhatsNewsCollection
Speaking of Twitter, I thought this cartoon in the News Review section was pretty funny.
On a different note, remember the Arian Foster tracking shares. Be glad you did not buy them at $10 or even $5.
Please do remember to print off lecture note packet 3 for class tomorrow!

In today's class, we put the finishing touches on private company valuation by looking at valuing IPOs. In particular, the question of what happens to the proceeds from an offering can affect value per share, and the offering price itself is subject to the dynamics of the issuance process, with investment bankers more likely to under price than over price offerings. We then started on the mechanics of option pricing by looking at replicating and arbitrage. In particular, we argued that while real options add a premium to DCF valuation, they should be used sparingly and only if you pass the three tests: Is there an option embedded? Does the option have significant economic value? Can you use an option pricing model. I am attaching the post class test & solution for today.

Attachment: Post class test and solution

11/12/13 The first mystery project submissions are coming in and I realized that I had not given you the magic subject line to get them in the right mailbox. Here are the general suggestions for submission:
1. Put "No mystery here" in the subject line
2. If you could list your 5 cheapest and most expensive stocks on the cover page, the multiple you used to make that judgment and your takeover stock on the cover page, it would make my life easier.
3. Please try to create one pdf file of your report rather than a word file or multiple excel files.
If you have already submitted your report, no problems. I will move your submission to the right place.
11/12/13 I know that you are busy on your mystery project but you may get a chance later in this week to look at the valuation of the week. It looks at how much of a multiple of earnings or book value that you pay can be attributed to growth. You can start with this blog post:
You can then download the spreadsheet that I use for breaking down growth:
Finally, I tried this out on one of the hottest, momentum stocks out there, Netflix, to see how much of the multiple that you are paying (PE =421.39, PBB = 16.36, EV/Sales = 4.75) can be attributed to growth. You can even solve for the growth you would need to justify these multiples. Until next time!
You can then download the spreadsheet that I use for breaking down growth:

In today's session, we tried applying (with mixed results) option pricing to value a patent. We argued that the fact that a patent is not viable today does not imply that the patent is not valuable. Valued as an option, patents have values in excess of their discounted cash flow value, though the magnitude of the premium can be a function of how competitive the market place is. In general, you are on pretty weak ground in using option pricing to value viable patents but it may be more useful in valuing non-viable patents in risky businesses.I have attached an option valuation spreadsheet that you can use to value patents as well as the post class test & solution.

Attachment: Post class test and solution


I know that you have to prepare for the next quiz but this week's challenge can help you at least on the private company valuation piece.

Attachment: Weekly challenge


The social media fever is spreading. Snapchat turned down $3 billion from Facebook for the company. I assume that they are extrapolating their value from Twitter's value, which is extrapolated from Facebook's value which is extrapolated from... (you get my point).

On a different note, the review session for quiz 3 is up and running! You can get it on the webcast page for the class. The link to the webcast is below:
The slides for the presentation are at this link:
You can find the past quiz 3s and the solutions below:
Past quiz 3s: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3.pdf
Solutions: https://www.stern.nyu.edu/~adamodar/pdfiles/eqexams/quiz3sol.xls
Remember that the earlier quiz 3s included a big chunk of real options, which are not covered on this quiz. So, stick with the relative valuation and private company valuation questions.

11/16/13 The newsletter for the week is attached. I know that you are busy preparing for the quiz, but there are a couple of interesting stories in the Wall Street Journal today. One is a list of PE ratios by country. Since you have the tools to deconstruct PE ratios, you can take the next step with this table and figure out which of these markets are cheap and which deserve to be cheap:
It seems like the big question that is on everyone's mind is whether we are in a bubble. I am sure that you are thinking about some of the same questions.
I am almost done with your mystery projects and should send out the last few today. I will also post the valuation tools webcast when I get a chance. I was on the road yesterday and day before and did not have enough bandwidth to upload the webcast on to the server. I will try again today.

By now, you should have your mystery projects back. If you have not, please send it to me again. Looking over your analyses, here are some of the overall impressions I have:

1. Multiple used: The two most widely used multiples were PE and EV/EBITDA. There were 35 groups overall.
Multiple Number of groups
PE 17
EV/Sales 3
Other 3
In making your choices, the following factors seemed to come into play: (a) the regression R-squared (higher R-squared) (b) differences in accounting standards across markets (led people to choose Revenue or EBITDA over EPS) (c) Number of firms that you would lose in the sample (steered away from multiples that cost you too many firms). I think that these are all legitimate factors. A few groups mentioned that they were using equity multiples because they were equity investors. I don't think that is necessarily the case. Equity investors can use EV multiples and back into a value for equity... There were twogroups that used combinations of multiples and figured out creative ways to reconcile their choices. There were also a few groups that ran the regression within each sector and picked under and over valued companies on that basis.

2. Regressions: Almost everyone followed the script and ran the regressions... One thing I did notice is that some of you chose to stick with all of the variables in the regression, even when there was no statistical significance. Sometimes, taking a variable out rather than leave it is the better choice. About 20% of the groups reported regressions with dummy variables for emerging markets. Four groups ran the regressions by sector or used sector dummies. While this makes sense, you have to be careful to make sure that you have enough data within each sector to sustain the regression. (The simple rule of thumb is that you can have one independent variable for every 15 observations. Thus, if your sample size is 35, you can have at the most 2 independent variables.)

3. Recommendations: When picking under and over valued companies, what matters is the percentage and not the absolute difference. In other words, a company that trades at a PE of 10 with a predicted PE of 15, is more undervalued that a company that trades at a PE of 40 with a predicted PE of 50. As I checked through the lists, I was struck by how little commonality there was across the lists. Each of you had your own idiosyncratic list, which tells me that there are no clearly under or over valued companies that stick out, across all approaches and multiples. Good to know, but perhaps not surprising. However, there were some companies that showed up more frequently than others.
Most under valued companies
Company Groups
Sistema JSFC (MICEX:AFKS) 13
Rallye Société Anonyme 9
SK Holdings Co. Ltd. (KOSE:A003600) 9
Fiat 8
China United Network 7
Grupo Mexico 7
Christian Dior 6
Several others 5

I don't know much about Sistema but I aim to find out. I do know a little bit about Rallye but have not valued it. I have valued Fiat and it has some strange stuff (due to its financial arm) that may be throwing the multiples off.

Most over valued firms
Company Groups
Amazon.com Inc. (NasdaqGS:AMZN) 16
Facebook, Inc. (NasdaqGS:FB) 11
Nippon Steel & Sumitomo Metal Corp 9
Vodafone Group Public Limited Company (LSE:VOD) 8
It was not close. Almost half the groups found Amazon to be over valued. Time to take a look at Mr. Bezos, his vision and how the market is pricing that vision.

4. LBO candidate: A good target for a leveraged buyout will be under valued, under levered, easy to takeover and badly managed. Almost all of you focused on finding an under valued company (which is good), an under levered company (makes sense) and a company easy to takeover (low takeover defenses), but the search on the fourth dimension (bad management) was all over the place. Some of you were looking for companies with high margins and others with stable cash flows. The most widely picked candidate was WellPoint, a health care firm. As a general rule, control requires inputs that you can change and that indicates a firm with below-average margins. There was almost no overlap between the groups with no company being picked more that twice. I have a paper on LBOs that fleshes out what you may want to look for in a LBO candidate. f you get a chance, please browse through it.


This week's challenge was on valuing private businesses and it is useful as preparation for tomorrow's quiz. (If you have trouble with the voting and non-voting shares, let it go, since we have not done it in class yet, but I think you can still figure it out) So, if you get a chance, review both the challenge and the solution. I have attached both.
Finally, the valuation tools webcast is up. I am sorry I could not get it uploaded on Friday. It is about valuing a patent as an option:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/optiontodelay.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/optiontodelay.pdf
Spreadsheet: https://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/webcasts/optiontodelay/productoption.xls

Attachment: Weekly Challenge Solution


I hope that you found the quiz to be fair, if not easy. I will send the usual email when it is ready to be picked up.
In today's class, we looked at three more investment options: natural resource options, the option to expand into new markets or products and the option to abandon. The natural resource options come closest to meeting all the requirements for option pricing to work: exclusivity and tradeability, and it should be no surprise that they have the deepest roots in real options. The option to expand is exciting because it allows us to add a premium to the values of some young, growth businesses, but it is prone to misuse. The option to abandon is really a different way of thinking about why flexibility adds value to an investment.

Attachment: Post class test and solution


The quizzes are done and can be picked up outside the front door to the finance department. The solution is attached.

Attachment: Solution as well as the distribution of grades

This week's valuation is of a pretty boring company: Exxon Mobil. However, it became exciting to a lot of people last week, after Berkshire Hathaway announced that they had acquired $3.7 billion of the company.
You can start with this summary that I have of my valuation of Exxon:

You can then download the 10K and summary financial data:

Follow that up with my DCF valuation and maybe you can find something that I am missing:
I considered doing an option pricing model, and decided not to, as explained in this document:
Finally, you can use the oil company summary data that I have in the excel spreadsheet to do a relative valuation:

Frankly, I am puzzled by Berkshire's enthusiasm for the company.


In today's class, we started with a discussion of financial flexibility viewed as an option, and argued that it has the most value to companies with capital constraints, unpredictable reinvestment needs and projects with high excess returns. Consequently, these companies are completely rational when they choose to not only accumulate cash but not borrow money. We then looked at equity in a publicly traded company as an option, and argued that the optionality increases as the company's earnings health deteriorates and its debt increases and becomes more long term. The post class test and solution are attached.

Attachment: Post class test and solution


As promised, here is your to-do list on the rest of the project. It is a long email but I hope it helps.

1. DCF Valuation
1.1. Consider feedback you got on your original DCF valuation and respond, but only if you want to.
1.2. Update macro numbers - riskfree rate to today's rate and equity risk premium
1.3. Update company financials. If a new quarterly report has come out, compute new trailing 12-month numbers
1.4. Review your final valuation for consistency

2. Relative valuation
2.1. Collect a list of comparable firms (stick with the sector and don't be too selective. You will get a chance to control for differences later) and raw data on firms (market cap, EV, earnings, revenues, risk measures, expected growth)
(You can this data from Bloomberg or Cap IQ. The latter is a little more user friendly)
2.2. Pick a multiple to use. There may be an interative process, where you use the regression results from 2.4 to make a better choice here)
2.3. Compare your company's pricing (based on a multiple) to the average and median for the sector. Make a relative valuation judgment based upon entirely subjective analysis.
2.4. Run a regression across the sector companies. (Be careful with how many independent variables you use. As a rule of thumb, you can add one more independent variable for every 10 observations. Thus, if you have only 22 firms in your list, stick with only two.)
2.5. Use the regression to make a judgment on your company and whether it is under or over valued. (If you are using an EV multiple, estimate the relative value per share. This will require adding cash and subtracting out debt from EV to get to equity value and then dividing by the number of shares)
2.6. Use the market regression on my website to estimate the value per share for your firm.

3. Option valuation (Wednesday's class)
3.1. Check to see if your company qualifies for an option pricing model. It will have to be a money losing company with significant debt obligations (a market debt to capital ratio that exceeds 50%).
3.2. If yes, do the following:
3.2.1: Use your DCF value for the operating assets of the firm (not the equity value) as the S in the option pricing model
3.2.2: Use the book value of debt (not the market value) as the K in the option pricing model
3.2.3: Check your 10K for a footnote that specifies when your debt comes due. Use a weighted-maturity, with the weights reflecting the debt due each year. (You don't have to worry about duration)
3.2.4: Go to updated data on my website and check towards the bottom of the page for the industry average standard deviations, Use the standard deviation in firm value (not equity value) as the standard deviation in the option pricing model.
3.2.5: The value of equity that you get from this model is your option pricing estimate of value for equity.
I have attached an excel spreadsheet that should help in this effort.

4. Bringing it all together
4.1: Line up your intrinsic value per share (from the DCF model), the relative value per share (from the sector), the relative value per share (from the market regression) and the option based value per share (if it applies)
4.2: Compare to the market price now (not in January 2013 or some earlier date)
4.3: Make your recommendation (buy, sell or hold)

5. Numbers to me!!!!
Fill in the attached excel spreadsheet when you have all the numbers for all of the people in your group and please get it to me by December 8, 2013 (If you have someone who is holding up the group, just send me the rest of the numbers). Please do not modify the spreadsheet in any way.

6. Final Project write up
Write up your findings in a group report. The report should be brief and need not include the gory details of your DCF valuation. Just provide the basic conclusions, perhaps the key assumptions that you used in each phase of valuation. (There should be relatively little group work. So, you may not really need to get together for much more than basic organization of the report) The group report is due electronically by Monday, December 9, at 5 pm. A pdf format works best. You do not need to attach the raw data and excel spreadsheets). I am not a stickler for format but here are good examples of reports from previous semesters online.

And no.. you don't have to do everything that these groups did (So, don't spend the next five days converting your DCF valuations into pictures). I just like the fact that the valuations were organized, presented in much the same format and were to the point. Of course, content matters.

7. Celebrate, but remember that your final exam is four days later (on December 13, 2013).

11/22/13 I know that this is the beginning of your and I will respect that, starting tomorrow (no newsletter tomorrow, no valuation of the week next week). However, I did put up my latest valuation tools webcast, on valuing distressed equity as an option. I used Jet India, an Indian airline with a history of losses and a mega debt load to illustrate the process. You can start with the webcast below:
The financials for Jet India are contained in this sheet:
The DCF valuation that you need to get your option model started is here:
The value of Jet India's equity as an option is contained in this spreadsheet:
It is pretty straight forward and may be useful to some of you are trying to use this approach on your company.
I will leave you to enjoy the week to come, with no emails, until next Saturday. If you are going home for Thanksgiving, have a wonderful time with family. If you are not going home for Thanksgiving, I hope you find a warm, friendly place to spend it.

Welcome back! I kept my side of the bargain. No emails for an entire week, but I will have to make up for it in the next few days. I am attaching the newsletter to remind you more of where we are in the class than to report news. We are into the home stretch of the last lecture note packet. On Monday, we will talk about acquisitions and the valuation or misvaluation of synergy and control. On Wednesday, we will take a different perspective and examine how we can change the value of a business. I hope that you will find that useful, especially if you are planning to run your own business or be in consulting.

Attachment: Weekly Newsletter #11


I am sure that you are looking forward to being back in class (NOT!!! But let's make believe!)... In today's class, we will look at acquisition valuation. Rather than have a start of the class test, like we usually do, the test will run through the entire class. While the questions that will be posed are straight forward, it may be helpful to take a look at the questions before class. Should take only a few minutes of your time and will give you a head start on the class.

Attachments: Acquisition in-class test


In today's class, we completed our discussion of acquisitions by looking at the types of acquisitions most likely to create value. To start our discussion of value enhancement, we started by drawing a contrast between price and value enhancement. With value enhancement, we broke down value change into its component parts: changing cash flows from existing assets, changing growth rates by either reinvesting more or better, lengthening your growth period by creating or augmenting competitive advantages and lowering your cost of capital. We then used this framework to compute an expected value of control as a the product of the probability of changing the way a company is run and the value increase from that change (optimal - status quo value). This expected value of control allows us to explain why market prices for stocks rise when corporate governance improves, why voting shares usually trade at a premium over non-voting shares (and why they sometimes don't) and why there is a minority discount in private company transactions. I have attached the post class test and solution. Until next time!

Attachments: Post class test and solution


As you work through the relative valuation section, a few questions that seem to be recurring:
1. Sample size: There is a trade off between sample size and finding companies that look more like yours. If you are doing a subjective comparison - comparing your company's PE with the PE ratio of comparables, controlling for differences with a story, you want a small sample of companies that look like yours. If you are doing a regression, you should try to get a larger sample, even if it means bringing in firms that may not look like yours. You can control for differences in the regression. And one more thing. Don't fight the data. If a regression does not work, it does not. Remember that you get to make the ultimate judgment and you can decide that given your company and its peers, the best estimate of relative value is just the average PE for the sector.

2. Market regressions: The updated market regressions from the start of 2013 are on my website under updated data. Look to the bottom of the page (and at the first link in the first column, not the archives). Here is the direct link

3. Option valuation
If you are one of those unlucky people who has been saddled with the money-losing company, here is one more cross to bear. If your firm owes a lot (my rule of thumb is a market debt to capital ratio that exceeds 50%), you can value the equity in your firm as an option... Before you jump out of the window, let me hasten to add that it is not as bad as it sounds. Here are the inputs you need to the option pricing model:
1. S = Value that you attached to your firm (not equity) in your DCF valuation. I would make this a conservative estimate (use low or no growth) to reflect the fact this is liquidation value.
2. K = Face value of all of the outstanding interest- bearing debt in your firm. If you can, add the expected coupon or interest payments to this number. Thus, if you have a 10 year, 8% loan for $ 100 million, your face value would be 100 + 10 * (.08*100) = 180 million
3. t = Weighted average duration of the debt ( I know... I know.. Duration is a pain in the neck to estimate... You can use maturity) There should be a table in your financial statements telling you how much debt comes due by year (there will be a thereafter... just make that a year beyond your last year) Take a face-value weighted average of when the debt comes due.
4. Standard deviation in firm value = Use the bottom up estimate for the sector that you can download off my site. Go to updated data and look towards the bottom of the page.
5. Riskfree rate - Find the treasury bond rate that corresponds to your option life
If you want to download a spreadsheet that does the calculation for you, you can find one under spreadsheets on my site....and you can watch the last valuation tools webcast.
If you do not have a money losing, indebted firm, you do not have to do option pricing.... I am attaching the summary sheet, for those of you who may have lost it.

Until next time!

Attachment: Summary of findings


Thank you for being at the closing class. I have attached both the closing presentation and the summaries of your valuation findings (for the entire class). If you get a chance, please go through the ten tests that we went through in class today and make sure that you are comfortable with the arguments. If you are on the list of the most undervalued companies and are buying your recommended stock, please let me know. I may very well join in.

On a different note, the final exam is scheduled for Friday (1-3) in KMEC 2-60. I am trying to get a second room for that day and will keep you posted. It will cover everything that we have covered in the class (which is a lot) but it will emphasize the material since the third quiz, with 60% (or 3 of the 5 problems) covering option valuation, acquisition valuation and value enhancement. I will post a review session online tomorrow.

Attachment: Closing Presentation and Project summaries (for entire class)


As Stern MBAs, you know how the routine goes. You take a class and the final piece of bureaucracy that you have to deal with is the faculty evaluation (CFE). You are also probably aware that to make you fill out the CFE, the administration will withhold your online access to grades, if you don't fill it out. Normally, I would stay out of this bureaucratic maze, but I do feel the blowback if you don't fill out your CFEs, since you will email me for your grade, if you cannot get it online. So, to save me and you some pain, please fill out the CFE for this class. The window is a narrow one and will close on Thursday at midnight. Since it should take you only a couple of minutes to do, my suggestion is that you do it now.

Student Instructions for Completing Online CFEs

1. Login to https://ais.stern.nyu.edu and provide your password. 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.
2. Select the "Submit CFEs" link (select correct term) under "Course Evaluation".
3. In the dialog box, highlight the course you wish to evaluate and follow the instructions.

12/10/13 I have a review session I put together focusing primarily on real options, acquisition valuation and value enhancement which will be 60% of the final exam. You can find it by going here:
Webcast: https://www.stern.nyu.edu/~adamodar/podcasts/Webcasts/valfinalreview.mp4
Presentation: https://www.stern.nyu.edu/~adamodar/pptfiles/val3E/valfinalreview.pptx
All of the past finals and solutions are online (check on the webcast page for the class) and are also attached to this email. Until next time!
12/11/13 By now, you should have received your final project back. If you have not, the culprit is in your subject line (not Grand Finale) but let me know and I will find your submission in my regular email box. As you can see, the project is graded out of 30.
The final exam is scheduled for 1-3 on Friday (December 13). I have a second room reserved (2-70) to relieve some of the crowding in 2-60. Here is the seat assignment for the final exam:
If your last name begins with Go to
A- G KMEC 2-70
H- Z KMEC 2-60
The review session link that I sent you yesterday had some linking issues, but they are fixed now. Until next time!

Just a reminder about the CFEs. Today is the last day for submitting them. So, please get it out of the way. In case, you have forgotten already, here are the instructions:
Student Instructions for Completing Online CFEs
1. Login to https://ais.stern.nyu.edu and provide your password. 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.
2. Select the "Submit CFEs" link (select correct term) under "Course Evaluation".
3. In the dialog box, highlight the course you wish to evaluate and follow the instructions.

The final exam is tomorrow and please do go to the specified rooms. It will make life easier for all of us:
If your last name begins with Go to
A- G KMEC 2-70
H- Z KMEC 2-60

Finally, on the final exams, you will notice that the option problem does require you to use a cumulative normal distribution. (It will look like the attached sheet, if you want to get familiar with it) That will be provided with your final exam, but you will still need to be able to estimate d1 and d2 on your calculator. (The table will give you d and N(d) in 0.05 increments. You can interpolate but I will accept the nearest 0.05 number. Thus, if you d1 is 1.43, I will accept the N(d) of 0.9265 for 1.45) So, if you have never touched those ln and exp buttons on your calculator, please get acquainted with them. Better still, work through some of the option problems in past exams and see if you can come up with the same d1 and d2 that I come up with. Remember that if there is a cost of delay, the dividend yield adjusted version of Black Scholes comes into play. Until next time!

Attachment: Cumulative Normal Distribution


There are two questions seems to be coming up on the real options problems and m afraid I have contributed to the confusion. So, here is some clarification:

1. What is the probability that S>K?
As stated in class, it is N(d2) which is the risk neutral probability that S>K. In some of the problems, though, I have used a range from N(d1) and N(d2) as the range of probabilities. Let me explain why. N(d1), in addition to being an option delta, is also a probability that the option will be in the money. In fact, the only reason d1 is different from d2 is because you are uncertain about S
d2 = d1 - square root of the standard deviation
If you had a standard deviation of zero, N(d1) = N(d2). As the uncertainty increases, the gap between these two numbers will widen. Thus, you go from being certain about the probability to having a range. Having said all of this, N(d2) should be the point estimate on the probability that S>K. You can use the range to indicate that there is uncertainty about this probability.

2, What is the cost of delay?
This is a tough one. Sometimes, I use 1/n and sometimes I use the cashflow next year/ S and sometimes I use no cost of delay at all. Lets look at the conceptual basis. The cost of delay is a measure of how much you will lose in the next period if you don't exercise the option now as a fraction of the current value of the underlyign asset (It parallels the dividend yield. On a listed option on a stock, if you exercise, you will have the stock and get the dividends in the next period) . Thus, if you have a viable oil reserve, the cost of delay is the cashflow you would have made on the developed reserve next period divided by the value of the reserve today.
Here is the overall rule you should adopt. If you have a decent estimate of the cashflows you will receive each period from exercising the option, it is better to use that cashflow/ PV of the asset as the dividend yield. If your cashflows are uneven or if you do not know what the cashflow will be each period, you should use 1/n as your cost of delay. If you will lose nothing in terms of cashflows by waiting, you should have no cost of delay.
Let me take three examples. The first is the bidding for rights to televise the Olympics in an earlier quiz. There were two years left to the Olympics and you were trying to price the option. In this case, there is no cost of delay since you really cannot exercise the option early even if it is deep in the money. (You cannot televise the Olympics a year before they happen...) The second is the oil reserve option. Since the cashflows from the reserve tend to be fairly uniform over time (based upon the barrels of oil you would produce and the current price per barrel, it is easy to estimate the cashflows you would generate each year on the reserve. In most of the oil reserve problems, therefore, you would go with the cashflow/ PV of oil in the reserve as your cost of delay. The third is the patent examples. While you may be able to estimate the expected cashflow each year from commercialising the patent, these cashflows are more difficult to obtain and are less likely to be uniform over time. That is why many of the patent problems use the less preferred option of 1/n as the cost of delay, where n is the number of years left in the patent.


I hope you are done and are out celebrating. However, just in case you still care about grades, yours just went online. Your final exams are also ready to be picked up in the usual spot. I know that some of you have left they city and I will move the finals that are not picked up into my office by the end of the week. I have attached the solution for the final and a spreadsheet that lets you enter your scores on the quizzes and projects and see how your final grade was computed.

I know that I threw a lot of stuff at you during the course of the last few months: weekly challenges, valuations of the week and valuation tools webcasts. I am a realist and know that most of you did not have the time to do most of these things, but I do hope that when you do get a chance, you will try your hand at valuing other companies that interest you. I believe that valuation is a craft (not theory or models) and that you get better at it by doing more. So, trust your instincts, stand your ground on first principles and be pragmatic when it comes to tools and models.

If you have been keeping count, this is the 114th email of this class and if you were in corporate finance, my 230th email overall. If you have been reading my emails (and I won't blame if you stopped a hundred emails ago, you will also note that this email does not end with the three words that every other one has, "until next time". That is because this will be my last email to you as students in one of my classes. I wish you the very best with whatever you plan to do with your lives. I hope your "job" brings you as much joy as mine has to me. If you enjoy what you are doing, you will never have to work a day in your life. You do have my email address for life and you can bounce off any questions, queries or issues that you have with corporate finance, valuation or the most valuable sports franchises in the world (the answer to the last is always the "Yankees"). It has been a pleasure having you in my class for the last semester or two. Thank you!

Attachments: Solution and grade checker.